South African Reserve Bank Governor Lesetja Kganyago announces a repo rate cut at central bank’s head office on January 16, 2020 in Pretoria.
Gallo Images/Business Day/Freddy Mavunda
- The Reserve Bank has cut interest rates by another 25 basis points, taking the repo rate to 3.5%.
- Some economists say the bank could have introduced deeper cuts in response to deflationary risk.
- However, Reserve Bank Governor Lesetja Kganyago says that inflation is to expected remain contained.
Reserve Bank Governor Lesetja Kganyago has said that inflation is expected to remain contained over the next two years, despite concerns from some economists that SA is heading toward a deflation “danger zone”.
The governor was speaking during a briefing on Thursday evening following the repo rate announcement. The Monetary Policy Committee decided to cut rates by 25 basis points, in line with market expectations. This brings the repo to 3.5%, the lowest rate since the repo system was introduced in 1998.
The central bank has slashed interest rates by 300 bps so far this year.
Some economists however feel the MPC could have introduced deeper cuts, given the unprecedented economic crisis brought on by the Covid-19 pandemic.
Taking into account the collapse in growth and weak inflation, there is “scope” for deeper cuts, said Old Mutual Chief Economist Johann Els. He previously told Fin24 that the bank should be responding to the risk of deflation.
“Under these circumstances one needs to frontload [rate cuts] as much as possible,” he said during a phone call just after the rates announcement.
Kganyago however noted that South Africa is experiencing disinflation – which means inflation is growing at a slower place than the previous period and not deflation, when prices decline. Currently the SA bond market has not priced for deflation and it is also not the base case for the bank, he said.
“Deflation means prices have turned negative and that is not what we are experiencing in the SA economic space at the moment,” he said. “Inflation is well contained. Over the next two years; 2021 and 2022, we do not see inflation as a problem. It is within target and it is closer to the midpoint of our inflation target range.”
The bank forecasts that headline consumer price inflation will average 3.4% in 2020, and 4.3% in 2021 and 2022.
Old Mutual’s forecasts headline inflation to be below 3% until March 2021. Els said that even if SA is currently experiencing disinflation, the inflation rate is below 3% and could be below the targeted 4.5% for a longer period. “That is risky territory,” said Els.
Duma Gqubule, an economist and founding director at the Centre for Economic Development and Transformation, believes there is a real risk of deflation.
“I think there is more of threat we are going to go down to a deflationary danger zone because of the collapse of the economy. I don’t see inflation as a threat, whatever their forecast says I don’t see it as a threat for the next year or two. So right now, the Reserve Bank should have cut interest rates much deeper.”
But Kganyago is of the view that the bank has been fairly aggressive this year by “front loading” rate cuts, outlined in its quarterly projection model, at each of the MPC meetings this year. “How much more aggressive can you be?” he said during a question and answer session at Thursday’s briefing.
The bank will continue to rely on data to inform its rate decisions for the remainder of the year. Currently the uncertainty brought on by the Covid-19 pandemic has impacted data collection, so instead of indicating whether the it is nearing the end of the rate cutting cycle, the bank will be sitting tight for any developments as they arise.
Momentum investment economist, Sanisha Packirisamy, is a little more optimistic that the bank may continue its response to the crisis with further cut in coming months. “In our opinion, the SARB may be inclined to temporarily cut real interest rates by more than usual to play its role in softening the blow of the virus shock on the local economy, and as such, see further space for marginal easing to 3.25% in the coming months.”
Momentum Investments, meanwhile, expects the bank to consider raising interest rates by the first half of 2021. When inflation is higher than interest rates there is a risk that savings would fall in value, Packirisamy pointed out. “Moreover, a long period of too low interest rates could distort financial markets and elevate the risk of financial instability,” Packirisamy said.