Reduced repurchase rate by another 100 basis points to record …

The Reserve Bank of South Africa (SARB) has reduced its repurchase rate by another 100 basis points, bringing it to 4.25%, a record low. And now he sees the South African economy shrinking 6.1% in 2020, the biggest loss of production since the Great Depression.

The Reserve Bank said in a statement Tuesday, April 14, that it had advanced its May Monetary Policy Committee (MPC) to make the decision to lower its repurchase rate by another 100 basis points.

The move is a surprise, but it is not shocking given the prolonged blockade to contain the Covid-19 pandemic and the increasing number of victims, and the development of world events, are affecting South Africa’s economy. It raises the consumer prime rate to 7.75% and follows a cut of 100 basis points at the March bank meeting of the MPC. The cut means that interest rates are at their lowest point in South African history. The previous low was 5% in 2013.

History is also being made on other fronts. And what a difference three weeks makes in these turbulent times.

“A lot has changed since the March meeting,” Governor Lesetja Kganyago said during an online conference with journalists and other MPC members.

Just three weeks ago, the SARB saw a contraction in 2020 of 0.2%, a forecast that even at the time seemed extremely optimistic. SARB staff spend the long weekend of Easter processing data, giving rise to the new bleak, but much more realistic, outlook.

“The Covid-19 outbreak will have a major health and social impact, and forecasting national economic activity presents unprecedented uncertainty. With that in mind, the Bank expects GDP in 2020 to contract by 6.1%, compared with the -0.2% expected just three weeks ago. GDP is expected to grow 2.2% in 2021 and 2.7% in 2022, ”said the MPC statement.

Mike Schussler, an economist at economists.co.za, said a 6.1% contraction would be the biggest drop in South African output since the Great Depression in the 1930s, underscoring the magnitude of the challenge facing formulators. policies. And given how anemic growth has been in recent years, it will likely mean that the economy will end 2020 around the size it was four or five years ago, a major setback that will make the “lost years of Zuma” seem almost an age of lost gold. That’s how bad things are right now.

The Reserve Bank is clearly concerned about the growth of bad loans and debts for households and businesses that have lost income and income streams due to the blockade, compromising their ability to make repayments on time. Central banks around the world have been cutting rates in an attempt to circulate more money through economies experiencing unprecedented stress.

“Economic contractions are expected to be deeper in the second quarter of 2020, and some recovery is expected in the third quarter of the year. The strength of the recovery in the fourth quarter and 2021 will depend on the speed with which countries can safely open up to economic activity, requiring sustainable rules of social distancing, security processes established by companies and public institutions, and the ability to hospitals to accommodate those in need, “said the MPC statement.

The current quarter is when the economy is expected to actually collapse, which is not surprising, as the economy is stuck for at least the first month of the period, with some notable exceptions, such as the mining industry that is in a slow restart process. .

Consumer inflation in February accelerated to 4.6% from 4.5% in January, but inflation is not a concern in an economy that is in the midst of a depression-size contraction with rising unemployment. will fire from its already shocking levels. Compared to the prime rate, interest rates are not yet negative, and both inflation and rates could drop further.

“The Bank’s overall forecast for consumer price inflation averages 3.6% for 2020 … The overall risks to the inflation outlook at this time appear to be downward,” the SARB noted. This gives the bank room for more cuts.

Oil prices are depressed, but further weakness in the rand could fuel inflation. On Tuesday, the rand had lost more than 1% against the Euro to rise to more than 20 / Euro, while it was reaching around 18.27 per dollar, according to data on sharenet.co.za.

“Credit risk has returned to 2008 levels and non-resident investors have sold close to R100 billion of local assets,” said the SARB. He did not give an immediate timeline for the sale of local assets, but a large currency outflow is one of the many trends that make the currency vulnerable.

“The rand has depreciated 22.6% against the USD since January and 17.3% since the March meeting of the MPC,” said the SARB. So the rate at which the currency is losing ground is increasing rapidly.

The SARB, like some other branches of government, not to mention business and civil society in general, is certainly being proactive.

The efforts of the Minister of Mines and Energy, Gwede Mantashe, to return parts of the mining sector to function as safely as possible also fall into this category. An unprecedented crisis requires unprecedented action and competent hands at the tiller. In that sense, the Zuma years seem anything but golden. BM