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MPC Commentary

22 May 2020 Reza Hendrickse, Portfolio Manager at PPS Investments

The Monetary Policy Committee (MPC) once again unanimously voted in favour of lowering the repo rate this month, although 2 out of the 5 members preferred a shallower cut.

In a vote of 3 to 2, the MPC decided to lower the repo rate by 50bp to 3.75%. We have now seen the policy rate lowered by 2.75% this year, with a cut every month apart from February, taking interest rates to levels last seen in the early seventies.

Rates have been lowered aggressively, both locally and abroad to provide support to economies that have been weakened by the COVID-19 shutdowns. The Reserve Bank once again lowered its forecast for domestic GDP growth for this year to -7%, compared to the -6.1% forecast last month, and the -0.2% in March. This is significantly worse than expected global growth, with the IMF currently forecasting a contraction of 3% in 2020. These forecasts indicate the extent of SA’s vulnerability, and underscore the Bank’s attempt to ease conditions for households and firms in the current environment, in addition to the fiscal measures announced.

The MPC is expecting inflation to remain well below the midpoint of the target range this year, against the backdrop of economic contraction and given the subdued inflation outlook. The oil price remains low, as well as food inflation, and while the rand has weakened considerably this year, its risk to inflation are not viewed as significant given that pass-through remains low. Risks worth monitoring though include electricity and other administered prices as well as disruptions to the supply of goods and services.

Looking ahead, further interest rate cuts are probable, with the SARB’s Quarterly Projection Model indicating two possible 25bp cuts in the coming quarters. This would further erode the positive real yield that has been achievable locally, and means that the possibility of negative real rates in the future cannot be ruled out.

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