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PPS Investments: MPC Commentary

19 March 2020 Luigi Marinus, Portfolio Manager at PPS Investments

The Monetary Policy Committee (MPC) unanimously decided to decrease the repo rate by 100 basis points to 5.25%. This somewhat unprecedented move was a direct result of the deterioration in economic conditions due to the COVID-19 pandemic experienced in South Africa and across the globe.

Both global and local GDP growth was revised lower by the Monetary Policy Committee (MPC). The forecast for global GDP for 2020 is down to 1.1%, with a rebound to 2.8% in 2021. For South Africa, the GDP growth is forecast to slow to - 0.2% in 2020, 1.0% in 2021 and 1.6% in 2022.

Due to the decline in oil prices and lower demand in general, the scope for lowering interest rates was accommodated by the expected muted levels of inflation. Inflation is expected to be around the mid-point of the target band in both 2020 and 2021 with break-even rates over five years at 3.9%.

In the past the rhetoric has been that the MPC and the Reserve Bank Governor has been hawkish, but the previous prudent stance has allowed for the space for this rate cut. Although the level of the rand is not the primary focus of the MPC the recent volatility of the currency has not made this decision any easier. The MPC should be commended for their efforts to keep inflation stable and their bravery for offering some relief in difficult times for South Africans.

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