South African Reserve Bank cut rates by 100 basis points

The South African Reserve Bank (SARB) cut rates by another 100 basis points this morning in an inter-meeting move. Rates are now down 225 bps since the start of the year, and down 250bps since July last year.

The SARB now expects GDP growth to contract by 6.1% in 2020 (from their -0.2% forecast three weeks ago). This compares to my -3.5%, which I said is subject to downward revision while awaiting detail of Government’s economic support package.

The SARB now expects inflation to average 3.6% in 2020 (versus my forecast of 3%) acknowledging that inflation risks are mostly on the downside. I think there is enough room for the Bank to cut more – at least another 100bps.

There is also room to implement massive quantitative easing (QE) USA-style and a need to help finance the budget deficit, with less risk in executing massive QE than not doing it.

I am more worried about deflation than inflation. Thus, I am not worried about the traditional concern of hyperinflation in the case of a central bank financing budget.

President Ramaphosa promised an economic support package, which is likely to be announced this week. I do wonder about the SARB’s timing. Did they want to get ahead of the announcement in an effort to maintain their independence?