The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) meets again on May 17-19 to discuss interest rates and other monetary matters.
Lullu Krugel, chief economist for PwC Strategy& Africa and Dr Christie Viljoen, PwC Strategy& economist, discuss what to expect.
The MPC has reduced interest rates on three occasions this year. On January 16, policymakers reduced the repurchase (repo) rate by 25 bps to 6,25%, after the central bank significantly lowered its inflation forecast. Both actual and expected price trends moved lower in the months leading to the January 2020 meeting while economic growth remained in the doldrums.
On March 19, the SARB made a larger-than-expected 100 basis points cut in the repo rate to 5.25%. As the reality of the global economic slump – and the impact thereof on the South African economy – became clearer, the central bank used the room provided by very favourable inflation conditions to provide some monetary stimulus to the local economy.
Following an unscheduled Easter Weekend meeting, the MPC announced on April 14 another 100 basis points cut in the repo rate to just 4,25%. The SARB referenced an extension to the country’s initial three-week lockdown (prolonged for another two weeks) and indicated that it expected the economy to contract by 6,1% in 2020. At the same time, given the tepid domestic and international economic outlook, inflation pressure had fallen near the lower bounds of the 3%-6% target range.
Consumer price inflation remains muted
Headline inflation decreased from 4,6% year-on-year (y-o-y) in February to 4,1% y-o-y in March 2020. A major driver behind the decrease in March’s headline inflation was disinflation in the transport component of the consumer basket.
Fuel costs were 1,6% month-on-month (m-o-m) lower, resulting in a 1,7% m-o-m decline in the overall cost of transportation. The global slump in energy prices – oil is currently trading around 60% lower compared to a year ago – resulted in a further R3,62/litre (23%) decline in the Gauteng retail petrol price during April and May.
Statistics South Africa has also reported a decline in the price of some essential goods during the Level 5 lockdown. Results from a weekly survey shows that the cost of fish (-1,7%), fruit (-3,7%) and vegetables (-4,6%) declined in the three weeks ending April 23.
The statistics agency is providing these snapshots of essential prices due to the delay in normal publications. Due to the lockdown affecting Stats SA’ ability to collect data, the official inflation report for April is only due for publication on May 27.
The MPC commented in April that it expects inflation to average just 3.6% in 2020. The central bank expects the oil price to average $42/barrel this year compared to a current level of $30/barrel or less. While electricity price increases, municipal tariff adjustments, and a volatile exchange rate are some of risk factors to the low inflation forecast, the weak domestic and international economic environment is likely to keep consumer price inflation very low this year.
Economic activity drops sharply at the start of 2020Q2
South African economic activity slowed markedly from late-March. The IHS Markit South Africa Purchasing Managers Index (PMI) – a measure of economic activity based on a survey of purchasing managers at around 400 private sector companies – plunged to a record low in April.
Respondents reported a sharp drop in client demand due to the national lockdown. Some companies were able to remain open for business and had to drastically reduce their production. Others were forced by lockdown regulations to close shop temporarily.
Workplace activity declined dramatically in April. Internet giant Google has released data reflecting the change in visits and length of stay at places of work from users who have opted into location history tracking on their Google accounts.
This data – which tracks activity on a daily basis compared to a reference period of January 3 – February 6 – show a notable decline in South African workplace activity since the lockdown started on March 27. On average, workplace activity was 66% lower during Level 5 of the lockdown compared to the reference period.
Deep recession forecast for 2020
Looking ahead, the PMI indicated that new orders for future delivery declined dramatically in April – both from local as well as international customers.
Input purchases declined due to forecasts of weak future output: the PMI report commented that many companies were uncertain that the South African economy would rebound quickly following a lifting of lockdown measures as of the start of May. Sentiment about the nature of business activity over the coming 12 months dropped to the lowest on record.
PwC’s modelling indicates the South African economy could contract by as much as 13% this year, based on the current risk-adjusted approach communicated by government.
Our analysis is based on the impact of the lockdown on specific industries, business and consumer confidence in general, the disruption of supply chains and international trade, as well as jobs at risk. We also considered the mitigating effects of fiscal and monetary policy responses up to date.
The latter includes the 225 basis points in rate cuts (so far) as well as other financial measures like money market operations and intraday liquidity support to clearing banks.
MPC keeps door open for more monetary policy easing
The MPC said in mid-April that its internal modelling suggests room for a further five interest rates cuts of 25 basis points each over the coming 12 months. (There has been very little public comment from the SARB on interest rates since the last official statement.) However, given the speed at which the local and global environment is changing at present, it is not impossible for the MPC to make another big (i.e. larger than 25 basis point) rate cut in the near future. A lot has changed (read: deteriorated) in the South African economy since the previous MPC statement a month ago.
Given the deterioration in the economic outlook since the last monetary policy meeting – where it was conceivable that the easing of lockdown regulations would be much more accommodative from May 1 – the SARB will definitely revise its economic growth forecast to show a deeper recession this year.
Hopefully, South Africa will get more information from the Cabinet in the coming week on the future easing of lockdown restrictions – this will directly impact the central bank’s economic forecasts.
Considering the very favourable inflation situation as well as the deteriorated economic outlook since the last MPC meeting, PwC expects the SARB to further reduce interest rates next week.
However, we do not expect it to be of a similar magnitude to the two 100 basis points cuts seen in March and April. A 50 basis points cut – taking the repo rate to 3.75% – is more likely.