South Africa cuts key rate to record low

Bloomberg

South Africa’s central bank unexpectedly cut its benchmark interest rate to a record low to support an economy that’s projected to slump even deeper into recession after the government extended a nationwide lockdown in response to the coronavirus.
The repurchase rate was reduced to 4.25% from 5.25%, the South African Reserve Bank said in an emailed statement. The decision was unanimous.
After the biggest cut in more than a decade in March, the central bank said it has the space to respond to turmoil from the coronavirus pandemic, thanks to inflation that’s projected to be below the midpoint of its target range. At the time, the Reserve Bank said the outbreak and national lockdown could see the economy contract by 2% to 4% this year. Since then the lockdown, that was due to end
on April 16, was extended by
two weeks and the Monetary
Policy Committee now sees the economy contracting by 6.1%.
“The supply and demand effects of this extension will reduce growth and deepen it in short term,” the MPC said in a statement read by Governor Lesetja Kganyago. “This will likely also increase job losses, with further consequences for aggregate demand.”
The official unemployment rate is 29%. The rate according to the expanded definition, which includes people who have stopped looking for work, is almost 39%. Millions of South Africans depend on informal trade and odd jobs to make a living and most of such activity has been halted by the lockdown.
While the central bank said in a presentation last week the initial lockdown would lead to 370,000 formal-sector job losses and cause 1,600 business closures, it could not provide estimates for the extended closure of economic activity.
The central bank increased its economic growth forecasts for 2021 to 2.2% from 1% and for 2022 to 2.7% from 1.6%.
“The deep damage that an extended lockdown is going to do to the economy is finally sinking in at the Reserve Bank,” said Peter Attard Montalto, head of capital markets research at Intellidex.
The central bank lowered its inflation projections and now sees average price growth at 3.6% for this year, 4% for 2021 and 4.2% for 2022.
The overall risks to the inflation outlook “appear to be to the downside,” according to the MPC. “Electricity pricing remains a concern but has moderated somewhat. Risks to inflation from recent currency depreciation are expected to be muted as pass-through is slow.”
The next MPC announcement will be on May 21, as originally scheduled.
“The Reserve Bank rate cut reflects the sharp deterioration in the economic outlook following the two-week extension of the current lockdown. Even though the central bank is doing everything it can to mitigate the economic impact of the lockdown, the outlook remains bleak in the absence of a similarly aggressive fiscal response,” said Bloomberg economists.