A MUST READ: Reserve Bank signals that easing cycle is done BY LYNLEY DONNELLY

RESERVE BANK SIGNALS THAT EASING CYCLE IS DONE

by LYNLEY DONNELLY

Published by BUSINESS DAY on 17 September 2020

The easing cycle has ended for the moment, the Reserve Bank, one of the most aggressive rate cutters among central banks in emerging markets since the outbreak of Covid-19, has signalled.

Its monetary policy committee (MPC) ended a meeting on Thursday without a reduction for the first time in 2020. The MPC left the repo rate at 3.5% and said its modelling suggests that rates may start rising in 2021, even as it forecast a deeper economic contraction and slower inflation.

The decision was not unanimous, with two out of five members favouring another reduction. Some analysts said the Bank’s aggressive rate-cutting cycle since the onset of the crisis has bottomed out for now.

Before this week’s meeting, the Bank has slashed the repo rate five times to the lowest policy rate it has implemented in about 47 years as it sought to support households and businesses through the worst of the pandemic crisis and accompanying lockdown.

Governor Lesetja Kganyago said while the Bank’s quarterly projection model indicated no further cuts in the near term, and two increases in rates late in 2021, future decisions will be data dependent. There is a limit to what monetary policy can achieve without structural reforms to reignite growth, Kganyago said.

“The steps we have taken so far are yet to really filter through to the real economy because they were taken in such quick succession,” he said. With most of the cuts coming during the lockdown, when people’s movements and business activities were restricted, the monetary policy stimulus has yet to take effect, said Isaah Mhlanga, chief economist at Alexander Forbes Investments.

Such stimulus typically works over 18 to 24 months. Along with the steep cuts, the effect of measures such as the government-backed Covid-19 loan guarantee scheme, as well as easing of capital requirements for banks is “still in the system”, Mhlanga said.

“A lot of our growth problems are structural. They require economicreforms,” he said. “It ’s more likely that we have seen the bottom in rates and the bottom in inflation as well, so I wouldn’t ’t expect them to cut from where we are,” he told Business Day.

The Bank now expects the economy to shrink 8.2% in 2020, compared to the 7.3% contraction forecast in July. It sees it rebounding by 3.9% in 2021 and 2.6% in 2022.

The revisions came in the wake of a dire GDP print from Stats SA last week that revealed a 51% annualised contraction. The MPC decision came a day after Cyril Ramaphosa announced that SA will move to level 1 of the lockdown regulations from midnight on Sunday, partially reopening SA’s borders and bringing hope that the economy can begin to recover.

SA has been under various phases of lockdown since late March. The Bank also revised its forecast for inflation — with headline consumer price inflation now to average 3.3% in 2020 — well below the midpoint of its 3%-6% target range where it says it wants the rate to be anchored.

Inflation will then accelerate to 4% in 2021 and 4.4% in 2022, it said. The revised inflation outlook means that real interest rates are negative on a forward-looking basis, showing that the Bank is “actually providing more support than is generally acknowledged”, Kganyago said.

The Bank has come under attack from critics who say it has not done enough and policymakers have rebuffed calls for it to resort to unconventional measures such as quantitative easing. “We have a marginally negative policy rates in real terms … but that is something we can live with because inflation is well contained at the moment and we think that the economy could do with the kind of support that we are providing,” Kganyago said.

The risks associated with a further rate cut outweighed the benefits, said Kevin Lings, chief economist at Stanlib. The downside of further cuts is the risk of reduced capital flows into SA, which would place pressure on the currency and in turn stoke inflation, he said.

Malaysia, Chile, Indonesia and Brazil are among the emerging markets that have kept rates on hold, he said. “The heavy lifting now has to be done by government policy,” Lings said.

The decision was viewed as a close call as, ahead of the meeting, nine out of 17 analysts polled by Bloomberg pencilled in a cut of 25 basis points. But there are distinct risks that the Bank may delay any move until it has a chance to assess the outcome of the upcoming medium-term budget policy statement due to be presented in October.

Johann Els, Old Mutual Investment Group’s chief economist, said the decision was“overly conservative” given that there are more downside than upside inflation risks.

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