South Africa in new interest rate cut, sees 6.1% GDP shrinkage

JOHANNESBURG, South Africa (UPDATED) – South Africa’s central bank on Tuesday, April 14, slashed its main interest rate by a full percentage point, the second such cut in less than a month, and predicted the economy would shrink by 6.1% in 2020 as a result of the coronavirus pandemic.

The surprise announcement followed an emergency meeting of the Monetary Policy Committee (MPC), whose scheduled meeting was due in May.

It also came as the International Monetary Fund (IMF) projected the country would this year plunge into deep recession.

The South African Reserve Bank “decided to cut the repo rate by 100 basis points” to 4.25% per annum, the bank said in a statement.

It was the 3rd cut this year.

On March 19, the bank cut the rate by one percentage point following a 0.25-percentage-point cut in January.

The latest move brings the repo rate to its lowest level since the repurchase system was introduced in 1998, according to local banks.

“The COVID-19 outbreak will have a major health and social impact, and forecasting domestic economic activity presents unprecedented uncertainty,” central bank governor Lesetja Kganyago told a news conference.

Three weeks earlier, the bank had forecast growth domestic product (GDP) this year to contract by 0.2%.

It now expects GDP in 2020 to contract by 6.1% before growing by 2.2% in 2021 and 2.7% in 2022, the governor said. (READ: South Africa’s mining, tourism brace for virus buffeting)

Finance Minister Tito Mboweni also foresees “a deep recession in 2020, followed by a rapid upswing in economic growth.”

“Beyond the COVID crisis, a major risk facing the economy and the fiscus is if long-run economic growth returns to the pre-crisis averages of between 1% [and] 2%,” Mboweni said.

“Higher levels of economic growth need to become a non-negotiable objective.”

The rand has depreciated by 22.6% against the greenback since the start of the year, he said.

‘More rate cuts expected’

South Africa, which has the biggest industrialized economy in Africa, had already slipped into a recession in the final quarter of 2019.

It has the highest recorded numbers of coronavirus infection in sub-Saharan Africa, with 2,415 cases, including 27 fatalities.

The outbreak prompted President Cyril Ramaphosa to impose a total lockdown, which kicked in on March 27 and has been extended to the end of April.

“The trigger of the unexpected timing of the rate cut was the decision by government to extend the lockdown from 21 days to 35 days,” said Nedbank in a note, adding that the “likelihood of more repo rate reductions is high.”

For Raymond Parsons, a business professor at North-West University, “the surprise decision” to again cut interest rates “is a welcome move which will help to support the South African economy as it grapples with a rapidly deteriorating situation as result of the extended COVID-19 lockdown.”

South African fiscal authorities made the historic move ahead of the release of an IMF report which projected that sub-Saharan African economies will contract by 1.6% in 2020 due to blanket lockdowns.

The IMF said the GDP of Nigeria and South Africa, the continent’s economic superpowers, would shrink by 3.4% and 5.8% respectively.

The IMF on Monday, April 13, also announced it had approved immediate debt relief for 25 poor countries, most of them in Africa, to help them free up funds to fight the pandemic.

Another grim prediction came from the World Bank last week, when it warned that sub-Saharan Africa could slip into its first recession in 25 years because of the pandemic. – Rappler.com