Reserve Bank signals that easing cycle is done

LYNLEY DONNELLY 
Article from BUSINESS DAY, supplied by NEASA

NO MORE RATE CUTS: Reserve Bank Governor Lesetja Kganyago at the Reserve Bank head office in Pretoria.Picture: FREDDY MAVUNDA © Business Day

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 Isaiah 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 capital requirements for banks is “still in the system”, Mhlanga said.

“A lot of our growth problems are structural. They require economic reforms,” 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.

Leave a Reply