PwC recommends a significant cut in interest rates for SA
PwC expects the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) to cut interest rates in the country in light of the potential Coronavirus-induced recession. The firm already anticipated a cut in rates prior to the crisis, and expects the current environment to confirm it.
“Prior to the COVID-19 panic, there were already expectations that the central bank could lower interest rates further in 2020. The MPC announced at its previous meeting in January a 0.25 percentage points cut in interest rates on the back of significant reductions in its inflation forecasts,” wrote Lullu Krugel and Christie Viljoen of PwC Strategy&.
Growth forecasts are now expected to be cut even further by the MPC, particularly in light of a deteriorating economic outlook. South Africa’s GDP forecasts were already dampened due to a stagnating economy and high rates of unemployment, among other factors, and the country had come to be at the brink of investment grade in the Moody’s rating.
Moody’s has now cut its growth forecasts for South Africa, attributing this cut to the impact that the Covid-19 crisis has had on trade and supply chains across the globe. South Africa’s ties with some major developed economies are already under threat from Covid-19 disruption, and Moody’s expects this situation to worsen in the near future.
Most countries across the globe are currently grappling with similar challenges, and the response has almost uniformly been to cut interest rates. Countries such as the US, Canada, Australia and Indonesia have reduced their lending rates in light of the global pandemic, which might encourage South Africa to do the same.
PwC has strongly recommended that such a policy be followed on an urgent basis. “We believe that, despite no need for an emergency MPC meeting earlier this month, this is an urgent enough situation to warrant an interest rate cut of 50 basis points. This could even be spread out: two 25 bps cuts in March and May, respectively, would suggest the SARB is not in panic mode,” said Krugel & Viljoen.
The Covid-19 crisis is building up to its peak across the globe, causing disruption in every aspect of personal and economic life. At last count, the World Health Organisation (WHO) reports approximately 300,000 cases of Covid-19 across the globe, a number that continues to rise. The economic impact that results from the closing of borders and trade relations is unprecedented, and a challenge to quantify at this point in time.
