Reserve Bank has policy space to cut interest rates — official

The decline in inflation has created the policy space for the Reserve Bank to cut interest rates, a senior Bank official said on Monday.

The Bank has cut the repo rate by 300 basis points to 3.5% so far in 2020.

This was as inflation dropped and then rose again to 3.2% in July, still near the lower end of the Bank’s 3%-6% inflation target range.

“Monetary policy has the room to move, which is not normal for us.

“The rate trajectory, given what we can see now, will be a pretty moderate one,” the Reserve Bank’s head of economic research, Chris Leowald, said during a panel discussion on the prospects of a post-Covid economic recovery at the SA Institute of Tax Professionals’ annual tax indaba.

Rises in wages and oil and fuel prices were expected to be gradual, Leowald said.

The fact that the depreciation of the rand was not having inflationary effects had also assisted.

Leowald said long-term rates remain high, meaning that though it was cheap to borrow for short-term investments it was not so cheap for long-term investments, which were critical for infrastructure drives and big investment projects.

What was needed, he said, was to see a carry through from the short-term rate into the long-term rate.

Leowald was quite positive on a macroeconomic recovery, pointing to supportive developments in the global economy.

SA’s terms of trade had been strong, particularly in mining, which would continue as the Chinese economy continued to rev up.

The US Federal Reserve’s monetary policy stance was also a positive factor.

But he said in terms of Reserve Bank modelling it would take at least a few years for the economy to fully recover from the effect of the Covid-19 pandemic, with sectors such as tourism expected to suffer for a long time.

The Bank projects an economic decline of 7.3% in 2020. — BusinessLIVE