Summary: The Federal Reserve’s latest tweak to monetary policy – a half-point cut in its benchmark interest rate – is likely to push the SARB to cut interest rates on March 19.
At Saxo, we have always been very optimistic about the long-term growth potential of the South African economy. However, in the short run, South Africa is facing strong headwinds that are ill-addressed by policymakers. Before COVID-19 outbreak, the economy was already in bad shape: data released on March 3 confirmed the country slumped into a recession in the fourth quarter last year, credit rating is at risk and Eskim’s heavy debt load is still worrying investors (for more on that topic, please read this great article written by M. Merten).
Adding to that downside risks to global growth due to the novel coronavirus outbreak, it is not surprising that pressures are mounting on the SARB to cut interest rates. An emergency rate cut is out of the question for the moment according to the governor of the SARB.
However, considering the SARB has a long history of following the Fed’s monetary policy tweak, we think that it will announce a half-point cut in its benchmark interest rate, from 6.25% to 5,75%, at its regular gathering on March 19. The Fed’s recent move gives South Africa and other EM countries with weak growth a little more room for maneuver to ease monetary policy without weakening too much their currency.