South Africa cuts rates further as COVID-19 strangles economy

A divided South African central bank cut interest rates for a fifth time this year on Thursday, trimming them to a record low as it looks to support an economy strangled by the coronavirus pandemic.

Three members of the generally conservative bank's five-member monetary policy committee favoured a 25 basis point (bps) cut while two voted for no change, a split also reflected in analysts' forecasts.

The cut brought the main lending rates to 3.50% and followed a previous 275 bps of cuts this year to try to cushion the impact of COVID-19 on consumers and firms.

The bank also cut its 2020 forecast for gross domestic product, to a contraction of 7.3% from the 7% predicted in May.

Beset by chronically high unemployment and several years of low growth, South Africa's economy has been further enfeebled by the continent's worst coronavirus outbreak, in which almost 400,000 people have been infected and close to 6,000 died.

Consumer inflation is seen remaining near the lower end of the central bank's 3% to 6% target range, and there have been growing calls from labour unions for policymakers to ease policy more aggressively.

However, the bank noted in its policy statement, read out by Kganyago, that upside risks to inflation could emerge "from heightened fiscal risks and sharp reductions in the supply of goods and services", and that future rate decisions would be data-dependent.

The easing of South Africa's lockdown "has supported growth in recent weeks and high frequency activity indicators show a pickup in spending from extremely low levels," he added.

The bank forecast average consumer price growth of 3.4% this year and 4.3% next, and said it expected GDP to expand 3.7% in 2021.

The rate cut decision boosted the rand and government bonds.

Chief Africa economist at Standard Chartered, Razia Khan, said the bank's statement was hawkish, but it was unclear whether the bank had reached the end of its easing cycle.

"A lot of monetary accommodation has been provided, but the impact of that is difficult to gauge, given the lockdown. In our view, this leaves open the likelihood of further easing, should inflation remain benign and growth weak," she said.

(Additional reporting by Olivia Kumwenda-Mtambo and Alexander Winning; Editing by Catherine Evans and John Stonestreet)

By Mfuneko Toyana