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South Africa Reserve Bank repo rate forecast report July 2020

Economists are divided on the next repo rate decision: 45% say the rate will fall, while 55% say it will hold.

Key findings

  • 45% of the panel say the rate will fall, 55% say it will hold.
  • Most of those predicting a decrease expect a 25 basis point fall.
  • 42% of economists expect an extended-U-shaped recovery.

Expert forecasts ahead of the July decision

Name and organisationForecastComment
Dr Elna Moolman, head of SA macro research at Standard BankDecreaseInflation should remain quite benign in the near term, while the worst economic contraction in a century clearly warrants all the relief that can be provided prudently. The near-term inflation forecasts are so low, that there is a material buffer that should keep inflation inside the 3-6% target range even if there is an adverse shock. This means that the SARB can provide some relief to the weak economy and it should have time to act timeously before inflation flares up.
Miyelani Mkhabela, CEO and chief economist at Antswisa Transaction Advisory ServicesHoldThe SARB Governor Lesetja Kganyago and Monetary Policy Committee (MPC) repo rate cuts totalled 275 basis points or 2.75% in 2020, which is a stunning response to manage monetary stability in the midst of the coronavirus pandemic and corporates and consumers have enjoyed additional disposable from the repo rate cut. The MPC’s April surprise 100 basis point cut was a great monetary policy strategy and we hope to see another cut in the short term, as we still have room to cut with another 100 basis points in the 2020 third and fourth quarters.
Ilse Botha, professor at the University of JohannesburgDecreaseDue to the current economic climate, debt levels are rising and a rate cut will be beneficial. Inflation is also currently within target and expansionary monetary policy makes sense, although a rate cut will not necessarily result in higher spending currently.
Dr Johan Coetzee, senior lecturer and researcher at the Department of Economics and Finance at the University of the Free StateDecreaseThe MPC is faced with a tough trade-off between providing a domestic environment more conducive to stimulating economic activity and encouraging foreign investment and a more stable currency through relatively higher interest rate differentials. With so much uncertainty in global markets, the problem is exacerbated as investors are playing off the risk versus return trade-off now more than ever. Inflationary pressure has subsided over the past six months, allowing the MPC the leeway to allow a less restrictive interest rate agenda. However, we should not discount the looming price pressures that the lockdown has enforced on the supply side of the economy. Coupled with poor economic activity, once the inflationary pressure starts playing out in official data, the relatively higher interest rate differential will become a more important policy consideration as the MPC will have to align its decisions more explicitly to maintaining its inflation policy mandate than the looser policy it is currently able to accommodate.
Dawie Roodt, an economist at the Efficient GroupDecreaseLow CPI and low GDP.
Jannie Rossouw, interim head at Wits Business School at the University of the WitwatersrandHoldIt is necessary to assess the full impact of the interest rate declines already announced thus far this year.
Jeff Schultz, an economist at BNP ParibasDecreaseWe expect the SARB to ease interest rates further in July on the back of materialising downside risks to both its inflation and growth forecasts. Our expectation for the SARB to miss its inflation target over the following 12 months, with CPI likely to average below the floor of its 3-6% target range, means that the bank probably has a bit more room to help support the economy, indebted consumers and struggling companies.
Annabel Bishop, chief economist at Investec.co.zaHoldInterest rates are at historical lows and the MPC has cut rates very substantially this year already. Further cuts, if they occur, are likely to wait until there is a compelling reason to drive them.

The 23 July repo rate decision

The South Africa Reserve Bank is set to hold the rate, according to a small majority (55%) of economists on Finder’s panel. However, 45% say the rate is likely to decrease, with most predicting a 25 basis point fall.

CEO and chief economist at Antswisa Transaction Advisory Services Miyelani Mkhabela says that the rate will hold, given that the Monetary Policy Committee (MPC) has already cut the rate by 275 basis points in 2020, but thinks there is scope to decrease the rate later in the year.

“The MPC’s April surprise 100 basis point cut was a great monetary policy strategy and we hope to see another cut in the short term, as we still have room to cut with another 100 basis points in the 2020 third and fourth quarter,” he said.

Senior lecturer and researcher at the Department of Economics and Finance at the University of the Free State Dr Johan Coetzee is the only panellist who thinks the MPC will make a decision in conflict with his own view. He expects that the Bank will cut the rate but is personally in favour of a hold.

“The MPC is faced with a tough trade-off between providing a domestic environment more conducive to stimulating economic activity and encouraging foreign investment and a more stable currency through relatively higher interest rate differentials,” he said.

Chief economist at Investec Annabell Bishop and independent economist Elize Kruger are both forecasting a rate hold, with each noting that the rate is either at or close to the bottom of the cycle.

Economist at BNP Paribas Jeff Shultz expects the most aggressive rate cut of 50 basis points on the back of materialising downside risks to both its inflation and growth forecasts.

“Our expectation for the SARB to miss its inflation target over the following 12 months, with CPI likely to average below the floor of its 3-6% target range, means that the bank probably has a bit more room to help support the economy, indebted consumers and struggling companies,” he said.

The repo rate will go no lower than 3% in this cycle, according to the panel average of the six experts who gave a precise figure for this question. Efficient Group economist Dawie Roodt and head of SA macro research at Standard Bank Dr Elna Moolman both said that the rate will go no lower than 3.5%, while Mkhabela had the lowest forecast of 2%.

Bond purchases

When asked whether or not the Bank should pursue a full-scale quantitative easing program, the vast majority (82%) said the current program of bond purchasing is sufficient.

Professor of economics at the University of the Western Cape Matthew Ocran thinks that the Bank’s approach to bond purchasing is appropriate.

“Unlike countries with reserve currencies such as the US, Britain, Japan and the Eurozone block, any attempt to adopt a full QE in South Africa will be disastrous,” he says.

Bishop agrees, noting that limits exist on the quantum of the South African government debt that the SARB can purchase.

“This is due both to a cap on bond purchases in primary market legislation and the Southern African Development Community’s treaty limitation that Central Banks should not provide more than 10% of funding to the government. The bond purchase programme has been embarked on in order to solve the prior dislocation in the bond market, which elevated bond yields,” she comments.

The majority of panellists (73%) think that the Bank is doing enough to support the economy throughout the COVID-19 pandemic. Around one in five (18%) weren’t sure, while just one panellist, Miyelani Mkhabela, thinks that the Bank isn’t doing enough.

Coetzee thinks the Bank’s response is sufficient.

“One of the first signs of uncertainty in an economy is the squeeze on liquidity in both the real and monetary sectors. Economic agents hold onto their liquidity and the flight-to-quality becomes more prominent. The bond purchasing programme by the SARB is therefore crucial to provide this liquidity.”

Moolman, who was on the fence about the SARB’s response, says there could be scope for further relief in due course if the inflation prognosis remains as benign as expected.

Mkhabela, the only panellist to say that the Bank should be doing more, says the Bank should be more inclusive to disadvantaged groups.

“I believe nationalisation of the Reserve Bank will add more value to the South African developmental state approach and expand the economy to be more inclusive to the previously disadvantaged and have at least two black banks to operate nationally in both retail and Corporate Investment Banking,” she says.

Economic recovery

According to nearly one in five panellists (17%), economic recovery in South Africa is expected to take the shape of an L.

However, the majority of panellists (75%) are expecting the economy to recover sooner, with 42% tipping an extended-U-shaped recovery (an initial drop, then extended stagnation followed by growth), and a third (33%) expecting a U-shaped comeback. Just 8% expect the recovery to look like a W.

Over the next six months, all panellists hold a negative outlook on employment, while 83% are also negative on wage growth and 75% are negative on household debt.

However, 42% hold a positive outlook on housing affordability, and nearly one in five (17%) also hold a positive outlook for cost of living.

The October Budget

The government will be unsuccessful in its attempts to stabilise debt at or below 87.4% of GDP by 2023/2024, according to the majority of panellists (67%). The remaining 33% of panellists are on the fence, but none think it will be successful.

Schultz says that they view South Africa’s supplementary budget as theoretically plausible but realistically challenged.

“The bold target of achieving a primary surplus by FY23-24 will require politically unpalatable compromises, something we are sceptical about. With much of the detail deferred to the October medium-term budget, debt sustainability questions are likely to continue facing the country, we think.

“While we expect some further pare back in state spending priorities, we think that all the cuts pencilled in are overly ambitious and, therefore, struggle to see debt ratios not surpassing 90% of GDP by FY22-23.”

Interim head of Wits Business School at the University of the Witwatersrand Jannie Rossouw also thinks the government will be unsuccessful in its pursuit, commenting, “The South African government repeats the error of overestimating economic growth.”

The majority of panellists (75%) say that the government’s future fiscal frameworks should be guided by the principles of zero-based budgeting. Just 8% say definitively that it shouldn’t, while 17% are on the fence.

Chief economist at Alexander Forbes Isaah Mhlanga says zero-based budgeting is aimed at cutting unnecessary spending.

“It will not achieve the consolidation path. It’s too ambitious and unlikely to be achieved as much of the spending cuts are difficult to effect, including the wage bill,” he says.

Member of the South African Parliament for the Democratic Alliance, Geordin Hill-Lewis, thinks it is extremely unlikely that the government will be able to implement zero-based budgeting anytime soon.

“Such an enormous exercise must be based on proper data about the efficacy of government spending programmes, which at the moment is largely absent. Almost all of the spending reviews the government has already done have pointed to the very poor quality of spending data,” he says.

When asked what measures they would like to see announced in the budget policy statement in October, many were quick to flag proposed expenditure cuts and the privatisation of state-owned enterprises. Other suggested measures included accountability principles to restore the country’s investment rating credibility, growth reforms and progress on the infrastructure investment program.

What measures would you like to see announced in the budget policy statement in October?

Name and organisationComment
Dr Elna Moolman, head of SA macro research at Standard BankWe expect to see more detail of the proposed expenditure cuts. It’s critical that the government remains committed to the consolidation strategy and targets set out in the Supplementary Budget.
Miyelani Mkhabela, CEO and chief economist at Antswisa Transaction Advisory ServicesImplementation of the planned economic development strategies and mechanisms on how we can go about governance and accountability principles, to restore our investment rating credibility.
Elize Kruger, independent economist at Carpe Diem Research ServicesPrivatisation of SOEs and a reduction in wage bill and size of the state.
Dr Johan Coetzee, senior lecturer and researcher at the Department of Economics and Finance at the University of the Free StateMore stringent accountability to radically eradicate corruption within the government structures. This, however, is a pipe-dream and, if announced, it will only be lip service filled with empty promises. No plan, policy or strategy can be implemented successfully if this is not addressed. Now more than ever, every penny counts and the welfare of the South African people should be at the forefront of the government’s budget policy going forward. Our policymakers propose wonderful policies – they do not have a good track record of following through with them, however.
Dawie Roodt, an economist at the Efficient GroupA dramatic cut in spending and privatisation.
Jannie Rossouw, interim head at Wits Business School at the University of the WitwatersrandNo increase in civil service remuneration expenditure. The government will only purchase vehicles manufactured in South Africa at all levels of government (including for Cabinet ministers).
Jeff Schultz, an economist at BNP ParibasOutside of the MTBPS in October, we would like to see meaningful regulatory and policy enhancing policies finalised in order to set the country on a longer-term improved sustainable growth path. The ability of the Treasury to eventually stabilise debt over the medium-term now rests almost solely on the country being able to achieve higher levels of growth, given that scope for additional spending cuts to what has already been assumed seems unlikely, we think.
Annabel Bishop, chief economist at Investec.co.zaSubstantial cuts to planned increases in civil servants’ remuneration, including the elimination of above-inflation wage increases, bonuses and natural remuneration progressions.
Isaah Mhlanga, chief economist at Alexander Forbes
  1. Progress on the infrastructure investment program.
  2. Hard decisions to close dysfunctional SOEs.
  3. Progress on which reforms to boost growth will be the focus.
Matthew Ocran, professor of economics at the University of the Western CapeThere should be a clear indication of how the sorely needed structural reforms will be prioritised, sequenced and implemented in order to ignite growth. There should be credible efforts to halt the decay in the State-Owned Enterprises. We have to move from policy intentions to implementation. Enough of the talk on the need for reforms.
Geordin Hill-Lewis, Member of the South African Parliament for the Democratic AllianceA credible and realistic plan to reduce debt and stick to the Cabinet’s commitment of primary balance by 2023. This would entail reductions in expenditure on wasteful and unnecessary programmes so that spending on essential basic services can be protected. But even this is unlikely to be enough – it will need a re-sizing of the entire government to focus on only doing those things that the government is constitutionally charged with doing. It also requires ending frivolous vanity projects, like SAA and other zombie state-owned companies.

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