SARB cuts rates and rand continues to weaken

SARB moves rates to record levels

The South African Reserve Bank (SARB) has cut lending rates by another 100 basis points (1%) to bring the repurchase (repo) rate down to 4.25%, its lowest level on record. The prime lending rate is now 7.75% (previously 8.75%). Lending rates in South Africa have now been lowered by 2.25% in 2020 thus far.

Gross Domestic Product

The COVID-19 pandemic is having a significant impact on local and international economic activity with the outlook remaining very uncertain. The International Monetary Fund (IMF) has lowered its 2020 outlook for global economic growth to -2.9%, from +3.5% earlier on in the year. In turn the SARB now expects the South African economy, already in recession, to contract by around 6.1% this year. This marks a dramatic decrease in the outlook which was forecast at -0.2% in 2020 by the Reserve Bank only 3 weeks ago. Some of the slack in South Africa is expected to be picked up in 2021 and 2022, with growth forecast at 2.2% and 2.7% respectively.

Inflation

Inflation is expected to be negatively impacted by the severe depreciation of the rand amidst the weak global sentiment. However, lower oil prices and weak domestic demand side growth is expected to partially offset the inflationary pressure caused by the softer domestic currency.

The SARB’s headline consumer price inflation forecast averages 3.6% for 2020, 4.5% for 2021, and 4. 4% in 2022. The forecast for core inflation is lower at 3.8% in 2020, 4.0% in 2021, and 4.2% in 2022.

The Rand

The rand has weakened following the Reserve Banks surprise decision to ease monetary policy ahead of the original meeting which was scheduled for May 2020. The domestic catalyst for weakness in the rand is noted by the currency underperforming its emerging market currency peers on the day of the announcement.

USD/ZAR

The long-term trend for the USD/ZAR remains up (USD strength / Rand weakening). After pulling back from the all-time high at R19.35/$ the currency pair now seems to have found and be reversing off support at R17.85/$. The reversal off support suggests the uptrend to now be continuing.

R19.35/$ becomes the upside resistance target from the move. Should the USD/ZAR instead move to close below R17.85/$, then R17.15/$ becomes the next downside support target. However only a move below the R17.15/$ support level would consider the long-term uptrend to be reversing course.

EUR/ZAR

The EUR/ZAR chart looks like that of the USD/ZAR in that the long-term trend remains up, while in the near term the currency pair looks to be reversing off support (R19.50/EUR). R20.90/EUR becomes the upside resistance target favoured from the move. Should the EUR/ZAR instead move to close below support at R19.50/EUR the bullish continuation assumptions would be deemed to have failed.

GBP/ZAR

The GBP/ZAR chart looks like the chart of the USD/ZAR and EUR/ZAR, in that the long-term trend remains up, while in the near term we have seen a bullish reversal off support, suggesting a continuation in this uptrend. R23.70/GBP becomes the initial upside resistance target, while a close below R22.25/GBP would consider the bullish assumptions to have failed.