Monetary policy and COVID-19: what to expect from the SARB

The SARB Monetary Policy Committee (MPC) is set to meet within the week (between the 17th and the 19th of March 2020[1]) to discuss their decision on whether the interest rate should be changed.

Without the threat of Covid-19, I would have been almost certain that the MPC would have decided to slash repo rates by 25 basis points. This would have likely been due to a slowdown in expected output growth by 1.4%[2] in the fourth quarter of 2019, and would have been done as a means to stimulate the economy slightly[3].

This decision, though, would probably not have been unanimous.

Our economy slipped into a technical recession[4] at the end of 2019 due, in large part, to pervasive load-shedding which crippled production. This, along with debt crises plaguing our country’s State-Owned Enterprises, might have provided enough ammunition for ratings agency Moody’s to downgrade our credit status accordingly (even in light of Minister Tito Mboweni’s relatively strong and sensible budget speech).

In the event that a credit ratings downgrade was expected by some members of the MPC, these members might have argued for the repo rate to be increased. This has the theoretical impact of improving yields on South African investments and could have been used as a means to stave off some of the expected capital flight which would occur in the event of a downgrade[5].

This move to increase the repo rate would have likely been outvoted, though, and the likely decision would have been to decrease the repo rate.

However, this scenario is hypothetical, because it exists without the impact of Covid-19 on the South African economy. This means that the MPC will have to also include the potential economic impact of Covid-19 when discussing the repo rate changes during this coming week.

Given the balance of evidence, I believe that the following statements hold true:

1. South African growth has worsened, and is expected to remain low over the coming year- this is evidence to suggest that the SARB could decrease the interest rate on the 19th of March.

2. There is some[6] risk that, at the end of March, our economy could be downgraded, given some political uncertainty, as well as ballooning state debt. This is evidence that the SARB should hike interest rates, in order to ensure that there is not a mass exodus of capital in the future.

3. Covid-19 has had the potential impact of:

a. Weakening the rand[7]. Because the SARB has a mandate of maintaining the purchasing power of our currency, it is likely that the MPC now sees a potential need to increase the repo rate, and in so doing, prop up capital inflows into South Africa, improving the strength of the currency.

b. Depressing economic growth even further, given South Africa’s reliance on world economic growth as a means to improve our own economic growth[8]. Again, this is reason enough for the MPC to cut interest rates and stimulate our economy.

Prior to Covid-19, it was almost a certainty that repo-rates would have been cut on the 19th of March. Now, given this confluence of evidence, there are a handful of scenarios and their likelihoods which I explore briefly in the table below:


Having explained the first two cases, it is the third scenario that is potentially most interesting (and very rarely discussed, especially when faced with complicated economic situations).

Because the SARB might not want to depreciate the currency further, or increase the risk of capital outflows in the event that a ratings downgrade is on the cards, the MPC might simply not want to risk decreasing the repo rate. On the other hand, whilst increasing the repo rate might be able to prop up the Rand, and assist in staving off capital flight to an extent, the decision will have hugely detrimental effects on economic growth in the short-term.

Thus, it is in maintaining the repo rate (in doing nothing) that the SARB would be able to:

1. Maintain sluggish growth, but not worsen it, and

2. Maintain a weakened currency, but not worsen it.

If the MPC did not want to “rock the boat” in any way, this would be the avenue through which the current (weak) state of the economy could be sustained. This, in my opinion, might be the most appropriate ‘action’ at this moment in time.

However, because the South African market has been pricing in a reprieve from the SARB, and because the growth-impact of Covid-19 has been hugely negative across the globe, it is likely that the MPC will still decrease the repo rate in an attempt to revive a flat-lining economy.


[1] (The South African Reserve Bank, 2020)

[2] (Statistics South Africa, 2020)

[3] A decrease in the repo rate would have decreased the cost of lending, amongst other things, propping up the economy by means of increased investment and consumption(Blanchard, 2014).

[4] Two consecutive quarters of real GDP decreasing

[5] An increase in the repo rate would make it more lucrative for investors to remain in South Africa, and could be used as a “reward” for investors to continue investing in what is perceived as a risky economy.

[6] I say some because it is quite likely that the well-received budget statement of Minister Mboweni could have calmed the jitters of Moody’s and co.

[7] As evidenced by the large depreciation in the rand over the last week, which has been at least partially attributed to Covid-19 (White, 2020)

[8] For a theoretical discussion, see Thirlwall (1979). For statistical evidence, see Cepni, et al. (2020), among many others.