March 19, 2020 / 1:48 PM / in 19 days

UPDATE 2-South Africa delivers 100 bps rate cut to fight coronavirus

* Central bank delivers 100bps cut to support flagging growth

* Bank says to ready act further if conditions worsen

* Analyst see easing cycle but in smaller bouts (Adds details, background, analyst quotes)

By Alexander Winning and Mfuneko Toyana

PRETORIA, March 19 (Reuters) - The South African Reserve Bank (SARB) cut its main lending rate by 100 basis points to 5.25% on Thursday in a surprise unanimous decision, citing a dire local and global economic outlook due to the deepening impact of the coronavirus pandemic.

The cut, the biggest since the global financial crisis a decade ago, helped drag the rand from levels near its lowest ever and was twice as large as the half-percentage-point reduction predicted by a Reuters poll last week.

Only one of the 22 analysts polled had forecast the aggressive 100 bps move.

The SARB has not cut in increments larger than 25 bps since 2012. The benchmark rate is now at its lowest since 2013.

Analysts applauded the bold move, saying it signalled the start of an easing cycle, albeit in smaller increments, as the bank tries to balance growing fiscal risks with the need to keep yields high enough to keep foreign investors happy.

South Africa relies on foreign investment to finance twin budget and current account deficits, one of its main economic weaknesses.

RECESSION COMING

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of COVID-19. Our decision and its magnitude seeks to do this in the near term,” SARB Governor Lesetja Kganyago told a news conference in Pretoria.

Africa’s most developed economy slipped into its second recession in two years in 2019 as agriculture, transport and construction activity contracted, with severe power cuts by struggling state utility Eskom a key impediment to growth.

The bank slashed its 2020 forecast for gross domestic product growth to -0.2% from the 1.2% it had forecast in January, the first official institution to predict a full-blown annual recession this year.

“The forecast is much more realistic now. The 1.2% looked ridiculous in light of what we’re seeing globally,” said Jeffrey Schultz, senior economist at BNP Paribas. “But there’s big downside risk even to that -0.2%, so it wouldn’t surprise us if the SARB makes further downward revisions to growth.”

YIELD BATTLE

The massive selloff of emerging market assets over the past two weeks, triggered by the coronavirus pandemic, has already dragged the rand close to all-time lows, increased bond yields, and wiped hundreds of billions of rand off the South African stock market.

That in turn has further elevated fears the country will lose its last investment-grade credit rating, from Moody’s, which could further deter foreign investors, many of whom have already fled for safe-havens amid the coronavirus turmoil.

Year-to-date selling of bonds at the end of last week reached nearly 40 billion rand ($2.3 billion). “Despite the SARB’s consistent line that easing today was not motivated by any advance knowledge of Moody’s decision, due next week, this will not stop market participants assuming the decision must be supported by some degree of confidence that a downgrade is not imminent,” said Razia Khan, chief Africa economist at Standard Chartered.

A cut to junk by Moody’s would see South Africa’s debt ejected from the FTSE World Government Bond Index (WGBI), triggering up to $11 billion of selling by foreign investors, analysts estimate, probably pushing up borrowing costs sharply.

SARB’s monetary policy committee said the recent selloff had yet to affect financial stability, but it did not rule out emergency policy interventions.

“The repo rate is working just fine. There was no reason to go and play around with the reserve requirement,” Kganyago said. “Should we be in a position that we feel we have got to do something urgently, there’s nothing stopping us”. ($1 = 17.3185 rand)

Editing by Catherine Evans

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