What to expect from South Africa’s interest rate meeting this week

The holiday-shortened week will be dominated by the release of the August consumer inflation (CPI) figures on Wednesday (22 September), followed by the conclusion of the South African Reserve Bank (SARB) policy interest rate meeting on Thursday (23 September).

In a research note on Monday, the Bureau for Economic Research (BER) said that it expects headline CPI to increase by 0.4% month-on-month in August, driven by the 91c/litre petrol price hike at the beginning of the month.

The monthly increase should drive an annual acceleration in headline CPI to 4.9%, from 4.6% during July, it said. It added that the monetary policy committee of the SARB is projected to keep the repo policy rate unchanged at 3.5%.

“Besides the rate decision, there will be some focus on the SARB’s take on what the recently released GDP rebasing/historical revisions, as well as the much better-than-expected Q2 2021 real GDP print, imply for the growth outlook.

“The central bank’s 2021 real GDP forecast is likely to be raised from the 4.2% expected at the time of the July interest rate meeting to around (and potentially above) 5%.”

The SARB’s updated growth view beyond 2021 will also be of interest, the BER said.

“There may be some focus in the Q&A after the decision on SARB governor Lesetja Kganyago’s stated preference for the bank’s inflation target to be lowered to 3% over time.”

Survey says hold 

A separate survey conducted by Finder.com found that 97% of respondents believe that the SARB is set to hold the repo rate at 3.5% in its September meeting.

Investec chief economist, Annabel Bishop, thinks the rate will and should hold while the economy remains unstable.

“The SARB needs to avoid interest rate hikes this year, even if monetary policy is extremely accommodative, as the economy is still fragile and well below the level it was at before the lockdowns of Q2 2020. Even next year, interest rate hikes should be held off as long as possible, hopefully until 2023,” she said.

One panellist, Tshwane University of Technology senior lecturer Mulatu Zerihun, said the rate would and should fall by 0.5 bps at the September meeting to boost employment.

“Decrease the repo rate so that investors and consumers’ confidence may increase and hence contribute towards economic recovery,” he said.

Gordon Institute of Business Science professor, Adrian Saville also thinks the rate will hold but favours a preemptive increase to combat inflationary pressure.

However, a rate increase is unlikely to happen until the employment rate improves, according to 62% of panellists who say the slow recovery in employment is preventing a hike.

University of the Free State senior lecturer Johan Coetzee, who is part of both majorities, agrees the rate should hold while unemployment remains high.

“Although there are stirring signs of future rate hikes due to international developments, at this stage the SARB need not increase the repo rate. The high unemployment rate of over 34% and stagnant economic activity would not benefit from this. It is on the cards in the not too distant future, though,” he said.

The employment rate significantly dropped in 2020, and according to most panellists (81%), recovery is still years away.

Just 15% think employment will recover to pre-pandemic levels within the next year, while around a third (37%) say it will happen by 2024, 30% in 2025, and 15% in 2026 or later.

One panellist, Intellidex head of research Peter Attard Montalto, said that the employment rate would never completely return to its pre-pandemic levels.

Other top factors preventing a rate hike cited by panellists include inflation being contained this year (55%) and accommodative US monetary policy (45%).

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What to expect from South Africa’s interest rate meeting this week