Reserve Bank keeps rates unchanged – with further cuts unlikely in the near term

The South African Reserve Bank’s Monetary Policy Committee has voted to keep rates on hold.

This leaves the total rate cut in 2020 at 300 points, with the repo rate sticking at 3.5% and the prime lending rate at 10%. The prime and base home loan rate remain at a historic low of 7.0%.

Reserve Bank governor Lesetja Kganago said that since the MPC’s July meeting, the Covid-19 pandemic has abated in South Africa, however, a number of countries continue to experience a rapid spread of the virus.

“The economic effects of the crisis have been extensive and a recovery to pre-pandemic levels will take several year,” he said.

“Current forecasts from the IMF show global gross domestic product (GDP) contracting by about 4.9% this year, although the general economic outlook has improved somewhat.”

The governor noted that many central banks have taken a position to wait out the outbreak, and wait for new data to emerge to gauge conditions and assess the speed of economic recovery before making further adjustments to economic policy.

In South Africa, this data has emerged through a record decline in GDP in the second quarter of the year, which has impacted growth projections for 2020 as a whole.

Following the 51% quarter on quarter (saar) contraction of GDP in Q2, the central bank now forecasts a GDP contraction of 8.2% in 2020, compared to the 7.3% forecast in July. GDP is expected to grow by 3.9% in 2021 and 2.6% in 2022.

Kganyago said that further easing of the lockdown has supported economic growth, and that high frequency indicators generally show a pickup in economic activity from extremely low levels in April and May.

He further highlighted that:

• South Africa’s terms of trade remain robust;
• Commodity export prices are high;
• Oil prices remain generally low; and
• The rand has depreciated by 14.5% against the USD since January and remains below its estimated long-run equilibrium value.

Headline Inflation forecast for 2020 is revised lower to 3.3% from the 3.4% previously promulgated in the July meeting. Overall risks to the inflation outlook appear to be balanced, Kganyago said.

However, he noted a big risk factor in the sharp rise in South Africa’s public financing needs amid falling tax revenue and higher spending, which has been financed by higher private sector savings and borrowing from international financial institutions.

“Despite a higher than expected inflation outcome in July and elevated levels of country financing risk, the (MPC) notes that the economic contraction and slow recovery will keep inflation below the midpoint of the target range for this year.

“Barring risks outlined earlier, inflation is expected to be well contained over the medium-term, remaining below but close to the midpoint in 2021 and 2022,” he said.

Against this backdrop, the MPC decided to keep rates unchanged at 3.5% per annum. Two members of the committee preferred a 25 basis point cut, and three preferred to hold rates at the current level.

The implied policy rate path of the Quarterly Projection Model indicates no further repo rate cuts in the near term, and two rate increases in the third and fourth quarters of 2021.

The decision is in line with expectations from the market, which was split on a hold vote and a vote to cut by 25 basis points.

Approximately 40% of polled economists predicted a 25bps cut while 60% expected rates to remain unchanged.

Those in support of a cut said that weaker than expected GDP and inflation, and the strengthening of the rand, provided room for a further rate cut – while those pointing to a hold said that further cuts were unlikely to drive the needed growth, with rate stability would appear more beneficial.

The full statement is below:

Read: Why interest rates are not likely to go up in South Africa any time soon