Reserve Bank shifts to ‘wait and see’ after Covid-19 response

South Africa’s central bank has shifted to a “wait and see” strategy as it expects the benchmark interest rate to remain low after aggressive monetary-policy easing in the first half of the year to counter the economic damage wrought by the coronavirus pandemic.

“While the initial Covid-19 shock clearly justified a forceful response,” policy is once again more data dependent with the rate either cut by smaller increments or left unchanged in the second half of the year, the Reserve Bank said Tuesday in its six-monthly Monetary Policy Review.

The central bank last month held the repo rate at 3.5% after 300 basis points of reductions this year. With the key rate at the lowest level since it was introduced in 1998 and inflation forecast to have bottomed out, it’s likely to move “somewhat higher” in future, the central bank said.

The normalization of the repurchase rate is “likely to be gradual, with rates staying at low levels for an extended period,” it said. While the monetary policy committee hasn’t committed to an interest-rate trajectory, the bank’s forecasting model suggests an upward movement will take place toward the end of 2021.

The model shows the repo rate at 4.03% by the end of that year.

Significant Support

While the central bank has been criticized by politicians and labor-union officials who say it should be doing more to create jobs and support an economy that it sees contracting by 8.2% this year, it says the strongest effects of the rate cuts in the first half are likely to be seen on credit growth in mid-2021. However, it maintains that monetary policy alone can’t deliver prosperity.

“Monetary policy is providing significant support, but low rates would provide even more stimulus if there were greater certainty about the economy’s medium-term direction,” it said.

Even with a rebound expected in the third quarter, output will only recover to pre-virus levels by mid-2023, according to central bank forecasts that predict a year-on-year decline of 9% in the three months to September.

It could recover faster if constraints including electricity shortages, record-high government debt and weak confidence are addressed, the central bank said. Though a resurgence of Covid-19 infections globally could curb the rebound, Kuben Naidoo, a deputy governor said.


Read: Government unlikely to target South Africa’s retirement funds

Must Read

Partner Content

Show comments

Trending Now

Follow Us

Reserve Bank shifts to ‘wait and see’ after Covid-19 response