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

 ·18 Nov 2020

The Reserve Bank’s Monetary Policy Committee (MPC) is expected to hold the repo rate at 3.5% when it announces its policy decision on Thursday (19 November).

12 of 14 economists (86%) surveyed by Finder anticipate a hold when the South African Reserve Bank (SARB) makes the announcement this week – despite nearly half of economists calling for a rate cut.

57% of economists think a hold is a right decision and 43% say the bank should cut the rate.

Stanlib economist, Ndivhuho Netshitenzhe, is in favour of a 25bp decrease, but is forecasting a hold due to the MPC’s conservatism.

“The MPC tends to lean on the more conservative side so they have become more reluctant to cut rates anymore because the benefits of it have diminished and they can argue the real rates are now negative so it is very accommodative,” she said.

University of the Free State senior lecturer in banking and finance, Johan Coetzee, thinks the MPC will and should hold, given that, as an emerging economy, it is important for South Africa to have a higher interest rate differential than major economies around the world.

“This will, at least to some extent, provide a buffer to volatile exchange rate movements. Having said this, there is so much uncertainty in the world today that any seemingly logical policy decision might not have as much traction as was the case in the past,” he said.

Lockdowns to play a role 

South Africa’s MPC meets as key data suggest gross domestic product may have exceeded its forecast for an annualised 45.2% increase in the three months through September, Bloomberg said in its analysis.

“Stricter lockdowns in advanced economies that pose a threat to exports and output in the final quarter, as well as the bank’s decision to front-load aggressive cuts in the first half of the year, could see it stand pat,” it said.

12 of 16 economists in a Bloomberg survey see the rate staying at 3.5%, with the other four predicting a 25 basis point cut. Forward-rate agreements, used to speculate on borrowing costs, predict a less than one-in-four chance of a quarter percentage point cut.

“Split decisions at the last three meetings suggest a lack of consensus among the MPC and that its signals are ‘becoming far less clear’, which supports the case for a pause,” said Nicky Weimar, chief economist at Nedbank.

Focus on inflation 

Nedbank’s economists also believe that a rate cut is unlikely this week, with the focus likely to be on inflation, the bank said in a research note this week.

“The rand’s recent strength, with the local unit around 9% firmer than the R17.07/US dollar starting point assumed at the time of the September MPC meeting, is unlikely to tilt the MPC towards a cut,” he said.

“The focus will be on the anticipated inflation outlook and the SARB’s economic growth forecasts relatively to potential output.”

Nedbank said inflation is likely to remain benign over the remaining months of 2020, before gradually drifting higher in 2021 off the low base established this year.

“We expect inflation to average slightly less than 4.5% over the next three years. However, the SARB’s inflation forecasts presented in September was slightly worse than ours and the output gap is likely to narrow in the years ahead as the economy recovers from the shock of level 5 lockdown.”

The MPC has indicated that monetary policy is already stimulatory and reiterated that growth and employment can only lifted by significant structural reforms.

“A further 25 basis point rate cut is also unlikely to add any meaningful further stimulus given that the yield curve remains extremely steep as investors are pricing in the higher risk premium due to South Africa’s dismal fiscal position at the longer end of the curve.

“Our forecast of unchanged interest rates are based on all these considerations,” it said.

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