What economists say about another rate cut for South Africa

 ·19 Jan 2021

South Africa’s Monetary Policy Committee (MPC) will meet for the first time in 2021, on Thursday (January 21), with economists anticipating the central bank to keep rates at a record low.

This, Bloomberg reported, stems from the South African government’s decision to only reimpose some coronavirus restrictions amid a second wave of cases, instead of introducing another hard lockdown.

All but one of the 17 economists in a Bloomberg survey expect policymakers to hold the key repurchase rate at its current 3.5%, having halved it in 2020.

“Traders have pared their expectations of a rate cut with forward agreements, used to speculate borrowing costs, now pricing in a less than 50% chance of 25 basis-point reduction this week,” Bloomberg said.

While inflation is predicted to remain below the 4.5% midpoint of the central bank’s target range through 2022, the balance of risks to the outlook is changing with an increase in oil and crop prices since the November meeting, said Miyelani Maluleke, an economist at Absa Group Ltd.

The weakening of the rand in January could also weigh on decision-making, he said. The five-member panel was split in their votes at the last four gatherings, Bloomberg noted.

“A second wave of Covid-19 infections is sweeping through the continent, threatening the nascent recovery that is taking place. Policymakers may wish to extend additional support to their economies, however, rising inflation pressures have limited the space to manoeuvre.

“We therefore expect them to continue to keep rates on hold in the coming weeks in a fine balancing act between economy and inflation,” Bloomberg Economics said.

Economists at Nedbank said that the central bank is expected to maintain its repo rate at 3.5% when it announces its policy decision on Thursday.

“The rand’s recent strength, with the local unit about 10% firmer than the starting point of R16.50 against US dollar assumed at the time of the November MPC meeting, is unlikely to tilt the MPC towards a cut.

“The focus will be on the anticipated inflation outlook and the SARB’s economic growth forecasts relative to potential output. Inflation is expected to gradually edge higher in 2021, off the low base established in 2020,” it said.

Nedbank noted that the MPC has indicated that monetary policy is already stimulatory and reiterated that growth and employment can only be 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 SA’s higher risk premium due to the dismal fiscal position at the longer end of the curve,” it said.

A separate Finder panel also expects the South Africa Reserve Bank (SARB) to hold the repo rate this week, however, over a third (36%) think the bank should cut the rate.

BER chief economist, Hugo Pienaar, was the only panellist out of 15 forecasting a rate cut. He expects a 25bps drop, but is in favour of a deeper 50bps cut.

“With a benign inflation outlook, monetary policy has space to provide some moderate further stimulus to the economy at a time when fiscal policy is heavily constrained to do so,” he said.

Independent economist, Elize Kruger, expects the bank to hold, but is in favour of a 25bps rate cut.

“The SA economy is still bleeding amid the economic impact of the Covid-19 crisis, while consumer inflation remains well under control in the medium term forecast, thus a small window of opportunity has opened for further stimulation,” she said.

Stanlib economist, Ndivhuho Netshitenzhe, also called for a 25bps decrease, noting inflation remains under-control.

“…That, along with the weak domestic economic environment that is expected to continue at least into early 2021 (as a result of increased lockdown measures), gives the SARB some room to be more expansionary in its monetary policy.

“Despite this, however, the SARB is aware that although SA consumer inflation is still expected to remain comfortably below the midpoint of the inflation target over the next six months, base effects could push SA inflation somewhat higher in 2021, especially during the middle of 2021”.

However the majority of the panel (64%), including economist at RMB, Mpho Molopyane, think the bank should and will hold the rate.

“The growth and inflation outlook has not significantly changed since the November 2019 meeting to warrant a change [to] interest rates. GDP is going to take a while to return to pre-Covid levels, with inflationary pressures relatively contained.

This will enable the SARB to keep monetary policy accommodative and the repo rate unchanged in contrast to the tightening bias projected by the QPM at the November 2019 MPC meeting,” she said.

Nearly three quarters (73%) of the panel believe that rate is unlikely to increase this year. Nearly half (47%) said a hike would occur in the first half of 2022, 20% are forecasting an increase in the second half of 2022, and 7% in 2023.

IQbusiness chief economist, Sifiso Skenjana, expects an increase in the first half of next year due to inflation.

“We are seeing early signs of tapering off on monetary easing/accommodative policy in some of the developed economies which may suggest that we may see higher levels of inflation in those economies by year end 2021.”

Do you think the SARB will be forced to buy more bonds?

The panel was equally divided on whether the SARB will be forced to buy more bonds (50%-50%), Finder said.

BNP Paribas chief economist, Jeff Schultz, said that the bank will be forced to buy more bonds in the short term, but it is only likely to do so in response to further deterioration in economic conditions or market dislocations.

“…The SARB is likely to keep as much powder dry as possible and assess the outlook for the economy and bond market first before making any pre-emptive purchases. Right now the bond market continues to function well, having recovered from the massive sell off seen in March/April last year.

“This should limit the SARB’s willingness to aggressively re-enter its SAGB buying right now,” he said.

Read: South Africa’s economy sees major rebound in the third quarter

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