South Africa likely to keep interest rates at record low

 ·18 May 2021

The South African Reserve Bank (SARB) is expected to keep interest rates steady at 3.5% when they meet this week (18-20 May), with domestic inflation forecasts inside the bank’s target range.

All 25 economists surveyed by Reuters said the central bank is likely keep its repo rate at a record low at the SARB’s Monetary Policy Committee (MPC) meeting on Thursday (20 May).

Similarly, a unanimous vote by 21 economists on Finder’s repo rate forecast report, showed a rate hold.

While the entire panel said the rate will hold, three panellists called for a rate cut, with a lecturer at the University of South Africa, Mzwanele Ntshwanti calling for a cut of 50 points.

“Decreasing the repo by 50 bps will give room to households to spend and firms to aggressively invest in the economy for recovery,” Ntshwanti said.

Associate professor at the University of Cape Town Sean Gossel also believes that the MPC should cut rates, but thinks that a reduction of 25 basis points would be enough.

“To support South Africa’s weak recovery and to provide some relief to over-indebted consumers and stimulate business activities.

“International capital flows are sufficiently buoyant, so the slightly lower yields won’t stimulate excessive capital outflows,” Gossel said.

When will the rate next move?

Reuters’ survey medians suggest the Reserve Bank will hike rates by 25 basis points to 3.75% either in January or March next year, followed by another quarter of a percent rise either in July or September 2022 to 4%.

Finder’s panel is also in lockstep about the direction of the next rate adjustment, with all economists saying the next rate move will be up. However, the panel was unable to agree on just when that will happen.

Around a quarter (24%) think it could be as soon as November of 2021. However, the majority think the rate will hold until 2022 – 48% think an increase will happen in the first half of 2022 and 24% in the second half.

The remaining 5% think rates will stay at their current levels until 2023.

Chief economist from Efficient Group Dawie Roodt forecasts a move in November because “CPI and CPI expectations are likely to be rising by then”.

At the other end of the spectrum is Dean of the University of Pretoria Elsabe Loots, who believes that the rate will hold until 2023 saying “stronger growth, increase in inflation and some stronger downward trend in unemployment”.

In a research note on Tuesday (18 May), BNP Paribas South Africa said that it has advanced its projections for rates lift-off to November 2021, after initially predicting that rates would only be hiked from January 2022 onwards.

Jeff Schultz, senior economist at BNP Paribas South Africa and his Markets 360 Strategy and Economics team now forecast a 25 basis points hike in November, followed by a cumulative 50 basis point hike in Q1 2022 on the back of moderately higher inflation and economic recovery.

“A number of comments and media interviews given by SARB monetary policy committee (MPC) members in recent months suggest a central bank that is comfortable with the outlook for inflation and the positive role its ‘very accommodative’ policy stance is playing in South Africa’s recovery,” Schultz said.

“As at the March meeting, we expect a unanimous hold in the policy rate at 3.5% on Thursday, with the MPC likely to continue to strike a balanced tone: citing the SARB’s willingness to act in response to second-round inflation pressures but at the same time cognisant of the fragility of the recovery and the risks to the outlook.”

The monetary policy committee has cut the benchmark interest rate by three percentage points since the start of 2020, of which 275 basis points of easing was in response to the impact of Covid-19 on the economy.

That’s taken the rate to a record-low 3.5%. March’s decision was the first time since the 2020 rate cuts in which no member voted for a reduction and expectations have now shifted to when the first hike will come.

The Reserve Bank is likely to maintain its accommodative monetary policy stance to support the economy for as long as it has room to do so, said governor Lesetja Kganyago in an April interview with Bloomberg TV.

While the implied policy rate of the central bank’s quarterly projection model, which the MPC uses as a guide, indicates two rate increases this year of 25 basis points each — May and in Q4— policymakers see risks to the inflation outlook as balanced and feel that they can continue to offer support to the economy, Kganyago said.

Strong annual growth rate going forward

South Africa’s economy is expected to rebound 3.9% this year from last year’s 7.0% contraction, a 0.2 percentage points increase from April’s median, Reuters reported.

The IMF recently published its forecast for South Africa’s annual growth to end 2021 at 3.1% and fall to 2% in 2022. The majority of the panel did not agree with this assessment, with just over half (57%) believing that the growth rate will hit an average of 3.64% in 2021 and 2.1% in 2022.

EFConsult chief economist Frank Blackmore believes that the growth rate will hit 4% off the back of “base effects [accounting] for more growth in 2021 even with low year-on-year real increases”.

Read: Moody’s warns that South Africa is heading for trouble

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