The South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to raise the repo rate to 3.75% per annum.
Reserve Bank governor Lesetja Kganyago said in a statement on Thursday afternoon (18 November), that the rate hike comes against a backdrop of higher inflation, and a host of local issues that are having long-term effects on the economy – including load shedding.
Economic growth projections have been revised down to 5.2% for 2021 – from 5.3% before – reflecting “the larger negative effect on output than was previously estimated from the July unrest and other factors,” he said.
“While the domestic economy grew strongly in the first half of 2021, the second half of the year is expected to show mixed results,” Kganyago said.
Quarterly, growth for the third quarter of 2021 has been revised to -2.5% from -1.2% before. However, growth in the fourth quarter is forecast at 2.6% versus 1.6% before.
“Despite these quarterly revisions, the annual growth rate in GDP for 2021 reflects a healthy bounceback from the economic effects of the pandemic. In the next two years, economic growth is expected to align with a low rate of potential growth,” he said.
Globally, there has been pressure on local inflation, driven by uncertainty in global markets and higher commodity prices.
Oil prices are 68% higher, year to date, compared to 2020. Global uncertainty over inflation has also negatively affected the rand/dollar exchange rate, which has weakened since the September meeting
South Africa faces local issues as well, such as the July unrest, the pandemic, and ongoing energy supply constraints, which are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns, Kganyago said.
“High export prices are expected to fade, perhaps faster than previously expected. Very weak job creation will moderate household consumption. Investment will remain constrained by the high risk of further load shedding and ongoing uncertainty. The faster vaccine rollout presents some upside risk to the growth outlook,” he said.
Given this backdrop, Kganyago said that the MPC voted to raise the repo rate by 25 basis points, to 3.75%.
The vote was close, with three members of the committee preferring an increase and two members preferring an unchanged stance.
This latest MPC meeting was the last to be held in 2021, with rates expected to continue rising in 2022.
Kganyago noted that the implied policy rate path of the Quarterly Projection Model (QPM) indicates an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024.
“As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” he said.
“Given the expected trajectory for headline inflation and upside risks, the Committee believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates. Economic and financial conditions are expected to remain more volatile for the foreseeable future.”
The governor said that while the environment remains uncertain, policy decisions by the Reserve Bank will continue to be data-dependent.
“Current repurchase rate levels reflect an accommodative policy stance through the forecast period, keeping financial conditions supportive of credit demand as the economy continues to recover,” he said.