As most market commentators and economists anticipated, the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) decided to keep the repo rate on hold at 3.5% on Thursday, following its latest meeting.
Consequently, the prime commercial lending rate remains at a more than 40-year low of 7%.
Two members of the committee preferred a 25-basis point cut and three preferred to hold rates at the current level.
— SA Reserve Bank (@SAReserveBank) September 17, 2020
The decision, announced by Sarb governor Lesetja Kganyago, follows the bank’s three-day MPC meeting in Pretoria.
As part of its response to the economic fallout from the Covid-19 pandemic, the Sarb has already slashed the rate at which it lends money to commercial banks by 300 basis points since the beginning of this year.
The move to hold the repo rate this time round comes just a day after President Cyril Ramaphosa announced that South Africa would ease its Covid-19 restrictions to alert Level 1 over the next month. This would see the further opening up of the economy, in particular allowing international travel for the first time in more than six months as of October 1.
“Since the July meeting of the MPC, the Covid-19 pandemic has abated in South Africa. A range of other countries however continue to experience a rapid spread of the virus. The economic effects of the crisis have been extensive and a recovery to pre-pandemic levels will take several years,” said Kganyago.
The Sarb now forecasts a GDP contraction of 8.2% in 2020, compared to its 7.3% contraction forecast in July.
This forecast however is still less ominous than the double-digit GDP decline predicted by the likes of the OECD and IMF.
“The lower second quarter is followed by revised projections of a stronger expansion in the third and fourth quarters of 2020. Further easing of the lockdown has supported economic growth. High frequency indicators generally show a pickup in economic activity from extremely low levels in April and May,” noted Kganyago.
“However, getting back to pre-pandemic output levels will take time. With a sharp decline in investment, potential growth estimates have been lowered, resulting in a smaller output gap over the forecast period. GDP is expected to grow by 3.9% in 2021 and by 2.6% in 2022,” he added.
The central bank’s headline consumer price inflation forecast now averages 3.3% in 2020 and is lower than previously forecast at 4.0% in 2021 and at 4.4% in 2022. Its forecast for core inflation is also lower at 3.4% in 2020, while the bank expects this to “remain broadly stable” at 3.7% in 2021, and 4.0% in 2022.
“Despite a higher than expected inflation outcome in July and elevated levels of country financing risk, the MPC notes that the economic contraction and slow recovery will keep inflation below the midpoint of the target range for this year. Barring risks outlined earlier, inflation is expected to be well contained over the medium-term, remaining below but close to the midpoint in 2021 and 2022,” said Kganyago.
He also indicated that the repo rate cutting cycle may well be over this year, dashing hopes from some quarters that there could be one last 25 basis point cut at the MPC’s final 2020 meeting set for November.
“The implied policy rate path of the [Sarb’s] Quarterly Projection Model indicates no further repo rate cuts in the near term, and two rate increases in the third and fourth quarters of 2021,” Kganyago said.
The bank’s Quarterly Projection Model is however regarded as a “broad policy guide”, so the MPC may pull a surprise ahead of the festive season for South Africans.
Commenting on the MPC’s decision to hold the repo rate, Pam Golding Property group CEO Dr Andrew Golding, said the move was not entirely surprising.
“The 300 basis point rate cuts for the year to date are still taking effect, given the fact that the economy was in lockdown during the second quarter, and with restrictions not yet fully lifted,” he noted.
“With inflation currently just 3.2%, near the lower end of the 3-6% target range, there was the possibility of a further reduction in the repo rate in order to provide relief for debt-laden consumers. As the economy has largely reopened, lower rates are now likely to have more impact by easing debt burdens for households and businesses, and it is hoped that we will see an additional reduction in the repo rate at the next MPC meeting in November,” he added.
Listen: Annabel Bishop, chief economist at Investec, discusses the Reserve Bank’s interest rate decision.