No change expected when SARB announces its monetary policy decision on Thursday
JOHANNESBURG – THE SOUTH African Reserve Bank (SARB) is expected to leave interest rates unchanged for the second consecutive time this year when it announces its monetary policy decision on Thursday.
Economic indicators have pointed to a continuing depressed climate since the beginning of the year when Level 3 lockdown restrictions in January severely impacted consumer spending.
Data for wholesale and retail trade sales plunged into contractionary territory, while business and consumer confidence retracted in the first quarter.
Inflation has been the only positive coming from January, remaining at the lower end of the Sarb target band of 3.2 percent year-on-year.
SARB in January said the overall risks to the inflation outlook appeared to be balanced in the near and medium term and the high local food price inflation was expected to remain broadly contained.
The bank’s Monetary Policy Committee (MPC) has adopted a “wait and see” approach and policy is more data dependent.
However, the implied policy rate path of the SARB’s quarterly projection model (QPM) suggests a 25 basis points increase in interest rates in the second and third quarter of 2021.
Investec’s Kamila Kaplan said economic growth concerns were likely to continue to rank highly for the Sarb in its deliberations.
Kaplan said although they forecast economic growth to increase by around 3 percent in 2021, much of this would be a rebound effect from the low statistical base.
“We expect the Sarb to keep the repo rate unchanged at 3.5 percent at this week’s MPC meeting,” Kaplan said.
“In terms of the inflation considerations, this year’s inflation outlook remains relatively benign, with our forecast average of 4.2 percent versus 3.3 percent in 2020, although there are some upward pressures coming from oil which could push up the 2021 outcome.”
The Sarb in January said the slow economic recovery will help keep inflation below the midpoint of the target range for this year and next, unless certain risks materialised.
Old Mutual Investment Group’s chief economist Johann Els said last week the members of the MPC, who preferred a 25 basis point cut in November and in January, may vote for a hold.
“They are going to keep rates unchanged, and might adjust their growth forecast upwards,” Els said.
“Despite petrol price increases, we are expecting the rate of inflation to remain well contained below the target band for a variety of reasons, such as school fees and medical aid costs.”
The Sarb expects growth to expand by 3.6 percent in 2021 compared to the 2.8 percent forecast by the International Monetary Fund (IMF).
FXTM’s Lukman Otunuga was of a different view about a rate cut, and said that the Sarb had most likely reached the end of its easing cycle.
Otunuga said the burning question in the minds of many investors was when interest rates would be hiked.
“Given how inflation is projected to reach the 4.5 percent midpoint of the Sarb’s target in the second quarter, this may offer an argument for higher rates,” Otunuga said.
“When factoring in the sustained increase in oil prices and higher than expected electricity tariffs, the Sarb could be forced to make a move to tame inflation.”