The South African Reserve Bank (SARB) is expected to keep interest rates unchanged at 3.5 percent this week as consumers continue struggling with rising fuel and electricity prices. Picture: Bongani Shilubane/ African News Agency (ANA)
The South African Reserve Bank (SARB) is expected to keep interest rates unchanged at 3.5 percent this week as consumers continue struggling with rising fuel and electricity prices. Picture: Bongani Shilubane/ African News Agency (ANA)

Economists not expecting Reserve Bank to raise interest rates at MPC meeting

By Siphelele Dludla Time of article published Jul 19, 2021

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THE SOUTH African Reserve Bank (SARB) is expected to keep interest rates unchanged at 3.5 percent this week as consumers continue struggling with rising fuel and electricity prices.

The central bank’s Monetary Policy Committee (MPC) will this week announce its interest rates decision following a unanimous decision to keep them unchanged in May.

SARB Governor Lesetja Kganyago, however, warned that the implied policy rate path of their projection model indicated an increase of 25 basis points in each of the second and fourth quarters of 2021.

Inflation is forecast to moderate to around 4.9 percent in June from 5.2 percent in May, above the SARB’s 3-6 percent target range, as base effects have worn off.

The central bank expects that stricter lockdown regulations may slow, but will not derail economic recovery.

Economists on Friday, however, were of the view that recent lockdown restrictions and social unrest may negatively impact the economic recovery momentum.

The unrest and looting of industries that engulfed Gauteng and KwaZulu-Natal over the past week has already led to an economic strife, pushing the rand to three-months lows and consumer prices higher.

Investec’s economist Kamilla Kaplan said the SARB was likely to keep rates on hold as the bank considers the economic impact of the unrest and restrictions.

“Economic growth concerns are likely to dominate, as the enforcement of restrictions in response to the country’s third wave of infections as well as the disruption stemming from the protest action have together dimmed the recovery prospects,” Kaplan said.

“The SARB is likely to reiterate that the focus will remain on second-round effects, for instance from a higher oil price or a depreciated rand, for the emergence of sustained upward price pressures.”

There is a creeping food insecurity crisis and exorbitant prices as the logistics and transportation of goods was severely disrupted by the unrest.

Food prices had already risen notably in May, with tomatoes and potatoes seeing significant supply-side price increases due to adverse weather conditions in growing areas.

PwC chief economist Lullu Krugel said consumers would have been concerned with recent price inflation given their sensitivity to prices.

As such, Krugel said the MPC was unlikely to raise rates until early in 2022.

“The central bank will keep monetary policy accommodative to support the economic recovery,” Krugel said.

“The SARB has also warned since late last year that it will at some stage need to start with monetary policy normalisation.”

However, BNP Paribas senior economist Jeff Schultz said some inflation upside was materialising.

Schultz said they expected the central bank to tee-up a gradual normalisation cycle, hiking in both September and November and taking the end-2021 repo rate to 4 percent.

“Our reading of the Sarb’s rhetoric in recent weeks is clear: rates cannot remain at record lows forever and the SARB favours starting policy normalisation in the second half of 2021, and not in 2022,” Schultz said.

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