South African Reserve Bank Governor Lesetja Kganyago. Photo: Thobile Mathonsi/African News Agency (ANA)
South African Reserve Bank Governor Lesetja Kganyago. Photo: Thobile Mathonsi/African News Agency (ANA)

Sarb keeps repo rate at 3.5%

By Siphelele Dludla Time of article published Nov 20, 2020

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JOHANNESBURG - THE SOUTH African Reserve Bank (SARB) yesterday slashed consumers’ hopes for an early Christmas present when it indicated that the rates cutting cycle was over and leaving the repurchase rate (repo rate) unchanged for the second consecutive time.

In its final rates decision for the year, Sarb’s Monetary Policy Committee held interest rates at 3.5 percent.

The bank said it was a split decision as two members preferred a 25 basis point cut and three preferred to hold rates at the current level despite a favourable inflation outlook.

The move is expected to dampen consumer confidence ahead of the festive season buying after household income was severely affected by lack of economic activity during the hard Covid-19 lockdown.

SARB Governor Lesetja Kganyago said that the implied policy rate path of the Quarterly Projection Model indicated no further repo rate cuts in the near term, saying the country can expect two increases of 25 basis points in the third and fourth quarters of 2021. He said that the risks to the inflation outlook were on the downside in the near term and balanced over the medium term.

“Unless risks outlined earlier materialise, inflation is expected to be well contained over the medium-term, remaining below but close to the midpoint in 2021 and 2022,” Kganyago said.

The bank’s headline consumer price inflation forecast has been marked down from 3.3 percent to 3.2 percent for 2020 and 3.9 percent for 2021 from 4 percent, while 2022 is unchanged at 4.4 percent. Interest rates have already been reduced by 300 basis points for the year to date to a near 50-year low of 3.5 percent as a way to shore-up the struggling economy.

FNB chief economist Mamello Matikinca-Ngwenya said the current economic shock kept demand in the economy very low, and as a result inflation has remained contained.

Matikinca-Ngwenya, however, said rates may be open to more cuts in the year ahead should inflation surprise to the downside. “At the moment, we assess the risks to the inflation outlook to be balanced. We are, however, concerned about the medium-to-longterm growth outlook,” she said.

The central bank revised slightly upwards its growth forecast for the year, saying that the gross domestic product (GDP) would decline at least by 8 percent compared to the contraction of 8.2 percent that was forecast in September.

Sarb’s forecast of third quarter GDP growth has been revised up to 50.3 percent quarter on quarter, seasonally adjusted and annualised from 51 percent contraction in the second quarter.

Kganyago said that the bank’s monetary policy had eased financial conditions and improved the resilience of households and firms to the economic implications of Covid-19.

However, Kganyago reiterated the bank’s concerns over the country’s fiscal and debt burden which might result in further credit ratings downgrades today.

Momentum’s economist Sanisha Packirisamy said that a dismal growth trajectory and depressed demand would exert downward pressure on inflation in the near term.

“Growth forecast for 2021 remains at risk from a more severe than expected second wave of Covid-19 infections and related restrictions on the economy, which will further delay in sectors affected by social distancing and travel restrictions, such as hospitality and tourism,” Packirisamy said.

BUSINESS REPORT

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