The South African Reserve Bank yesterday elected to keep interest rates unchanged, despite calls for a 0.25 percent basis point reduction in order to bring more liquidity into the economy. Picture: David Ritchie/African News Agency(ANA)
The South African Reserve Bank yesterday elected to keep interest rates unchanged, despite calls for a 0.25 percent basis point reduction in order to bring more liquidity into the economy. Picture: David Ritchie/African News Agency(ANA)

SARB keeps repurchase rate unchanged

By Siphelele Dludla, Philippa Larkin Time of article published Jan 22, 2021

Share this article:

JOHANNESBURG - THE SOUTH African Reserve Bank (SARB) yesterday elected to keep interest rates unchanged, despite calls for a 0.25 percent basis point reduction in order to bring more liquidity into the economy.

The SARB left the repurchase rate (repo rate) unchanged at 3.5 percent as inflation fell to a 16-year low in 2020.

In its first rates decision for the year, SARB’s monetary policy committee split on the decision, with two voting for a 25-basis point cut, while three preferred to hold rates at the current level.

SARB governor Lesetja Kganyago said the overall risks to the inflation outlook appeared to be balanced in the near and medium term.

Kganyago said though global producer price inflation and oil prices had risen, a more appreciated nominal exchange rate expected in recent months would moderate some inflationary pressure.

“Expectations of future inflation appear more stable after sustained moderation last year, although those of households continue to moderate from quite high levels,” Kganyago said. “Unless risks outlined earlier materialise, inflation is expected to be well contained in 2021, before rising to around the midpoint in 2022 and 2023.” The bank upped its consumer inflation forecast for 2021 to 4 percent from 3.9 percent, and is 4.5 percent up from 4.4 percent for 2022. Similarly, core inflation forecasts for 2021 and 2022 are unchanged at 3.4 percent and 4 percent, respectively

North-West University economics professor Raymond Parsons said the central bank missed an opportunity to boost the economy.

Parsons said the combination of subdued inflation, a relatively stable rand and the weak growth outlook created space for a further modest cut in borrowing costs for business and consumers.

He said the balance of risks on both the inflation and growth fronts recently shifted in ways which would have allowed for a 25 basis points cut with little risk to the SARB’s anti-inflation mandate.

“The burden of proof for a central bank cannot be absolute certainty,” Parsons said. “Even a small further positive move on borrowing costs at this stage would have sent an affirmative message to the economy. The MPC failed on this occasion to give the economy the injection of confidence it needs.

Kganyago said the implied policy rate path of the Quarterly Projection Model (QPM) indicated two increases of 25 basis points in the second and third quarters of 2021.

FXTM senior research analyst Lukman Otunuga said there was still a strong case for lower interest rates as inflation flirted near the lower boundary of the SARB’s target band of 3 to 6 percent. Otunuga said the decision to uphold the current rates signalled that the easing cycle could be over with the bank adopting a wait-and-see approach moving forward.

"Given the growing uncertainty over when South Africa will be able to vaccinate enough people to counter the negative impacts of Covid-19, the outlook remains shaky and fragile,“Otunuga said.

”On top of this, concerns continue to linger over South Africa’s ballooning debt. All eyes will be on the annual Budget in February which could offer fresh insight into whether the country’s debt can be brought under control.“

BUSINESS REPORT

Share this article: