The SA Reserve Bank’s monetary policy committee (MPC) left the benchmark interest rate unchanged at 3.5% on Thursday. The unchanged repo rate was in line with market expectations, although some analysts say market conditions were ripe for further loosening.
Reserve Bank governor Lesetja Kganyago told South Africans that the overall risks to the inflation outlook appeared to be to the downside in the near term and balanced over the medium term.
Kganyago said this was because global producer price inflation and oil prices remained low, local food price inflation was expected to remain contained and an expectation of temporary reductions in medical insurance price inflation for next year.
“Given low pass-through, risks to inflation from currency depreciation are expected to stay muted,” said Kganyago.
However, he warned that additional exchange rate pressures could result from heightened fiscal risks.
Adding that while there are no demand side pressures, electricity and other administered prices remained a concern.
“This is the backdrop against which the MPC decided to keep rates unchanged at 3.5% per annum,” he said.
Locally, further easing of lockdown restrictions has supported economic growth.
According to the MPC statement, the Reserve Bank’s forecast of third-quarter GDP growth has been revised up to 50.3% quarter-on-quarter, seasonally adjusted and annualised.
“The growth rate for the full year is now expected to be -8.0%, compared with the contraction of -8.2% expected in September. South Africa’s terms of trade remain robust. Commodity export prices are high, while oil prices remain generally low.”
“Overall, risks to the growth outlook are assessed to be balanced, but this is tentative and open to adjustment, given the wide range of shocks hitting the economy,” reads the statement.
However, even with these warnings, two out of five members of the committee preferred a 25 basis point cut.
Stanlib economist Ndivhuho Netshitenzhe said because inflation was not a concern, the MPC should cut the rate by 25 basis points.
“The inflation rate is well below the midpoint of the Reserve Bank’s inflation target and we see no significant upward pressure in inflation going forward. That is the underlying demand will remain low for a while with the output gap remaining wide, preventing any overheating of the economy.”
“Furthermore, US policy rates are expected to remain lower for longer, removing pressure from the Reserve Bank to increase interest rates,” Netshitenzhe said.
In his address, Kganyago explained the move to hold the repo rate at 3.5%. He said while market-based expectations for short- and medium-term inflation had eased slightly, longer-term inflation expectations remain higher.
He also warned that the yield curve remains exceptionally steep, reflecting elevated levels of risk associated with high public borrowing needs.
Mamello Matikinca-Ngwenya, chief economist at FNB, said: “The current economic shock has kept demand in the economy very low, and as a result inflation has remained contained. The central bank has responded decisively to these shocks. The Reserve Bank has reduced the repo rate significantly since the onset of the crisis, providing much-needed relief to consumers and business. We are not surprised the bank opted to keep rates on hold at this meeting.”
Matikinca-Ngwenya said FNB expects inflation to remain well contained within the inflation target over the medium term.
She added that in the absence of any severe shocks, monetary policy should remain accommodative over the medium term.
“We are, however, concerned about the medium- to long-term growth outlook. In the absence of the implementation of growth-enhancing measures, the growth outlook beyond 2021 leaves much to be desired. This will have negative implications for public finances.”
“While the medium-term budget policy statement sets forward targets to reduce expenditure, we are concerned that government may not be able to reach these targets. High government debt and weak GDP growth continue to present material risks,” she said.