The South African Reserve Bank (Sarb) has decided to leave the interest rates unchanged with the repo rate remaining at 3.5% and the prime lending rate at 7%.
The decision was announced on Thursday by Governor Lesetja Kganyago following the bank’s three-day Monetary Policy Committee (MPC) meeting in Pretoria.
Kganyago said there is no need to adjust the repo rate as inflation was contained and economic activity was forecast to increase following President Cyril Ramaphosa’s announcement on Wednesday that the country will move to level 1 of the national lockdown.
Kganyago said even though the Covid-19 coronavirus pandemic had abated in South Africa, the economic effects of the crisis have been extensive. He said the recovery to pre-pandemic levels will take several years.
“The Covid-19 outbreak has had major health, social and economic impacts, presenting difficulties in forecasting domestic and global economic activity. The compilation of accurate economic statistics has, and will, remain severely challenged,” he said.
Kganyago added: “Getting back to pre-pandemic output levels will take time. With a sharp decline in investment, potential growth estimates have been lowered, resulting in a smaller output gap over the forecast period. GDP is expected to grow by 3.9% in 2021 and by 2.6% in 2022.”
Kganyago told the nation that the third and fourth quarter recoveries for 2020 are expected to be robust.
However, he warned, the pace of growth into 2021 could be modest depending on control of new virus outbreaks, the extent of supply and demand losses and future growth in investment and productivity.
To alleviate economic pressure, the Sarb had reduced the repo rate by 300 basis points since the implementation of the Covid-19 lockdown.
In August, Kganyago said the Sarb responded flexibly, quickly and aggressively to the crisis allowing the policy rate to drop to its lowest in nearly half a century. The repo rate is the rate at which the Reserve Bank lends to commercial banks.
On September 8, Statistics SA released its second quarter gross domestic product (GDP) data showing a contraction by a record 16.4% (or by 51% on a quarter-on-quarter seasonally adjusted and annualised rate), extending SA’s technical recession to four consecutive quarters of negative economic growth.
Stats SA GDP figures showed that GDP shrank 17.1% year on year in April, May and June – reflecting the effects of the country’s stringent lockdown restrictions to try to curb the spread of the coronavirus.
The strict lockdown brought economic activity to a standstill, with manufacturing and mining the biggest losers in the quarter.
Kganyago said because of this the Reserve Bank now forecasts a GDP contraction of 8.2% in 2020, compared to the 7.3% contraction forecast in July.
Kganyago said policy responses to the coronavirus pandemic were robust. This resulted in South Africa’s terms of trade remaining strong, mainly because commodity export prices were high, while oil prices remained low.
“The Brent crude oil price increased between July and September and is expected to average about $42 per barrel in 2020, rising to $47 per barrel in 2021 and $52 per barrel in 2022,” he said.
The governor said risks to the growth outlook were assessed to be balanced, but this was tentative and open to adjustments given the wide range of shocks hitting the economy.
Kganyago said the reason behind the unchanged repo rate can be attributed to the Sarb’s headline consumer price inflation forecast which averages at 3.3% in 2020, lower than previously forecast at 4.0% in 2021 and at 4.4% in 2022.
He said the overall risks to the inflation outlook at this time appeared to be balanced. He added that global producer price and food inflation have bottomed out, oil prices remained low and local food price inflation was expected to remain contained.
“Risks to inflation from currency depreciation are expected to stay muted while pass-through remains low,” he said.
But there are some concerns. While there are no demand side pressures evident, electricity and other administered prices remain a concern, said Kganyago.
“Additional exchange rate pressures could result from heightened fiscal risks. Importantly, expectations of future inflation continued to soften this year and have shifted slightly below the mid-point of the band for 2021,” he said.
He said monetary policy eased financial conditions and improved the resilience of households and firms to the economic fallout of Covid-19.
He added that the Reserve Bank also ensured adequate liquidity in domestic markets by providing regulatory capital relief to the banking sector and sustaining lending given to consumers and firms by financial institutions.
He said this was all that the monetary policy could do.
Kganyago said monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks.
“These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation,” he said.