The SA Reserve Bank is forecast to leave interest rates unchanged on Thursday when its monetary policy committee meets for the last time in a year that has seen the Bank act swiftly to cushion the economy amid the Covid-19-induced recession.
Since the onset of the pandemic crisis in March, the Bank has slashed rates to 3.5% — the lowest policy rate implemented by the bank in almost half a century — including one unscheduled meeting in April during the severest phase of SA’s lockdown.
According to a survey by consumer comparison website Finder, 12 out of 14 economists surveyed expect the bank to hold rates at 3.5% again. However, 43% believe the bank has space to cut.
In the Finder survey, IQbusiness chief economist Sifiso Skenjana said the bank will hold rates but believes they should cut.
“Weak economic growth, and lower global growth sentiment, and therefore a likely accommodative global monetary policy [environment] should motivate the bank to lower rates by 25 basis points,” Skenjana says.
The majority of 16 economists surveyed in a Bloomberg poll also foresee the Bank holding rates.
Along with lowering rates, the Bank has stepped in to ease dysfunction in the bond market after government bond yields soared during March as investors fled to safe haven assets at the onset of virus-induced panic.
The Bank has upped its holdings of government bonds to almost R40bn by October, through its bond buying programme, though purchases have slowed in recent months as the market stabilised.
It has also eased regulatory requirements on banks to ensure that lending to businesses and individuals continues through the crisis.
The Bank’s cutting cycle ended in September, however, when it held rates steady at 3.5%, despite easing its inflation forecasts and cutting it expectations for growth, in a split decision from the monetary policy committee (MPC). Two members voted for a cut of 25 bps.
In 2020, inflation has breached the lower end of the Bank’s target range of between 3% and 6%, with the most recent data for September showing it has stayed closely anchored at the lower end at 3%.
The Bank expects consumer price inflation to remain below the midpoint of the target range through to 2022 — averaging 3.3% in 2020, 4% in 2021 and 4.4% in 2022. It cut its expectations for growth, forecasting a contraction 8.2% for 2020.
BNP Paribas economist Jeff Schultz, polled by Bloomberg, holds an out-of-consensus view that the Bank could cut rates by 25 bps. However, he told Business Day “the decision will be a very close call”.
“Our base case for a 25 bps cut in the policy rate is finely balanced, as we acknowledge the MPC might remain in ‘wait-and-see’ mode, while domestic fiscal risks and public sector wage uncertainty persist, [third quarter] GDP is yet to be released ... and global economic recovery uncertainty persists in Europe with Covid second waves,” he said.
But regardless of whether the Bank cuts rates this week, the more important signal will be its quarterly projection model’s (QPM) forecast for policy rates by end-2021, said Schultz.
In September, the QPM suggested about 50 bps in hikes next year. “We think that a combination of a larger output gap and downward adjustments to its CPI forecasts means that its QPM is likely to start fully pricing out any hikes next year,” said Schultz.
Nedbank economists Nicky Weimar and Candice Reddy, who expect the Bank to hold, said in a note on Monday that the MPC has reiterated that monetary policy is already stimulatory and “that growth and employment can only lifted by significant structural reforms”.
“A further 25 bps rate cut is also unlikely to add any meaningful further stimulus given that the yield curve remains extremely steep as investors are pricing in the higher risk premium due to SA’s dismal fiscal position at the longer end of the curve,” they said.
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