The Reserve Bank, which left interest rates unchanged on Thursday, indicated that it intends to weather temporary price shocks as it seeks to shore up an economy battered by Covid-19 and lockdowns.
Governor Lesetja Kganyago said the decision to keep the repo rate at 3.5%, the lowest official rate for about five decades, was unanimous even though the five-member monetary policy committee (MPC) turned slightly more hawkish and also upgraded its GDP forecast. On Thursday, policymakers said they judged the risks to the inflation outlook to be to the upside, compared to March, when they saw them as balanced.
The repo rate has been unchanged since July 2020, after the Bank, which often draws the ire of left-wing critics in the ANC alliance who say it is too conservative, implemented 2.75 percentage points of cuts in the wake of the Covid-19 outbreak, having also reduced it by 0.25 percentage point in January that year. The economy needed more support, Kganyago said.
“The stance is accommodative because we believe that inflation is contained, that there is slack in this economy and this economy could do with some support,” he said after the policy announcement.
The decision was in line with economists’ forecasts, and came despite the Bank’s internal model suggesting an increase could have come as early as Thursday. While a report earlier this week showing inflation back at prepandemic levels spurred markets to price in a higher chance of rate hikes later in 2021, the MPC’s forecast for 2021 was slightly lower at an average 4.2% vs 4.3% in March. This remained at or near the midpoint of the 3%-6% target in 2022 and 2023.
Rate cuts in 2020 did not prevent the economy from shrinking 7% that year, the worst slump in 100 years, as a series of lockdowns shuttered mines, factories and restaurants for months on end. GDP is likely to expand 4.2% in 2021, up from a 3.8% estimate at the previous meeting, the Bank said. It then sees the rate slowing to 2.3% in 2022 and 2.4% in 2023, little changed from March.
“The MPC is conscious of the underlying economic weakness and the need to provide monetary policy accommodation for as long as possible,” FNB chief economist Mamello Matikinca-Ngwenya said. “The ... recession of last year was deep, and its impact lingers.”
SA’s economic recovery is seen as vulnerable still to Eskom’s inability to provide reliable energy for industry and households and the country’s relatively slow vaccine rollout programme, which may not prevent new waves of Covid-19 infections and lockdowns.
“Slow progress on vaccinations, limited energy supply and policy uncertainty continue to pose downside risks to growth,” Kganyago said. “Getting back to prepandemic output levels will take time.”
The Bank’s quarterly projection model (QPM) had indicated a rate increase of 25 basis points in the second quarter, and another in the last three months of the year. Thursday’s was the only meeting scheduled for the second quarter. Those hikes are still on the table, Kganyago said.
“The Bank cannot outsource its decisions to a model,” Kganyago said in response to questions. The QPM was merely “a broad policy guide” that could change between meetings, the governor said.
North West University Business School’s Prof Raymond Parsons said: “Given the current balance of risks in the economy, the case for keeping borrowing costs low for as long as possible remains strong.”
Kganyago said the MPC would seek to “look through temporary price shocks” and would act if it saw them leading to rising inflation expectations. The committee did not discuss lowering rates, he said, which may reinforce economists’ expectations that the next move will be higher.
“Did we consider tightening policy at this meeting? We will always consider the adjustment of policy, whether we are tightening, loosening or keeping it the same, and there was no discussion about loosening of policy. There was a discussion about when will policy normalise,” the governor said.
The rand strengthened on Thursday, gaining as much as 1% to R13.9643/$, before trading at R14.0027/$, up 0.7% compared to the previous day.
The yield on the R2030 bond was at 9.05%, eight basis points lower than Wednesday’s close. Bond yields move inversely to their prices.
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