The violence that disrupted SA’s key supply chains negated a strong economic recovery in the first quarter and prevented an upward revision of full-year growth forecasts, the Reserve Bank said on Thursday as it kept its benchmark interest rate at a record low.
In a decision in line with the median of 18 estimates in a Bloomberg survey, governor Lesetja Kganyago and the other members of the monetary policy committee (MPC) kept the repo rate at 3.5%, the lowest official rate for about five decades. Speaking after the decision, Kganyago said the Bank had been set to revise growth forecasts higher, but the violence had prevented that.
“There is no doubt the unrest disrupted supply chains,” he said, adding that it had also hurt confidence among investors, both locally and internationally.
The committee made the call to keep rates on hold even as it slightly upgraded the 2021 inflation forecast, saying consumer price increases were contained while the economy faced potential downside risks in the wake of the unrest.
In the first official estimates of economists of the violence that killed more than 300 people, closed the crucial N3 road between Gauteng and KwaZulu-Natal and caused businesses from banks to retailers to shut, the Bank said that it had kept its 2021 GDP growth forecast unchanged at 4.2%. Kganyago said he did not expect the economy, which shrank 7% and lost about 1.4-million jobs in 2020, to return to prepandemic levels before 2023.
The “recent unrest and economic damage could have lasting effects on investor confidence and job creation”, the MPC said in its statement.
“We estimate the unrest to have fully negated the better growth results from the first quarter.... The direct and indirect costs of recent events will likely further slow SA’s economic recovery.”
The Bank’s decision came a day after a Stats SA report showed consumer inflation turned the corner in June, retreating from the 30-month high reached the previous month, easing to 4.9% from 5.2% in May and staying within the 3%-6% target range.
The Bank revised its headline CPI forecast for 2021 to 4.3%, from 4.2% at its previous meeting. It lowered its forecast for core inflation, which excludes food and energy, to 2.9% in 2021, compared with a previous 3%.
In a sign that underlying inflationary pressures will remain muted, the revision for 2022 was even bigger, with the MPC now expecting the rate to average 3.7%, compared to its May prediction of 4%.
Kganyago said “better anchored” expectations of future inflation could keep rates lower for longer, particularly if fiscal debt is stabilised, energy supply is improved and wage and administered price inflation is kept low. Risks to growth included the potential for longer and tougher than anticipated lockdowns and the unrest slowing the vaccination programme.
“The Bank will remain aware of the prevalent cyclical economic weakness and the need to provide as much monetary policy accommodation as possible, for as long as they can,” said Mamello Matikinca-Ngwenya, chief economist at FNB.
Relatively benign inflation has given the Bank more scope to keep interest rates lower for longer at a time when the economy is struggling.
Kganyago said if a decision was made by the Treasury and the Bank to revise the inflation target after a macroeconomic review, the move would be lower, not higher.
Higher inflation is an enemy of people on fixed incomes or reliant on government grants, he said. In comments that may be interpreted as a defence against critics who say the Bank has not done enough to stimulate growth, he stressed the benefit of its ability to keep price increases in check.
“Higher inflation begets higher interest rates,” he said.
“It was a very measured MPC statement which indicates they’re not too worried about inflation or economic growth, although they did mention downside risks to growth,” said Johann Els, head of economic research at Old Mutual.
“But while they said they would’ve lifted their 2021 growth forecast if it wasn’t for the unrest, they maintained their economic growth estimates for 2022 and 2023. That suggests the impact of the unrest on the economy will be short term rather than lasting.”
Els said that he expected the Bank to start tightening policy only in 2022, at a “slow and measured” pace.
The rand weakened after the rate decision and, at 7.20pm, had fallen 1.18% to R14.71/$. It also lost 0.8% to R17.30/€ and 1.6% to 20.25/£. While the rand was sold off sharply in the initial aftermath of the unrest, slipping from about R14.28/$ on July 8 to as weak as R14.78/$ on July 14, it has since recovered some ground and is about where it started 2021.
A stable or stronger currency helps keep a lid on inflation by limiting price increases for imported goods such as oil and for commodities such as maize that are priced in dollars in international markets.
Bonds dropped slightly on Thursday, with the yield on the R2030 rising four basis points to 8.98%.
Bond yields move inversely to their prices.
“Given the additional uncertainties recently injected into the economy by civil unrest, the level 4 lockdown and the trajectory of the pandemic, the need to now keep borrowing costs low and stable is reinforced,” said Raymond Parsons, economics professor at North West University Business School.
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