The SA Reserve Bank is likely to keep interest rates on hold at next week’s meeting of its monetary policy committee (MPC), given record unemployment levels amid a still-nascent economic recovery and benign inflation outlook.
This is the dominant view of 29 local economists recorded in a survey released on Monday — as markets look ahead to next week’s rates announcement.
The Bank has held the benchmark rate at 3.5% — its lowest level in almost five decades — for more than a year now, to support the economy through the ravages of the coronavirus pandemic.
Though the country has been experiencing improved economic growth — driven largely by buoyant minerals exports — recent unrest in KwaZulu-Natal and parts of Gauteng, as well as tougher lockdown measures, have yet to be reflected in the country’s official GDP data for the third quarter.
At its last MPC meeting in July, the Bank said the economic damage wrought by the unrest “fully negated” the better-than-expected growth outcomes. As such the Bank left its growth forecast for 2021 unchanged at 4.2% for 2021
The Bank must make its call as the pace of global economic recovery picks up and rising inflation has prompted worry that developed market central banks will pull back on expansive monetary policy support measures, instituted to help economies cope with the pandemic.
The European Central Bank said last week that it would moderately slow down its bond-buying programme instituted under an emergency scheme to put in place under the pandemic.
These worries notwithstanding, the Bank does not expect inflation to break out of its 3%-6% target for the foreseeable future — forecasting that it will average 4.3% in 2021 dropping to 4.2% in 2022.
According to the survey — conducted by consumer comparison site Finder — 97% of economists surveyed believe the bank will hold rates steady next week. The main factors cited as preventing the Bank from raising rates are the slow recovery in unemployment and expectations that inflation will remain contained through 2021.
The majority of the economists surveyed — or 62% — cited the slow recovery of employment as the driving factor behind rates staying put, while 55% cited inflation staying contained as another dominant factor.
Professor of economics and COO of Stellenbosch University, Stan du Plessis said inflationary pressure “appears to be rising in the economy and there are signs of economic recovery. This suggests that the period of highly accommodating monetary policy can be phased out, but I would urge a cautious approach in that direction. I would hold off till we see further signs of economic recovery”.
According to the survey, Investec chief economist Annabel Bishop pointed to civil unrest and the slow recovery of the employment rate as the reasons.
“The setback to economic growth from the civil unrest in July will have reduced appetite for interest-rate hikes this year from all but the most diehard of inflation targeters, and with inflation in any case likely to be fairly well contained next year as well — the Bank’s current key forecast period in its inflation-targeting framework.”
Though SA economy has seen a recovery, this has not translated into a pick-up in jobs numbers, with the official unemployment rate rising to 34.4% in quarter two, one of the worst in the world.
Roughly two thirds of economists surveyed backed the Bank’s expectations for growth of 4.2%.
However, PwC economist Christie Viljoen was an outlier, with a forecast for a much weaker 2.5%.
Viljoen pointed out that at the Bank’s most recent MPC meeting, it had highlighted the recent unrest, its effect on the vaccine drive, a longer-than-expected lockdown, limited energy supply and policy uncertainty as “posing downside risks” to economic growth.
“It is likely that the major difference between the Reserve Bank’s current forecasts and our own projections is that PwC has already incorporated more adverse impacts from these downside risks into our assumptions,” he said.
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