The SA Reserve Bank’s monetary policy committee kept the benchmark interest rate at record lows of 3.5% on Thursday.
The decision, which was unanimous, was in line with market expectations predicting the Bank would keep rates steady.
The Bank has left SA’s repo rate at its lowest level in close to five decades to help SA businesses and households navigate the coronavirus shock, which has been compounded by violent looting in late July.
Despite what the Bank viewed as “the much larger negative effect on output” caused by the unrest, it still expected the economy to perform much better than it forecast in July, revising its growth estimate to 5.3% in 2021, up from the previous 4.2%.
But it noted that the July events and the pandemic were likely to have lasting effects on investor confidence and job creation, adding that “most of the bounce back from the recovery is now in the past”. The Bank's expectations for growth in the outer years were adjusted downward to 1.7% in 2022 and 1.8% in 2023, compared to July’s forecast for 2.3% in 2022 and 2.4% in 2023.
The Bank revised its inflation estimates for 2021 marginally upward, forecasting that consumer inflation prices would average 4.4% in 2021. It noted that risks to inflation in the short term — including from rising global producer price and food price inflation and higher administered prices locally — were to the upside.
But in the light of largely unchanged inflation expectations — even with continued upside risks — the MPC expects inflation to stay close to the midpoint of the Bank’s 3%-6% target range. Its inflation forecast for 2022 and 2023 remained unchanged at 4.2% and 4.5%, respectively.
The decision comes as the US Federal Reserve indicated on Wednesday that it will probably begin rolling back expansive monetary policy support, provided conditions in the US economy continue to improve.
Market commentators have read this to mean that the tapering of its $120bn a month asset buying programme could begin before the end of 2021, and highlighted that there was now an even split among Fed officials who were expecting an interest-rate hike in the US in 2022.
The normalisation of monetary policy in developed markets is viewed as a risk for emerging markets such as SA, as holding higher yielding but riskier local assets becomes less attractive for investors.
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