The SA Reserve Bank (SARB) has maintained its rate holding streak, even as it lays the groundwork for a potential rate hiking cycle that could start as soon as November.
The Bank’s monetary policy committee voted unanimously to keep the benchmark interest rate at a record low of 3.5%, in line with market expectations, with its internal modelling pointing to a round of rate hikes starting in the fourth quarter of this year and running through 2022 and 2023.
Though the Bank may not stick doggedly to the path set out in its quarterly projection model, given Reserve Bank governor Lesetja Kganyago emphasis that any policy decisions “will continue to be data dependent” in an uncertain environment, some analysts believe the door for potential hikes has now been opened.
The Bank has left SA’s policy rate at the lowest level in close to five decades to help SA businesses and households navigate the coronavirus shock, which was compounded by civil unrest and looting in late July.
With global inflationary pressure picking up as economies come back from the pandemic, and moves from other central banks to begin normalising their extremely accommodative monetary policies, the question of when the Bank would signal its own shift in this direction loomed large ahead of Thursday’s meeting.
“Endogenous impetus for the SARB to hike rates imminently or to hike rates aggressively remains limited,” said Carmen Nel, economist at Matrix Fund Managers. “That said, we should not rule out a November repo rate hike, as per the SARB’s model, given the monetary policy committee’s emphasis on data dependence.”
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 have highlighted that there is 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.
The Bank’s November monetary policy committee meeting will follow the local government elections, the US central bank’s November meeting, where it is expected to confirm the taper, and the medium-term budget policy statement, noted Nel.
“Hence, event risk runs high into the meeting and the monetary policy committee would want to keep its options open,” she said.
But Oxford Economics Africa analyst, Pieter du Preez, expects the monetary policy committee to take a wait-and-see approach, and for rate hikes to begin next year. But should the US Fed start to taper and commodity prices start to decline, the Bank could pull the trigger and raise rates by 25 bps in November, said du Preez.
Kganyago said that as policy in advanced economies begins to normalise there “will be a repricing of financial assets and a realignment of global exchange rates, which could lead to capital outflows from SA and weaken the rand.
The Bank will watch for any adverse second round effects from these developments, but Kganyago pointed out that SA was in a better position than it was in 2013, when similar decisions led to a “taper tantrum” that riled emerging market currencies in 2013.
Importantly, SA was running a current account surplus that leaves it less vulnerable to capital outflows, he noted.
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 are 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”. With this in mind growth in the outer years was 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% 2021, noting 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 light of largely unchanged inflation expectations — even with continued upside risks — the committee expects inflation to stay close to the midpoint of the Bank's 3% to 6% target range. And its inflation forecast for 2022 and 2023 remained unchanged at 4.2% and 4.5%, respectively.
FNB’s chief economist Mamello Matikinca-Ngwenya said that though a moderation in headline inflation has been held back by elevated food, fuel and electricity prices, core inflation — which strips out these volatile factors — remains at about the lower bound of 3%, a sign of weak demand.
“So, while recovery is gaining momentum, the economy is still in need of support and as such, the SARB should maintain the accommodative stance for longer,” she said.
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