Reserve Bank governor Lesetja Kganyago insisted that monetary policy remained accommodative even after the Bank took the first step in raising rates after taking them to record lows in the face of the Covid-19 outbreak and lockdowns.
The monetary policy committee (MPC) on Thursday raised rates by 25 basis points to 3.75% in a closely watched move that kept market players guessing in the run-up to the announcement.
It was the first increase in three years, and marks the beginning of a gradual normalisation of policy.
The decision was a divided one, with three MPC members voting for an increase and two for rates to be kept on hold.
The decision came despite the Bank making only small adjustments to its inflation outlook and saying GDP growth would average 1.8% from 2022 to 2024. However, it highlighted additional upside risks to its inflation outlook, including a weakening currency and escalating wage demands, even as it softened its growth expectations.
Kganyago said even after the change, the Bank’s stance remained accommodative.
“The monetary policy stance, even after this interest rate change, remains accommodative. As a matter of fact, the policy rate remains negative on a forward-looking basis,” said Kganyago.
Policy rates have been kept at a five-decade low of 3.5% since July 2020, in a bid to support businesses and households through one of the worst economic recessions in memory.
Given the weak economy, the Bank “could easily have waited longer before initiating the heightened interest rate cycle”, North West University Business School professor Raymond Parsons said. Arguments for higher rates are “not persuasive”, he said.
Though SA has begun its economic recovery, assisted by a global surge in commodities that boosted state coffers and the profits of SA’s mining companies, July’s civil unrest and more recently power cuts from embattled Eskom have cast a pall on this rebound.
Since its May meeting, the MPC has been highlighting the upside risks to inflation, which now appear to have settled into the forecast, said Reezwana Sumad, research analyst at Nedbank.
For this year and the next two years, the Bank revised its headline consumer price inflation forecast slightly higher to 4.5% for 2021 (from 4.4%), to 4.3% in 2022 (from 4.2%) and to 4.6% in 2023 (from 4.5%).
Headline CPI for 2024 is expected to be 4.5%.
Over and above its revisions, the Bank “still continues to warn of even more upside pressures to inflation”, and this likely drove the decision to hike, she said.
Momentum Investment economist Sanisha Packirisamy shared this view, arguing that what pushed the Bank to hike interest rates “were the risk parameters around the inflation forecast, not necessarily the inflation forecast itself.
“They have seen the inflation risks firmly to the upside in the short, medium and long term.”
Alongside global inflationary pressure, rising oil prices and higher electricity costs, the Bank said a weaker currency, higher domestic import tariffs and escalating wage demands present additional upside risks to the inflation forecast.
Given these risks, a “gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates”, Kganyago said.
At the same time the Bank warned of downside risks to economic growth. “The July unrest, the pandemic and ongoing energy supply constraints are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns,” he said.
The Bank expects the economy to grow 5.2% in 2021, revised down from 5.3%, though its forecasts for the following years are unchanged at 1.7% in 2022 and 1.8% in 2023.
GDP growth in 2024 is forecast to be 2%.
Ahead of the announcement, the median forecast of 21 economists surveyed by Bloomberg suggested the Bank would hike by 25 basis points to 3.75%, with 11 expecting a hike and 10 predicting it would hold.
Though incremental, the hike may add to uncertainty for businesses and consumers.
“Having already had to contend with the high fuel price and load-shedding, small business will surely be grappling with the recent decision to increase the repo rate,” said Andiswa Bata, co-head of the SME segment at FNB Commercial Banking.
“Many will now be looking to things like the urgent rollout of the economic reconstruction and recovery plan to provide pockets for growth, to provide income uplift that will help offset higher costs whilst looking to protect crucial employment.”
Turkish lira
Before the decision, the rand was down about 1% to the dollar, weakening a little further after the announcement.
At 3.38pm, it had fallen 1.38% to R15.6947/$, after briefly going as low as R15.76/$, its worst intraday level since early November 2020.
Analysts said the currency may have also been driven down by generally negative sentiment towards emerging markets.
The Turkish lira slumped 4% as that country’s central bank cut interest rates by 100 basis points, despite an inflation rate that accelerated to 20% in October.
After being a little weaker before the decision, bonds firmed, with the benchmark R2030 government bond last yielding 9.42%, down four basis points. Bond yields move inversely to their prices. With Thando Maeko
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.