South Africa’s monetary policy remains accommodative, supporting the economy
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) announced it is keeping the benchmark interest rate at 3.5%, hence the prime lending rate also remains at 7%. The repo rate has stayed at 3.5% since end-July 2020 following consecutive cuts of a cumulative 300 basis points from the start of 2020. The Governor stated that the Bank expects inflation to remain well contained in 2021, and that monetary policy remains accommodative, keeping financial conditions supportive of credit demand as the economy recovers.
Opinion polls on the likely decision of the Reserve Bank prior to the announcement indicated that the majority of economists expected the Bank to hold the repo rate at its current low rate. This, obviously, is on account of the economy's still requiring all the assistance it can get to exit the deep contraction it underwent in 2020 (real GDP declined by 7%). In addition to the sizable cut in interest rates since the Covid-19 pandemic-induced economic downturn, the Reserve Bank’s purchase of South African government bonds in the secondary market resulted in the Bank’s holding of the bonds to increase from R8.14 billion during end-February 2020 to R42.1 billion by end-January 2021. The bond buying in the secondary market by the Bank has had two major effects, the first being the injection of cash into the economy, which is associated with increased demand, and the second, the support of the country’s bond market liquidity. Nonetheless, the Reserve Bank’s latest statement of assets and liabilities shows that the Bank reduced its holding of SA government bonds by 361 million from January to February 2021. However, we expect the historic low interest rates to remain in place for the rest of 2021.
Our prediction on the likely path of interest rates is supported by the prevailing actual and expected inflation rates. South Africa’s headline inflation rate averaged 3.3% in 2020, well below the mid-point of the country’s 3-6% inflation target range, with the latest inflation rate (February 2021) moderating to 2.9% y/y after recording 3.2% y/y in January 2021. This places the inflation rate well below the target range. Despite upside risks emanating largely from rising oil and electricity prices (Eskom has won a court case that effectively gave it permission to increase electricity prices by over 15%), domestic demand remains dampened due to the highly unfavorable economic conditions, and this will continue to exert downward pressure on the inflation rate. Risks from wage inflation are also currently low, with Finance Minister Mboweni having demonstrated during Budget 2021 that he intends to contain the public sector wage bill, while wage increases in the private sector remain close to the inflation rate.
Now read on...
Register to sample a report