SARB keeps interest rates unchanged

(Bloomberg) – South Africa’s central bank held its benchmark interest rate for a third straight meeting as it revised its inflation forecasts higher and signalled that tightening may start sooner than previously indicated.

The Monetary Policy Committee kept the repurchase rate at 3.5%, Governor Lesetja Kganyago said Thursday in an online briefing. Of the five members on the panel, three favoured an unchanged stance and two preferred a 25 basis-point cut, the same vote split as in November and September.

The key rate remains at the lowest level since it was introduced in 1998. All but two of the 19 economists in a Bloomberg survey predicted the unchanged stance.

Read also: Alec Hogg: Dirty secret behind SARB backpedal on RAs

Key insights

  • The implied policy rate path of the central bank’s quarterly projection model now indicates two increases of 25 basis points in the second and third quarters of 2021, which means tightening may start earlier than it suggested in November. However, future decisions will be data dependent and “sensitive to the balance of risks to the outlook,” Kganyago said.
  • Inflation is now expected to reach the 4.5% midpoint of the central bank’s target range in the second quarter of this year, and while the MPC projects the rate will decline to 4.3% by year-end, it will average 4.5% next year and 4.6% in 2023.
  • The unchanged stance is likely to draw criticism from politicians and labor unionists, who say the Reserve Bank should be doing more to boost economic growth and help reduce an unemployment rate that returned to a 17-year high in the third quarter. The bank has relaxed accounting and capital rules to promote lending by commercial banks and increased its holdings of South African government debt, helping to bring down borrowing costs in the domestic market.
  • Africa’s most-industrialised economy probably contracted 7.1% last year, the most in at least nine decades. The central bank projects a return to growth and has increased its 2021 forecast despite the reintroduction of restrictions to curb the second wave of the coronavirus pandemic, which will weigh on output. It now sees gross domestic product expanding by 3.6% this year, 2.4% in 2022 and 2.5% the year after.
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