Lesetja Kganyago, Governor of the Central Bank of South Africa. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

The Reserve Bank of SA will not be raising interest rates at this time, and it is likely to suspend hikes for as long as possible in an effort to support economic growth.

First published in the Daily Maverick 168 weekly newspaper.

The South African Reserve Bank (Sarb) kept its key rates unchanged at 3.5% on Thursday 23 September for a sixth consecutive meeting, as the markets had predicted, saying that although consumer inflation would likely remain Contained in the medium term, the risks of the economic recovery, in particular the violent riots in July, must be closely monitored.

The Monetary Policy Committee (MPC) decision was unanimous, and its statement struck a balanced tone, slightly less hawkish than the Quarterly Projection Model (QPM) – the econometric tool the bank uses to generate macroeconomic forecasts and plot the future direction of repo rates.

The model suggests a 25 basis point (bps) increase in lending rates at the MPC meeting in November, and increases of the same amount in each quarter of 2022 and 2023, for a total of 225 basis points.

That would bring the repo rate to 7.75%, more than 1% higher than before March 2020, when the bank launched the series of rate cuts in response to the pandemic.

The governor of Sarb, Lesetja Kganyago, however, once again stressed that the QPM was only a “great political guide” and that the bank’s decisions on rates would depend on the data.

Other emerging markets, such as Russia and Brazil, have already raised lending rates and withdrawn support during the time of the crisis, fearing what appears to be the inevitable rise in interest rates in the United States. This put pressure on the SARB to follow suit. QPM forecasts and the latest Consumer Price Inflation (CPI) figures suggest it’s a matter of when, not if.

The headline CPI, which the bank aims to keep below the midpoint (4.5%) of its target range of 3% to 6%, has been moderate for most of 2020, largely due to lockdowns strict Covid-19, but has started to increase recently, fueled by rising global oil prices.

On September 22, price growth for August climbed to 4.9%, a nearly three-year high.

Sarb considers this increase to be temporary and forecasts an average inflation of 4.4% in 2021.

“The risks to the short-term inflation outlook are assessed on the upside. Rapid inflation in global producer and food prices has surprised on the upside in recent months and may do so again, ”Kganyago said.

“Oil prices have become more volatile in recent weeks and may exceed our expectations. Electricity and other administered prices also continue to present short-term risks. Given the medium to long term projections set out above, a weaker currency, higher domestic import tariffs, and escalating wage demands present other longer term upside risks to the forecast. inflation. “

Sarb, however, is still keen to continue supporting economic growth, and will therefore likely delay rate hikes for as long as possible. He raised his GDP forecast for 2021 to 5.3% from 4.2% in July, but warned that the fading global commodities boom, coupled with the violence of two months ago, constituted a danger for the activity and sentiment of investors, with a knock-on effect on employment.

“The virus is just one of the current risks to the economic recovery, including rising inflation, falling commodity export prices and the long-term impact of the scars from the pandemic and the July unrest, ”Kganyago said.

On the bright side, Kganyago said the output gap, a measure of the difference between actual economic output and potential output, was narrowing.

“It is precisely because the output gap is closing that we have revised inflation slightly upwards. And when we look back, the production gap up to 2020 was narrower than initially thought, ”Kganyago said in response to questions from DM168.

Sarb estimates the production gap for 2021 at -2%, against -3.2% in July. For 2022, he sees it further shrink to -1.2% and reach a near-equilibrium of -0.2% by 2023.

Policymakers sometimes use potential output to assess inflation and generally define it as the level of output compatible with no pressure for prices to rise or fall. And while a narrowing gap indicates faster growth, it also suggests rising prices and, ultimately, higher borrowing rates.

FNB analysts said Sarb will keep rates low for as long as possible during the economic recovery.

“Headline inflation has continued to moderate from the recent peak, but has remained slightly above the midpoint of the target range due to high inflation in food, fuel and fuel prices. electricity. Excluding these elements, however, core inflation remains low around the lower target of 3%, a clear indication that demand-driven inflation is still subdued, ”said the FNB’s chief economist, Mamello Matikinca-Ngwenya.

“So as the recovery gathers pace, the economy still needs support and as such Sarb should maintain an accommodative stance longer.” Sarb then decides on prices at the end of November. DM168

This story first appeared in our weekly Daily Maverick 168 which is available for R25 from Pick n Pay, Exclusive Books and airport bookstores. For your nearest dealer, please click here.