/ 21 January 2021

Repo rate remains unchanged at 3.5%

The South African Reserve Bank has unanimously decided to keep the repo unchanged at 6.5%.
Reserve Bank stands at the ready to act if the rise in inflation threatens to become permanent

In its first meeting of the year, the South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged, at 3.5%.

The decision was not unanimous. Three MPC members decided to keep rates on hold, whereas two voted for a rate cut of 25 basis points.

The MPC’s decision takes place as South Africa is experiencing its second wave of Covid-19. To date, the country has confirmed 1.36-million infections and more than 38 000 deaths. 

However, after cutting rates by 300 basis points last year, to aid the country in recovering from the effects of the pandemic, as well as the various lockdowns, the central bank is taking a wait-and-see approach.

“The South African Reserve Bank has [been] very aggressive in our response”, said the governor, Lesetja Kganyago

Kganyago said that it has hardly been 12 months since the MPC took the first steps to reduce rates, and noted that the effectiveness of those actions could not be felt at the time because the economy was under lockdown. 

He said that the lockdown restrictions have since been relaxed, and the effects of their actions should trickle down into the economy. 

Earlier this year, President Cyril Ramaphosa extended the country’s adjusted level-three lockdown, which he first announced in December, to slow the increasing number of Covid-19 infections. 

Kganyago said that, at the moment, the restrictions are not as harsh on the economy compared to the stricter regulations of previous months. He added that the supply side of the economy was not affected. However, the lockdown could alter consumer confidence, thus affecting the demand side of the economy.

He added that although the virus will continue in waves, the rollout of vaccines is generally expected to boost global growth prospects. 

“We have, therefore, revised global growth for 2021 higher. However, the global distribution of vaccines is likely to be slow, creating an uneven pace of global economic recovery in 2021,” Kganyago said. 

The MPC expects global growth to increase to 5% in 2021 from its previous 4.5% forecast. 

Gross domestic product is expected to grow by 3.6% in 2021 (up from the MPC’s forecast at its last meeting of  3.5%), 2.4% in 2022 and 2.5% in 2023.

“Overall, risks to the domestic growth outlook are assessed to be balanced. Global growth, vaccine distribution, a low cost of capital and high commodity prices are supportive of growth. However, new waves of the Covid-19 virus are likely to periodically weigh on economic activity both globally and locally,” Kganyago said.

However, he added that the country’s energy problems, weak investment and uncertainty about vaccine rollout remain serious downside risks to domestic growth.

Meanwhile, in line with the bank’s expectations, consumer price inflation averaged 3.3% in 2020. It is the lowest rate since 2004. 

The bank’s forecast for 2021 is slightly higher at 4%; it is 4.5% for 2022. The forecast for 2023 is 4.6%. Core inflation averaged 3.3% in 2020. The estimates for 2021 and 2022 are unchanged at 3.4% and 4%, respectively. In 2023, core inflation is expected to be 4.3%.

Kganyago said that the committee notes that the slow economic recovery will help to keep inflation below the midpoint of its target range of between 3% and 6% this year.

“Unless risks outlined earlier materialise, inflation is expected to be well contained in 2021, before rising to around the midpoint in 2022 and 2023,” he said.