/ 25 March 2021

Reserve Bank keeps repo rate unchanged

The Reserve Bank.
In January, the South African Reserve Bank came out with its dire prognosis for the health of the country’s economy — forecasting GDP growth of just 0.3% in 2023

The South African Reserve Bank’s monetary policy committee (MPC) has decided again to keep the repo rate unchanged, at 3.5%.

The repo rate determines the interest rate at which the central bank lends money to commercial banks — which then affects the rate at which they lend to their consumers. 

The rate also affect the inflation rate.

This week, consumer inflation moderated to 2.9% down from 3.2% in January 2021. This was lower than the central bank’s inflation midpoint target of  between 3% and 6%. 

The Reserve Bank governor, Lesetja Kganyago, said inflation is expected to be well contained in 2021, before rising to around the midpoint of the inflation target range in 2022 and 2023. Therefore, the central bank decided to keep rates unchanged. 

“Lower inflation begets lower interest rates, higher inflation begets higher interest rates,” Kganyago said. 

He reiterated that last year’s adjustments were possible because the bank had the space to do so. The fact that inflation was declining gave the bank an opportunity to lower the repo rate. 

Last year the bank cut the rate by 300 basis points in order to aid the country in recovering from the effects of the pandemic, as well as the various lockdowns. 

The bank also noted that until vaccination is widespread and populations develop sufficient immunity to curb virus transmission, it is expected that waves of Covid-19 infection will continue. 

“As indicated by public health authorities, a third wave of virus infection is probable in coming months. Despite further expected waves, the start of vaccinations in many countries has lifted projections for global economic growth and boosted confidence significantly,” said Kgayango, adding that has improved global economic growth. 

The South African government now plans to inoculate 22-million citizens between November 2021 and February 2022, which is below its earlier target of vaccinating 67% of the population by the end of this year. 

Kganyago further said that sharply lower public and private investment last year and the weak economy will continue to weigh down the country’s growth prospects.

Domestic gross domestic product is expected to grow by 3.8% in 2021 and unchanged from the January meeting, expectations for 2022 and 2023 are 2.4% and 2.5%, respectively.

The bank’s projections are higher than the national treasury’s estimates of growth of 3.3% in 2021, moderating to an average of 1.9% in 2022 and 2023. 

Kganyago said that load-shedding had hampered the economy, and if it was not for electricity cuts, which took place after the government relaxed lockdown regulations, the economy would have been much stronger. 

“I have no doubt that if we did not have load-shedding, this economy would be much stronger than it is in the moment. It is for those reasons that we highlight the risk of the certainty of supply,” he said. 

Headline consumer price inflation averaged 3.3% in 2020. The forecast for 2021 is higher at 4.3%, up from 4% in January, and slightly lower for 2022 at 4.4%, down from 4.5%. The forecast for 2023 is 4.5%.