Repo rate stays put for now, but prepare for an increase soon – economists

After the Monetary Policy Committee (MPC) left the repo rate unchanged on 3.5% on Thursday, economists say that if it does not increase by 25 basis points in November, it is likely that it will happen early in 2022.

Prof. Jannie Rossouw from the Wits Business School says he expected that it would remain the same and that inflation will also stabilise.

“Consumers must remember that it is a forward-looking policy and that the price of goods increases faster than the price of services, but price increases for goods is more noticeable.”

He pointed out that Lesetja Kganyago, governor of the South African Reserve Bank, said when he announced the repo rate, that he would like the inflation target to be 3% instead of the 4,5% of the past twenty years.

ASLSO READ: Reserve Bank keeps SA’s repo rate at 3.5%

Repo rate not punishment

Prof. Dumisa Bonke, an independent economist, says people panicked yesterday when the inflation rate increased, but he was confident that the repo rate would stay unchanged.

“The MPC uses the inflation rate to gauge if the repo rate should be used to stop excessive spending. Inflation increased due to the unrest and the cost increases in transport due to the high fuel price.

“However, there are many other items in the basket used to determine inflation and everything is under control. As long as the MPC is comfortable with the inflation rate, it will not touch the repo rate. People must remember that the repo rate is not there to punish consumers.”

Hugo Pienaar, chief economist at the Bureau for Economic Research at Stellenbosch University, says against the backdrop of the historic revisions and the better-than-expected first half of 2021 outcomes, it was not surprising that the MPC revised its 2021 real GDP growth forecast significantly higher to 5.3% from 4.2% expected in July.

“As in the July statement, both short and medium-term inflation risks are judged to be on the upside. Although headline inflation is expected to remain around the midpoint of the target range, the flagging of upside risks suggest that the start of the interest rate normalization process is coming closer. Even so, we still see the first 25bps repo rate increase only in the beginning of 2022 as opposed to at the next MPC meeting in November already.

ALSO READ: Reserve Bank keeps repo rate at 3.5% as Kganyago warns of ‘volatile’ future

November repo rate could be more debatable

However, Oxford Economics Africa says the call for the last meeting in November could be more debatable, depending on local and international factors.

“We maintain our view that inflation will average at the midpoint (4.5%) of the target range this year, while we have also revised our economic growth forecast for 2021 higher to 4.7%  from 3.8% previously, on the back of robust growth in H1.”

They expect the MPC will continue to adopt a wait-and-see approach regarding the US Fed’s reaction or guidance with regards to US monetary policy. “We are of the opinion that the hiking cycle will only commence during Q1 2022, while we could see a couple of rate hikes next year.

“Nevertheless, should the US Fed start to taper its bond-buying programme earlier than expected, maybe as early as November, and commodity prices start to decline, we could see the MPC pulling the trigger at its last meeting in November and raise rates by 25 bps.”

ALSO READ: Reserve Bank cuts repo rate to four-decade low

Mixed tone of repo rate statement

Carmen Nel, economist and macro strategist at Matrix Fund Managers says the statement’s tone was quite mixed.

“It was not quite as hawkish as we were expecting, but hawkish enough to keep the door open should the MPC need to act soon. Endogenous impetus for the SARB to hike rates imminently or to hike rates aggressively remains limited.”

However, she points out, “We should not rule out a November repo rate hike given the MPC’s emphasis on data dependence. The November MPC meeting follows the local government elections, the Fed’s FOMC meeting on 3 November where it is expected to confirm the taper and the Medium-Term Budget Policy Statement.”

She says therefore event risk runs high into the meeting and the MPC would want to keep its options open. “The Reserve Bank would prefer inflation expectations to remain anchored close to 4.5% and potential risks to dislodging these would prompt a hawkish policy response. We think a weaker rand would be a key factor in the start of policy normalisation. In addition, a sustained recovery would necessitate that the Bank moves away from crisis-level policy rates.”