Repo rate remains unchanged at 3.5%

The monetary policy committee (MPC) of the South African Reserve Bank (Sarb) has again unanimously decided to keep rates unchanged at 3.5%.

This was done against the backdrop of a higher growth forecast that implies a small further narrowing of the output gap over the forecast period.

Sarb governor Lesetja Kganyago said at the announcement that the policy stance and repurchase rate level remains highly accommodative and will remain even when steps are taken to normalise interest rate levels in response to rising inflation.

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“With inflation expectations remaining stable and despite inflation risk increasing, the MPC still expects inflation to be contained in 2021 before rising to around the midpoint of the inflation target range in 2022 and 2023,” Kganyago  said.

He said the steady rate of vaccinations in many countries had lifted projections for global economic growth and significantly boosted confidence. But an uneven vaccination rollout affects some countries more than others as well as economic activity in sectors that depend on close contact, such as travel, tourism, hospitality and leisure.

Revised GDP

The International Monetary Fund’s (IMF’s) April forecast for global gross domestic product (GDP) for 2021 was revised up to 6% and Sarb’s forecast for global growth in 2021 is now also at 6%, while it expects global growth of about 3.8% in 2022. GDP is expected to grow by 2.3% in 2022 and 2.4% in 2023, little changed since the March meeting.

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Economic growth

After an expansion of 6.3% in the fourth quarter of 2020, the Sarb’s forecast for South Africa’s first quarter growth stands at 2.7%, much stronger than the 0.2% contraction expected at the time of the meeting in March. The economy is expected to grow by 4.2% in 2021 (up from 3.8%).

Pre-pandemic output levels

Sard believes that getting back to pre-pandemic output levels will take time as supply responses remain muted in some sectors harder hit by the pandemic. While investment is stabilising, it remains constrained.

Risks to domestic growth

The risks to the domestic growth outlook are balanced, with moderate growth in household spending expected over the forecast horizon while global conditions are generally supportive of growth. However, slow progress on vaccinations, limited energy supply and policy uncertainty continue to pose downside risks to growth.

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Appreciation of the rand

The generally favourable global conditions and strong commodity export prices have led to appreciation of the rand through the last half of 2020 and into this year, moving the currency close to its long-run equilibrium level, Kganyago said.

“Since the March meeting, the rand has appreciated by 4% on a trade-weighted basis. The implied starting point for the rand forecast is R14.46 to the US dollar, compared to R14.96 at the time of the previous meeting.”

Inflation

• Headline consumer price inflation averaged 3.3% in 2020 and the forecast for 2021 is slightly lower at 4.2% down from 4.3% while it is 4.4% for 2022 and for 4.5% for 2023
• Core inflation also averaged 3.3% in 2020 and the forecast for 2021 is lower at 3.0%, down from 3.3% and unchanged at 4.0% for 2022 and 4.3% for 2023
• Oil prices were revised up sharply in the previous forecast and remain unchanged, resulting in petrol price inflation of 12.5% for 2021, down slightly from 12.7%, while electricity prices are significantly higher at 10.6% for 2021, up from 9.7%.

The committee expects a stronger exchange rate going forward, as well as ongoing moderation in unit labour costs and sustained economic slack that will offset higher electricity and food price inflation, keeping the headline inflation forecast relatively stable.

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Future inflation has broadly stabilised around 4% for 2021 and 4.2% for 2022, while market-based expectations for inflation are slightly lower for 2021 and over longer horizons. Other expectations are that:

• Housing-led services price inflation may continue to surprise to the downside
• Food price inflation, already very high globally, has been more moderate than expected due to a stronger exchange rate and robust crop production
• Domestic and global producer price inflation have been rising and further risks could arise from higher domestic import tariffs and escalating wage demands
• A weaker rand would create additional upside risk to inflation, alongside the ongoing risk from electricity and other administered prices.

Future economic and financial conditions

Kganyago said economic and financial conditions are expected to remain volatile for the foreseeable future.

“In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on second-round effects,” he said.