Repo rate stays unchanged at 3.5%

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

The last time it moved was in July last year, when it was cut by 25 basis points to ease financial conditions and improve the resilience of households and companies to the economic implications of Covid-19.

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

Sarb governor Lesetja Kganyago said the decision was unanimous.

“The International Monetary Fund’s (IMF’s) January forecast for growth in global GDP for 2021 was revised up to 5.5%. The Sarb’s forecast for global growth in 2021 is now 5.8%. For 2022, we expect global growth of about 3.7%.

“Despite this more optimistic outlook, distribution of vaccines will be slow, contributing to an uneven pace of global economic recovery this year and next.”

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

Improvement in financial markets, but risk aversion persists

Kganyago said financial markets have generally improved in line with stronger growth and expectations that policy settings in advanced economies will remain accommodative.

“Capital flows to emerging markets increased in December and January. However, in recent weeks renewed uncertainty resulted in more volatility in flows and currencies. This reflects considerable sensitivity to risk, particularly where economies fail to take advantage of improved global prospects or run large macroeconomic imbalances.”

The repo rate over time.

Economic growth

South Africa’s economy expanded by 6.3% on a quarterly, annualised basis in the fourth quarter of 2020 and contracted by 7% for the year as a whole, he said.

ALSO READ: Repo rate stays the same

The Reserve Bank’s forecast for GDP for the first quarter of 2021 is -0.2%, down from 1% at the time of the January monetary policy committee meeting. The economy is expected to grow by about 3.8% (up from 3.6%) with stronger quarterly outcomes for the rest of this year.

Pre-pandemic output levels

Kganyago again warned that getting back to pre-pandemic output levels will take time.

“While recent lockdown restrictions have proved less constraining to economic activity, load shedding has been substantial and consumption levelled out after December. Rising oil prices have increased the economy’s total import bill, offsetting some income gains from stronger terms of trade.”

Lower investments

Kganyago also pointed out that sharply lower public and private investment in 2020 and continued weakness in 2021 would weigh on growth prospects. GDP is expected to grow 2.4% in 2022 and 2.5% in 2023, unchanged since the January meeting.

Balanced domestic growth outlook

Risks to the domestic growth outlook are assessed to be balanced, he said. “Global growth, progress in vaccination, a low cost of capital and high commodity prices all support growth. However, new waves of the Covid-19 virus are likely to weigh on economic activity, globally and locally.

“Ongoing constraints to the domestic supply of energy and uncertainty about vaccine rollout will also continue to pose downside risks to growth.”

Current account outlook

Kganyago said the present large current account surplus reflects good growth and higher prices for exports, moderate prices for imported oil and very weak demand for imported consumer and investment goods. This surplus is expected to give way to a modest current account deficit as the year progresses.

ALSO READ: Reserve Bank unexpectedly cuts repo rate by another huge 1% to 4.25%

Inflation

• Headline consumer price inflation averaged 3.3% in 2020, while the forecast for 2021 is higher at 4.3% (up from 4%) and for 2022 slightly lower at 4.4% (down from 4.5%). The forecast for 2023 is 4.5%.
• Core inflation also averaged 3.3% in 2020. The core inflation forecast for 2021 is slightly lower at 3.3% (down from 3.4%) and unchanged for 2022 and 2023 at 4% and 4.3%, respectively.
• Oil prices have been revised up sharply in the forecast, resulting in higher petrol price inflation at 12.7% for 2021, compared to 4.4% at the time of the January meeting. Electricity prices are significantly higher at 9.7% for 2021 (up from 8.1%).

Kganyago said expectations of future inflation eased further in the first quarter of 2021 and inflation expectations for households will diminish from quite high levels. Market-based expectations for short-term inflation are lower, but have increased for the medium and longer-term horizons.

He said the overall risks to the inflation outlook appear to be balanced. “A more appreciated nominal exchange rate in recent months and generally low pass-through, is expected to continue to moderate some inflationary pressure.”

The committee also noted:

• The significant, but likely temporary, reduction in medical insurance price inflation this year.
• Global food price inflation remains high, but local food price inflation is slightly lower than previously expected and should remain broadly contained due to higher local crop production.
• Oil prices have increased sharply this year and are expected to remain at these levels.
• Electricity and other administered prices remain upside risks to the inflation trajectory.

For more news your way, download The Citizen’s app for iOS and Android.