Sep 21, 2021

Repo Rate To Remain Unchanged At 3.5%

Spread the love

Kganyago said the domestic economy grew by 4.6% in the first quarter of 2021, which was much higher than the 2.7% expected at the previous MPC meeting.

FILE PHOTO: South Africa's Reserve Bank governor Lesetja Kganyago. PICTURE: Timeslive

Spread the love

JOHANNESBURG: The MPC of the South African Reserve Bank (Sarb) announced on Thursday it would keep the repo rate at a record low of 3.5%.

Inflation has slowed, and the move is to help support the economy as it struggles to recover from the effects of the Covid-19 pandemic.

Despite higher expectations and the continued upside risks of a weaker currency, higher domestic import tariffs and escalating wage demands, the Monetary Policy Committee (MPC) expects inflation to be contained in 2021 and 2022, before rising to around the midpoint of the inflation target range in 2023, Lesetja Kganyago, governor of the Sarb, said.

This also means that the prime lending rate stays at 7%.

He pointed out that despite higher vaccination rates, stronger confidence and better global economic growth, the Covid-19 virus continues to weigh on global prospects.

“As indicated by South Africa’s public health authorities, a third wave of virus infection is currently peaking. Additionally, by raising uncertainty and reducing investor confidence, the recent unrest in parts of the country is likely to slow our on-going recovery.”

The International Monetary Fund (IMF) forecast in April that global gross domestic product (GDP) will be 6.0% this year, while the Sarb forecast for global growth in 2021 to be 6.1%.

The Sarb expects global growth to be 4.4% and 3.4% in 2023, but emerging market and developing economies are expected to lag due to a slower pace of vaccinations.

The spread of the Delta variant of Covid-19, as well as higher global inflation and uncertainty about the normalisation path for interest rates, continue to cause volatility in financial markets and capital flow, as reflected in persistent risk aversion, especially towards emerging market economies.

Economic growth

Kganyago said the domestic economy grew by 4.6% in the first quarter of 2021, which was much higher than the 2.7% expected at the previous MPC meeting, thanks to better sectoral growth and robust terms of trade.

In addition, commodity prices have remained high, sustaining income gains despite higher oil prices.

“However, recent unrest and economic damage could have lasting effects on investor confidence and job creation. We estimate the unrest to have fully negated the better growth results from the first quarter, resulting in an unchanged estimate of 4.2% for growth in 2021.”

He said the direct and indirect costs of recent events will likely further slow the country’s economic recovery.

“Although some sectors, notably mining and manufacturing, have largely recovered to pre-pandemic levels, production remains muted in sectors harder hit by the pandemic and in regions now affected by the unrest.”

Investment forecast

Although Sarb’s investment forecast was revised up for this year, it remains constrained.

According to Kganyago, household spending is still expected to be healthy as consumers earn better than expected salaries and wages, asset prices rise and interest rates stay low.

GDP growth

GDP is expected to grow by 2.3% in 2022, and 2.4% in 2023, which is the same since the May meeting.

The risks to the medium-term domestic growth outlook are balanced, while high export prices, stronger household income and a better investment outlook are backed up by supportive global conditions, despite ongoing financial volatility.

The current account surplus also remains substantial, reflecting good growth and higher prices for exports, as well as moderate prices for imported oil and demand for imported consumer and investment goods.

This is expected to make way for a modest current account deficit by 2022, as exports slow and imports accelerate.

Headline consumer price inflation

The MPC revised its forecast for headline consumer price inflation for 2021 slightly higher to 4.3%, up from 4.2%, lower to 4.2% from 4.4% for 2022 and unchanged for 2023 at 4.5%.

The forecast for core inflation was also revised lower to 2.9% in 2021, down from 3.0% and to 3.7% in 2022, down from 4.0%. The committee expects core inflation to be 4.3% in 2023.

The Sarb’s forecast shows that higher food and petrol prices will push up near-term headline inflation, before slowing down towards the end of the year and into 2022.

The risks to the short-term inflation outlook are towards the upside, despite weaker than expected services inflation outcomes recently.

“Average surveyed expectations of future inflation have increased by 0.3 percentage points, to 4.2% for 2021 and by 0.2 percentage points, to 4.4% for 2022. Market-based expectations for inflation are slightly higher for 2021 and lower over longer horizons.”

Kganyago said economic and financial conditions are however 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.”

Leave a Reply

Your email address will not be published. Required fields are marked *