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Lesetja Kganyago, Governor of the Reserve Bank of South Africa. (Photo: Waldo Swiegers / Bloomberg via Getty Images)
The Monetary Policy Committee of the Reserve Bank of South Africa held its key loan or buyback rate stable at 3.5% as expected and now sees a greater contraction in GDP in 2020 than before. He also suggested that the party might have ended on the rate cut front.
There were no fireworks in the statement of the Monetary Policy Committee (MPC) read on Thursday by Governor Lesetja Kganyago. The Reserve Bank of South Africa (SARB) has already tried to revive the economy with 300 basis points in rate cuts so far this year, taking its key interest rate to 3.5%. The governor noted that the party could be over for now.
The SARB was widely expected to revise its GDP forecast after the 51% contraction in the second quarter, and it did. He now forecasts the economy to contract 8.2% in 2020 compared to 7.3% in July. Compared to other estimates, this is still optimistic. In its most recent economic outlook, the Organization for Economic Cooperation and Development (OECD) forecasts a contraction of 11.5% for the South African economy in 2020, the largest among the 19 countries surveyed. That is more in line with the perspective of most private sector economists.
The SARB noticed some bright spots in the economy.
“South Africa’s terms of trade remain strong. Export prices of raw materials are high, while oil prices generally remain low, ”the MPC statement said. Gold has hit record highs and prices for platinum group metals are solid, as are prices for export crops like citrus. In short, the “old” sectors of the economy are helping prop things up.
The SARB has a mandatory inflation target of 3% to 6% and its forecasts foresee that inflation will remain comfortably in that area.
“The central bank’s consumer price inflation forecast averages 3.3% in 2020 and is lower than previously forecast: 4% in 2021 and 4.4% in 2022,” the statement said. This is due in large part to moderate demand pressures in an economy reeling from job losses that may have pushed the unemployment rate above 40%.
The MPC emphatically noted “that the economic contraction and slow recovery will keep inflation below the midpoint of the target range for this year … Inflation is expected to be well contained in the medium term.”
That would suggest that the SARB has room to cut rates further, but the statement says that the bank’s “Quarterly Projection Model (QPM) indicates there are no more buyback rate cuts in the near term and two rate hikes in the third and fourth quarters of 2021 “. . The QPM is a broad guide that changes based on the data, but suggests that the end of the cutting cycle has been reached or is near.
“They want low rates for a long time. They are happy to have done a large amount and then now it is the government’s turn to do more. I see that rates have not changed until September 2021 at the earliest, ”said Peter Attard Montalto, head of capital markets research at Intellidex. Business maverick.
The MPC noted the blanket of uncertainty surrounding the economic outlook, making it difficult at this stage to act aggressively.
“Global economic and financial conditions are expected to remain volatile for the foreseeable future. In this highly uncertain environment, future decisions will remain data-sensitive and sensitive to the balance of risks to the outlook. The MPC will seek to analyze temporary price shocks and focus on second-round effects, ”the statement said.
Therefore, the SARB is being cautious in the face of volatility. You certainly wouldn’t want to have to suddenly reverse a repo rate cut with a surge due to an unexpected drop in the rand, which has depreciated more than 14% against the dollar in 2020. Monetary policy cannot do much. Rates fell as broad swaths of the economy closed under lockdown. The hope is that, at current levels, relatively low rates can help spur the recovery by putting additional money in the pockets of consumers, households and businesses as activity recovers and lockdowns are eased. Level 1 is now on the immediate horizon.
“The nature of the crisis has hampered the transmission of the monetary stimulus, so the impact of recent cuts could only emerge in the coming months,” NKC African Economics said in a note to clients.
The MPC statement did not mention the Federal Reserve’s recent shift from an aggressive focus on inflation to an emphasis on employment. The SARB probably doesn’t want to be dragged into such a debate at this point. Its mandate is “to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa”. It stands firm. DM / BM
