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The Monetary Policy Committee of the Reserve Bank of South Africa voted to keep rates on hold.
This leaves the total rate cut in 2020 at 300 points, with the buyback rate at 3.5% and the prime rate at 10%. The prime and base interest rate for mortgage loans remains at a historic low of 7.0%.
Reserve Bank Governor Lesetja Kganago said that since the July MPC meeting, the Covid-19 pandemic has subsided in South Africa, yet several countries continue to experience a rapid spread of the virus.
“The economic effects of the crisis have been extensive and recovery to pre-pandemic levels will take several years,” he said.
“Current IMF forecasts show that global gross domestic product (GDP) will contract by about 4.9% this year, although the overall economic outlook has improved somewhat.”
The governor noted that many central banks have positioned themselves to wait for the outbreak to pass and wait for new data to emerge to gauge conditions and assess the speed of the economic recovery before making further adjustments in economic policy.
In South Africa, this data has emerged through a record drop in GDP in the second quarter of the year, which has impacted growth projections for 2020 as a whole.
Following the quarter-on-quarter contraction of 51% of GDP in the second quarter, the central bank now forecasts a contraction of GDP of 8.2% in 2020, compared with the 7.3% forecast in July. GDP is expected to grow 3.9% in 2021 and 2.6% in 2022.
Kganyago said that further relaxation of the lockdown has supported economic growth and that high-frequency indicators generally show a rebound in economic activity from extremely low levels in April and May.
He also highlighted that:
- South Africa’s terms of trade remain strong;
- Export prices of commodities are high;
- Oil prices are generally low; and
- The rand has depreciated 14.5% against the dollar since January and remains below its long-term estimated equilibrium value.
The headline inflation forecast for 2020 is revised down to 3.3% from the 3.4% previously promulgated at the July meeting. The overall risks to the inflation outlook appear to be balanced, Kganyago said.
However, he pointed to a large risk factor in the sharp increase in South Africa’s public financing needs amid falling tax revenues and higher spending, which has been financed by increased private sector savings and loans from financial institutions. international
“Despite a higher-than-expected inflation result in July and high levels of country financing risk, the (MPC) observes that the economic contraction and slow recovery will keep inflation below the midpoint of the target range for this year .
“Except for the risks described above, inflation is expected to be well contained in the medium term, remaining below but close to the midpoint in 2021 and 2022,” he said.
In this context, the MPC decided to keep rates unchanged at 3.5% per annum. Two committee members preferred a 25 basis point cut and three preferred to keep rates at the current level.
The path of the implicit policy rate of the Quarterly Projection Model indicates that there will be no further cuts in buyback rates in the short term, and two rate increases in the third and fourth quarters of 2021.
The decision is in line with market expectations, which was divided into a pending vote and a vote to cut by 25 basis points.
About 40% of the economists surveyed predicted a 25 basis point cut, while 60% expected rates to remain unchanged.
Those who supported a cut said weaker-than-expected GDP and inflation, and the strengthening of the rand, provided room for a further rate cut, while those who called for a suspension said further cuts were unlikely to boost growth. necessary, with rates stability would seem more beneficial.
The full statement is below:
Read: Why Interest Rates Are Not Likely To Increase In South Africa Anytime Soon
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