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The Reserve Bank’s Monetary Policy Committee (MPC) is expected to keep the buyback rate at 3.5% when it announces its policy decision on Thursday (November 19).
12 out of 14 economists (86%) surveyed by Discoverer anticipate a suspension when the South African Reserve Bank (SARB) makes the announcement this week, despite nearly half of economists calling for a rate cut.
57% of economists believe that suspending is the correct decision and 43% say that the bank should reduce the rate.
Stanlib economist Ndivhuho Netshitenzhe is in favor of a 25bp decrease, but predicts that it will continue due to the conservatism of the MPC.
“The MPC tends to lean on the more conservative side, so they have become more reluctant to cut rates because benefits have decreased and they can argue that real rates are now negative, so it is very accommodative,” he said.
The senior professor of banking and finance at the University of the Free State, Johan Coetzee, believes that the MPC will and should be maintained, given that, as an emerging economy, it is important that South Africa has a higher interest rate differential than the main ones economies of the world. .
“This, at least to some extent, will provide a buffer for volatile movements in the exchange rate. Having said that, there is so much uncertainty in the world today that any seemingly logical policy decision might not have as much force as in the past, ”he said.
Locks to play a role
South Africa’s MPC meets when key data suggests that gross domestic product may have exceeded its forecast of a 45.2% annualized increase in the three months through September. Bloomberg he said in his analysis.
“Tighter locks in advanced economies that pose a threat to exports and production in the last quarter, as well as the bank’s decision to advance aggressive cuts in the first half of the year, could keep it firm,” he said .
12 of 16 economists in a Bloomberg survey see the rate holding at 3.5%, with the other four predicting a 25 basis point cut. Forward rate agreements, which are used to speculate on borrowing costs, predict a less than one in four probability of a quarter percentage point cut.
“The split decisions in the last three meetings suggest a lack of consensus among the MPC and that its signals are ‘becoming much less clear,’ supporting the case for a pause,” said Nicky Weimar, chief economist at Nedbank.
Focus on inflation
Nedbank economists also believe that a rate cut is unlikely this week, and the focus is likely to turn to inflation, the bank said in a research note this week.
“The recent strength of the rand, with the local unit around 9% firmer than the starting point of R17.07 / USD assumed at the time of the September MPC meeting, is unlikely to tip the MPC towards a cut, ”he said.
“The focus will be on the forecast for anticipated inflation and the SARB’s economic growth forecasts relative to potential production.”
Nedbank said inflation is likely to remain benign for the remaining months of 2020, before gradually increasing in 2021 from the low base set this year.
“We expect inflation to average just under 4.5% over the next three years. However, the SARB’s inflation forecasts released in September were slightly worse than ours and the output gap is likely to narrow in the coming years as the economy recovers from the impact of the level 5 lockdown. “
The MPC has indicated that monetary policy is already stimulating and reiterated that growth and employment can only be lifted through significant structural reforms.
“An additional 25 basis point cut is also unlikely to add significant additional stimulus as the yield curve remains extremely steep as investors are pricing the higher risk premium due to South Africa’s lousy fiscal position in the Longest end of the curve.
“Our forecast for unchanged interest rates is based on all these considerations,” he said.
Read: Time to buy South Africa Inc
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