SARB easing cycle probably over, rates to stay low - Capital Economics
Africa Economics

SARB easing cycle probably over, rates to stay low

Africa Economics Update
Written by Virag Forizs

Today’s decision by South African Reserve Bank’s to keep its benchmark rate unchanged probably means that further easing is unlikely to materialise. Even so, monetary conditions are likely to remain very loose in the coming years and we expect rates to remain on hold for longer than markets currently anticipate.

  • Today’s decision by South African Reserve Bank’s to keep its benchmark rate unchanged probably means that further easing is unlikely to materialise. Even so, monetary conditions are likely to remain very loose in the coming years and we expect rates to remain on hold for longer than markets currently anticipate.
  • Today’s decision to maintain the key policy rate at 3.50% followed 275bps of cumulative cuts since the onset of the coronavirus crisis. The decision was correctly predicted by eight of the 17 analysts polled by Bloomberg. We were among the remaining nine analysts that had pencilled in a 25bp cut (to 3.25%).
  • It seems that the balance on the MPC is becoming less and less dovish. Support for rate cuts was already waning at the July meeting, and today three MPC members opting to hold rates outvoted their two peers backing a 25bp cut. The SARB may be reverting back to its traditional hawkishness.
  • Governor Lesetja Kganyago reiterated that, on its own, monetary policy cannot lift the economy out of a pandemic-induced slump. The statement acknowledged the economic pain the containment measures have inflicted. South Africa’s GDP shrunk by 51.0% q/q on an annualised basis in Q2, one of the largest falls in output of any major economy.
  • Even with the SARB’s downward revision to its GDP growth forecast for this year (from a 7.3% contraction in 2020 to a 8.2% fall), Governor Kganyago struck a somewhat upbeat tone about a rebound in activity over Q3 and Q4. While we would largely agree with the SARB on the scale of the fall in South Africa’s output this year (our forecast is for an 8.5% decline), we would caution that the recovery is very fragile.
  • Afterall, retail sales fell in July compared to June, and manufacturing production expanded at a much slower rate at the start of Q3. Activity remains well below pre-crisis levels in key parts of the economy. And our Covid Mobility Tracker also points to a stalling rebound in activity.
  • For now, it seems that policymakers are taking a step back from providing further monetary stimulus to the economy. Further rate cuts are not out of the question, particularly if there is a significant deterioration in the economic outlook. But, as things stand, we now no longer expect additional easing this year. This is in line with the SARB’s Quarterly Projection Model and market expectations over the coming months.
  • Further ahead, we think that subdued inflation and a sluggish economic recovery means that SARB will probably keep rates on hold for the foreseeable future. The imposition of harsh fiscal austerity is a key factor why we think that South Africa’s economic recovery will be weak.
  • As a result, the output gap will remain large and core price pressures will stay subdued. The headline inflation rate is likely to drift up from 3.2% y/y in July but we expect to hover around the lower bound of the SARB’s 3-6% target range. (See Chart 1.) Monetary conditions are likely to remain looser than markets currently expect. Investors anticipate rate hikes from the second half of 2021, along the lines of the SARB’s model. (See Chart 2.)

Chart 1: Consumer Prices (% y/y)

Chart 2: Repo Rate (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com