SARB hunkering down for long period of low rates - Capital Economics
Africa Economics

SARB hunkering down for long period of low rates

Africa Economics Update
Written by Virag Forizs

Policymakers in South Africa looked through the recent virus-related deterioration in economic conditions and kept the policy rate unchanged, at 3.50%, today. As the recovery struggles to gain momentum, monetary conditions will probably stay loose for longer than most analysts anticipate.

  • Policymakers in South Africa looked through the recent virus-related deterioration in economic conditions and kept the policy rate unchanged, at 3.50%, today. As the recovery struggles to gain momentum, monetary conditions will probably stay loose for longer than most analysts anticipate.
  • Today’s decision by the South African Reserve Bank (SARB) to maintain the repo rate at 3.50% was the third consecutive meeting at which monetary policy settings have been left unchanged, following 275bp of cumulative cuts since the onset of the coronavirus crisis. The decision was in line with the Bloomberg consensus, although we were among a small number of analysts that expected the darkening economic outlook to prompt the Reserve Bank to cut rates by 25bp.
  • The decision was, once again, split with three MPC members voting for no change and two for a cut. A sizeable dovish minority that emerged last year has persistently pushed for further loosening in recent MPC meetings, underscoring worries about the weakness of the recovery.
  • The economic backdrop was certainly conducive to further easing today. The latest hard activity data from November showed that the economic rebound fizzled out even before additional restrictions were imposed in late December to curb the spike in coronavirus cases. Survey data point to a further slowdown in manufacturing production in December. And high-frequency data suggest a sharp drop-off in activity in late-2020 and early 2021. (See Chart 1.) Meanwhile, inflation remained subdued in December, at 3.1% y/y, close to the lower bound of the Reserve Bank’s 3-6% target range.
  • While Governor Lesetja Kganyago acknowledged the recent virus-related deterioration in economic conditions, early signs that the country passed its second peak appear to have received more weight. The boost to the global economic outlook from the development and rolling out of effective vaccines may have played a role in staying policymakers’ hands as well. And Governor Kganyago has persistently argued that there are limits to how much support monetary policy can provide in the current environment.
  • Looking ahead, we share the Reserve Bank’s rather pessimistic view about a subdued economic recovery. Widespread roll-out of vaccines in South Africa is unlikely in the near-term, which will weigh on activity. Power cuts by the state-owned electricity firm Eskom have also resumed. And following the early withdrawal of fiscal support, harsh austerity will depress demand.
  • Admittedly, headline inflation is likely to pick up over the coming months, peaking at around 5% y/y. But this will largely reflect unfavourable base effects created by last year’s collapse in oil prices. As these effects unwind and the anaemic recovery keeps core price pressures subdued, we expect that the headline rate will quickly drop back to lower bound of the target range and stay soft thereafter.
  • All told, a weak recovery and soft inflation will serve as serve as backdrop for policymakers to keep the repo rate unchanged at 3.50% until at least end-2022. (See Chart 2.) In contrast, most analysts and the markets expect rates to be higher in a years’ time.

Chart 1: Retail & Recreation Visits (Google Mobility Data, % Relative to 3rd Jan-6th Feb, 7d avg.)

Chart 2: Consumer Prices & Repo Rate

Sources: Google, Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


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