Split SARB decision signals policy to stay loose - Capital Economics
Africa Economics

Split SARB decision signals policy to stay loose

Africa Economics Update
Written by Virag Forizs

Policymakers in South Africa kept their benchmark rate unchanged at 3.50% today, but the close decision underlines lingering concerns about a weak recovery and subdued inflation. Even in the Reserve Bank refrains from further rate cuts over the coming months, as we expect, monetary conditions will probably remain loose for some time to come.

  • Policymakers in South Africa kept their benchmark rate unchanged at 3.50% today, but the close decision underlines lingering concerns about a weak recovery and subdued inflation. Even if the Reserve Bank refrains from further rate cuts over the coming months, as we expect, monetary conditions will probably remain loose for some time to come.
  • Today’s decision by the South African Reserve Bank (SARB) to maintain the repo rate at 3.50% was the second 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 and our own forecast. Financial markets had also anticipated no change in rates and, after an initial bit of volatility, the rand has settled back to where it was before the decision was announced.
  • The decision was, unsurprisingly, a close call. Two MPC members backed a 25bp cut but were outvoted by three of their peers who preferred to hold rates. Policymakers were similarly divided at the last MPC meeting in September. The fact that a sizeable dovish majority remains suggests that the balance on the Committee is quite feeble.
  • Rate decisions in the near term will continue to remain very close calls and the possibility of additional monetary easing cannot be dismissed. If a recent pick-up in daily new COVID-19 cases turns into a second wave as some seem to fear, the hit to the economy from potential new containment measures could shift the balance on the Committee in favour of providing more support. A further appreciation of the rand may also prompt more MPC members to consider further loosening.
  • For now, though, we are sticking to our view that the easing cycle has ended. That would be in line with the Reserve Bank’s Quarterly Projection Model, which indicates no further rate cuts in the near term. And our macroeconomic forecasts are broadly similar. We expect GDP to shrink by 8.5% this year while the latest SARB forecast is for an 8.0% contraction.
  • In the absence of adverse economic developments, Governor Lesetja Kganyago’s view that there are limits to how much support monetary policy can provide in the current environment is likely to prevail.
  • That said, today’s split decision underscores that policymakers are worried about the weakness of the recovery and subdued inflation. Hard activity data point to the rebound struggling to gain momentum in September. And survey data for October paint a similar picture of a lacklustre recovery. The prospect of harsh austerity over the next couple of years is a key headwind facing the economy.
  • Meanwhile, inflation at 3.0% y/y in September was at the lower bound of the SARB’s 3-6% target range. While there is likely to be a jump in the headline rate early next year due to the effects of oil prices, we doubt that it will remain above the mid-point of the target range for very long. (See Chart 1.)
  • Against this backdrop, we think that monetary conditions will remain loose for a long period. The repo rate is likely to stay at 3.50% throughout our forecast horizon. In contrast, investors are currently anticipating rate hikes towards the end of next year. (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