SARB to hold repo at record low through 2021

South Africa's economy is expected to grow 3.5% this year after a 7.4% contraction last year predicted in a December poll.

15 January 2021 | Economics

We think the MPC has room to cut the policy rate at least once, by 25 bps, to 3.25%, in 2021. Alexey Pogorelov, Economist: South Africa

VUYANI NDABA

South Africa's Reserve Bank (SARB) will keep its repo rate at a record low 3.50% at its Jan. 21 meeting, and for the rest of 2021, as the coronavirus pandemic rages and with inflation expected to remain low.

Reserve Bank Governor Lesetja Kganyago will hold rates steady this month, 17 of 20 economists said, after cutting them a cumulative 300 basis points last year as the pandemic swept the world.

The remaining three analysts forecast a 25-bps cut.

Inflation, which turned much weaker last year compared to previous years, is expected to average 3.8% this year, lower than the midpoint of the Reserve Bank's comfort range of 3-6%.

"The SARB will remain accommodative for longer. As disinflation risks should prevail in 2021, accommodative monetary policy will be the only available option to offset tighter fiscal policy," wrote Alexey Pogorelov in a Credit Suisse note to clients.

South Africa's already overblown budget has been hamstrung by the coronavirus, setting the stage for difficult public sector wage and tax deliberations in the upcoming February budget, economists reckon.

"Therefore, we do not expect the Monetary Policy Committee to hike the policy rate in the coming years. Moreover, we think the MPC has room to cut the policy rate at least once, by 25 bps, to 3.25%, in 2021," Pogorelov added.

GROWTH

South Africa's economy is expected to grow 3.5% this year, the poll conducted this week showed, after a 7.4% contraction last year predicted in a December poll. The economy will grow 2.0% next year.

Daily reported cases of the coronavirus in South Africa flared to 20 000 in the past week, surpassing levels seen during the first wave of the pandemic. Hospitals in hotspots are full and face a shortage of beds, dwindling supplies of oxygen and a lack of intensive care units.

Some economists predicted even deeper cuts to the repo rate in coming months on expectations the Reserve Bank would be more sympathetic if the economy struggled to rebound from the pandemic.

Goldman Sachs analysts wrote the combination of significant spare capacity and rand strength would continue to weigh on inflation through 2021, leading to a persistent undershoot of the mid-point inflation target range and an additional 75 bps of easing.

Economists at the investment bank were one of the first few to expect disinflationary trends in South Africa and they expect rates to be cut to 2.75% this year and stay there through 2023 due to continued weak inflation.

However, survey medians expect rates to be hiked to 4.00% next year and to 4.50% in 2023.- Nampa/Reuters

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