Bank keeps rates steady but MPC opinion still split 3-2

The SA Reserve Bank’s monetary policy committee (MPC) was split by a single vote in favour of keeping interest rates on hold for a third meeting in a row.

Policymakers voted 3-2 to keep the repo rate at a record low of 3.5% on Thursday. Some analysts had argued for a cut to support an economy that is reeling from Covid-19 and renewed lockdowns, while the Bank’s own projections indicate that inflation will stay comfortably within its 3%-6% target range.

It was the third consecutive time where the casting vote was against an interest rate cut. Though the Bank’s internal modelling pointed to potential hikes as soon as the second quarter of 2021, some economists said this was unlikely given uncertainties clouding SA’s economy.

The Bank, however, was more upbeat about growth, revising its forecasts for GDP growth in 2021 to 3.6% and predicting an expansion of 2.4% in 2022. That is up from November’s forecasts of 3.5% in 2021 and 2.4% in 2022.

Reserve Bank governor Lesetja Kganyago rejected suggestions that the Bank had been too cautious in its approach. It had been “very aggressive” and 300 basis points of reductions during 2020 had yet to be seen in real economic activity as monetary policy action takes between 12 and 18 months to filter down.

“It’s hardly 12 months since we took our first steps and the effects of that couldn’t immediately be felt because the economy was [in lockdown],” he said at a briefing after the decision.

Based on the Bank’s inflation outlook, SA was set to record negative real interest rates in the months ahead, he said.

The restrictions currently imposed are not as severe as those previously implemented, and “we think that the supply side of the economy should be able to cope”, he said. But the “mere existence of the lockdown has impacted business and consumer confidence and could affect the consumer side of the economy”.

After inflation averaged just 3.3% in 2020, the lowest level since 2004 as the pandemic weighed on demand, the Bank now sees it averaging 4% in 2021 and 4.4% in 2022, compared to its November forecasts of 3.9% and 4.4%, respectively.

Though the Bank’s quarterly projection model indicated two hikes of 25 basis points in the second and third quarter, this is “not going to happen”, said Citi economist Gina Schoeman.

The sustained split in the members’ votes “reinforces the fact that there is a gap between the thinking on one part of the MPC about how low rates could be”, she said. Nevertheless “rates are very unlikely to go lower from here” as “truly compelling data” would be needed to prompt one of the three hawks to change their stance.

Mamello Matikinca-Ngwenya, chief economist at FNB, said there is room for more easing because the “current economic shock has kept demand in the economy very low, and as a result, inflation has remained

firmly anchored below the midpoint of the target band”.

The Bank’s view on growth was “on the optimistic side”, said North West University Business School economist Raymond Parsons.

“Even a small further positive move on borrowing costs would have sent an affirmative message to the economy,” he said, adding that the MPC “failed to give the economy the injection of confidence it needs”.

IT’S HARDLY 12 MONTHS SINCE WE TOOK OUR FIRST STEPS AND THE EFFECTS OF THAT COULDN ’ T IMMEDIATELY BE FELT