Central bank actions in the spotlight

The Reserve Bank is expected to keep the repurchase rate at a five-decade low at 3.5% after the monetary policy committee meeting concludes on Thursday, but the tone of the Bank will be closely watched as policymakers worldwide begin thinking about normalisation.

The Reserve Bank is expected to keep borrowing rates at a five decade low in the week ahead, but the economic and social costs of violent protests may overshadow all scheduled events.

The rand, with shares of landlords and retailers, took a battering last week, with supply chain disruptions and a weaker local currency boding ill for SA’s economic outlook and inflation.

Ratings agencies Moody’s Investors Service and Fitch Ratings have warned that protracted unrest will affect SA ’ s economic recovery, but the agencies and analysts said if the situation calms down the effects are likely to be transitory.

The Reserve Bank governor is expected to keep the repurchase rate at 3.5% after the monetary policy committee meeting concludes next Thursday, but the tone of the Bank will be closely watched as policymakers worldwide begin thinking about normalisation.

“At times of heightened economic uncertainty, such as now, the best option is often to simply do nothing,” said RMB chief economist Etienne le Roux. “It’s easy to see a scenario where panic buying, coupled with broken supply chains, cause a near-term spike in for example food prices,” said Le Roux. However, without a sustained change in demand patterns, it will not cause a broad-based increase of inflation, he said.

“If rising cost pressures resulting from damaged infrastructure and supply disruptions have second-order price effects, it will be a concern,” he said. “But this isn’ ta given when the unrest has the potential to also negatively affect economic growth.”

The Bank lowered SA’s benchmark interest rate by 300 basis points in 2020, with 275 basis points of cuts coming since the onset of the pandemic to bolster the economy.

Rising food and fuel costs have been sufficient for BNP Paribas to tweak its expectations, now expecting two 25 basis point hikes in 2021 from one before, though they also expect the Bank to keep rates on hold on Thursday.

BNP Paribas expects the consumer price index (CPI) to average 5% in the second half of 2021, which is higher than the Bank’s preferred midpoint of 4.5%, while Brent crude is forecast to end the year at about $80 a barrel.

Data on Wednesday is expected to show inflation moderated in June from its 5.2% annualised rise in May that marked its fastest pace in 30 months. This was largely due to base effects given a sharp drop in fuel prices in 2020.

Core inflation, which excludes volatile energy and fuel components, is expected to remain steady at about 3.1%.

Against this backdrop, the Bank is expected to maintain its accommodative policy stance, said Investec economist Kamilla Kaplan.