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SARB Keeps Repo Rate on Hold, but Inflation Risk Is Shifting to the Upside

The Monetary Policy Committee (MPC) at the South African Reserve Bank (SARB) unanimously decided to maintain an accommodative monetary policy stance by keeping the repo rate unchanged at 3.5%.

The bank revised its inflation forecast marginally lower to 4.2% in 2021 compared to the previous estimate of 4.3%. But, the SARB still forecasts inflation CPI to reach 4.5% the mid-point of the inflation target range by 2023. Further, core inflation was revised downward to 3% in 2021 from the previous estimate of 3.3%. In subsequent years, the core inflation was stable and forecasted to get to 4.3% in 2023.

However, the SARB assessed the risk to the inflation outlook to be on the upside. And, the recent upside surprises on inflation globally and locally, adding to the risk. The statement noted threats to the inflation outlook emanating from elevated global food inflation, high domestic tariffs, and demand for wages above inflation. In addition, the exchange rate is highlighted as an upside risk to inflation.

The economic recovery is on track; SARB revised its GDP forecast higher to 4.2% in 2021 compared to the previous estimate of 3.8%. Eased lockdown restrictions and elevated terms of trade provide support to economic growth and high commodities export prices channel the income into the economy. However, the economy is expected to drift lower to over 2.3% and 2.4% in 2022 and 2023, respectively.

The quarterly projection model (QPM), which is an input to the MPC policy decision, produced two 25 basis points of interest rate hikes in the second and fourth quarter of 2021.

We are clearly at the bottom of the cutting cycle; however, this is going to be a slow upward cycle. There is no evidence of demand pressure, more than 1 million persons employed before the pandemic are without jobs, and credit growth extended to households remains below pre-pandemic levels. Moreover, the economy is expected to reach the 2019 level in 2022. Further, the exchange rate is firmer, which buys the SARB some time to provide policy support to financing conditions and economic recovery.

The third wave of infections is still at the infant stage, and it is not clear how significant the damage will be, given the slow vaccination campaign. The SARB should keep the policy rate on hold this year and begin policy normalisation at least next year, based on current information.

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