South Africa’s Central Bank Sees Stimulus Effects Peaking in 2021

South Africa’s central bank sees the impact of its unprecedented monetary policy stimulus peaking this year and boosting expansion for years to come.

While the monetary policy committee cut its benchmark rate by 275 basis points in early 2020 to a record-low 3.5% to counter the effect of the coronavirus, the changes are still filtering through to the economy and will “linger in the system for sometime, boosting growth in the outer years,” the Reserve Bank said Wednesday in its six-monthly Monetary Policy Review.

“While measuring the precise impact of policy-rate cuts on growth is difficult, and the current times are by no means ‘normal’, with higher-than-usual uncertainty, these effects should be expected to carry through, as the pickup in mortgage applications suggests,” it said.

The MPC sees Africa’s most-industrialized economy rebounding 3.8% in 2021, after contracting the most in a century last year because of the virus and restrictions to curb its spread. Domestically, the risk of a third wave of Covid-19 infections and slow rollout of vaccines that would lead to a reintroduction of stricter lockdown measures and ongoing electricity supply constraints could weigh on output.

Still, the projection model shows limited scope to support the economy further as consumer-price growth is set to temporarily breach the midpoint of its 3%-6% target range in the second quarter of this year. Returning it to 4.5%, the point at which the MPC prefers to anchor inflation expectations, will “require rates normalization” to close the gap between the benchmark interest rate and inflation, it said.

Implied Rate

The implied policy rate of the bank’s quarterly projection model, used as a guide for the MPC, indicates two increases of 25 basis points in the second and fourth quarters of this year. The committee’s May 20 meeting is the only one scheduled for the second quarter.

Two-month forward rate agreements, used to speculate on borrowing costs, see less than a 20% chance of a quarter-point hike next month.

Inflation is forecast to average 4.3% this year, but that could be revised higher with the bank now seeing electricity prices rising 14.6% from July 2021 compared with a previous estimate of 13%. While above-inflation increases in administered prices, including electricity and water, present upside risks to the outlook, inflation remains well contained and is only expected to average 4.5% in 2023, it said.

As inflation returns to the mid-point, the gap relative to the median of emerging market and developing economies is set to rise, “increasing South Africa-specific risk perception and leading to generally higher interest rate levels,” the central bank said.

While the annual inflation rate fell to a 16-year low in 2020, South Africa remained a high-inflation economy and the 3.3% out-turn placed South Africa 88th out of 154 countries, it said.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.