S. Africa Holds Key Rate and Signals Hiking May Start Sooner

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South Africa’s central bank held its benchmark interest rate for a third straight meeting and signaled that tightening may start sooner than previously indicated.

The monetary policy committee kept the repurchase rate at 3.5%, Governor Lesetja Kganyago said Thursday in an online briefing. The implied policy rate path of the central bank’s quarterly projection model now indicates two increases of 25 basis points in the second and third quarters of 2021, which means tightening may start earlier than it suggested in November. However, future decisions will be “sensitive to the balance of risks to the outlook,” Kganyago said.

S. Africa Holds Key Rate and Signals Hiking May Start Sooner

Forward-rate agreements used to speculate on borrowing costs rose after the announcement, and now indicate that rates are expected to stay flat this year. Economists including Jeffrey Schultz of BNP Paribas said despite what the model shows, the central bank may not be in a position where it would have to raise the benchmark this year.

What Bloomberg Economics Says

“The South African Reserve Bank sees the risks to the domestic growth outlook as balanced. We see them as skewed heavily to the downside, however. This, in our view, increases the chance of delayed policy tightening, with rates likely to stay on hold through 2021.”

--Boingotlo Gasealahwe, Africa economist

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The vote split of the five-member MPC was the same as in November and September, with three favoring an unchanged stance and two preferring a 25 basis-point cut. This indicates the panel remains open to ease policy further, should continued waves of Covid-19 infections result in tighter lockdown measures, which would weigh on the growth outlook, according to Mpho Molopyane, an economist at FirstRand Group Ltd.’s Rand Merchant Bank.

Africa’s most-industrialized economy probably contracted 7.1% last year, according to the central bank, the most in at least nine decades. It projects a return to growth and has increased its 2021 forecast despite the reintroduction of restrictions to curb the second wave of the pandemic. It now sees gross domestic product expanding by 3.6% this year, 2.4% in 2022 and 2.5% the year after.

“There is a big question mark over potential rate hikes and when they happen,” Nicky Weimar, chief economist at Nedbank Ltd., said by phone. “A lot will depend on how the South African economy returns to some form of trend growth. Things can change very dramatically if the global recovery doesn’t pan out.”

Inflation is now expected to reach the 4.5% midpoint of the central bank’s target range in the second quarter of this year and to average 4.5% in 2022 and 4.6% in 2023.

S. Africa Holds Key Rate and Signals Hiking May Start Sooner

The unchanged stance is likely to draw criticism from politicians and labor unionists, who say the Reserve Bank should be doing more to boost economic growth and help reduce an unemployment rate that returned to a 17-year high in the third quarter.

The key rate remains at the lowest level since it was introduced in 1998. All but two of the 19 economists in a Bloomberg survey predicted the unchanged stance.

©2021 Bloomberg L.P.

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