South Africa Central Bank Holds Rate and Signals Next Move Is Up

(Bloomberg) -- South Africa’s central bank held its benchmark interest rate for a second straight meeting and signaled increases next year, even as its forecasts for the economy and inflation remain muted.

The monetary policy committee held the repurchase rate at 3.5%, Governor Lesetja Kganyago said Thursday in an online briefing. Of the five members on the panel, three favored an unchanged stance and two preferred a 25 basis-point cut, the same vote split as in September. The key rate remains at the lowest level since it was introduced in 1998 after a total easing of 300 basis points this year.

Of the 17 economists in a Bloomberg survey, 13 predicted an unchanged stance, while the rest forecast a 25 basis-point reduction.

Key Insights

• The unchanged stance is likely to draw criticism from politicians and labor unions 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. It has relaxed accounting and capital rules to promote lending by commercial banks and increased its holdings of South African government debt, helping to bring down borrowing costs in the domestic market.
• The implied policy rate path of the central bank’s quarterly projection model indicates no further rate cuts in the near term, and two increases of 25 basis points each in the third and fourth quarters of 2021, Kganyago said. Still, future decisions will be data-dependent, he said.
• The central bank now sees Africa’s most industrialized economy shrinking by 8% in 2020, compared with its September estimate of an 8.2% decline. That’s despite stricter lockdowns in advanced economies that pose a threat to South African exports and output in the final quarter. The MPC expects economic growth to rebound in the next two years, predicting a 3.5% expansion in 2021 and 2.4% in 2022, slightly lower than its September projections.
• Inflation slowed to the 3% floor of the central bank’s target range in September, and the MPC sees it remaining below or at the 4.5% middle of the band until at least the end of 2022.

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