Lesetja Kganyago, Governor of the Central Bank of South Africa. (Photo: Waldo Swiegers / Bloomberg via Getty Images)
First published in the Daily Maverick 168 weekly newspaper.
The South African Reserve Bank (SARB) will almost certainly keep interest rates unchanged when its Monetary Policy Committee (MPC) meets on September 23. The economy is generally thought to be contracting this quarter, unemployment is high, inflation is moderate, and the rand is strong.
“The SARB must avoid interest rate hikes this year, even though monetary policy is extremely accommodating, as the economy is still fragile,” said Annabel Bishop, chief economist at Investec, as quoted by Finder. com, a global financial comparison platform.
A panel of economists polled by Finder.com found that 97% expected the SARB to keep its repo rate at 3.5%, which translates to a prime trade rate of 7.0%. The repo rate is at an all-time low and the prime rate is at its lowest in more than five decades after the central bank cut rates by 300 basis points last year, in response to the economic collapse triggered by blockages, national and global, to contain the deadly march of the Covid-19 pandemic.
Analysts largely expect the next move to be higher, but the timing remains uncertain. Some economists believe the SARB MPC should wait as long as possible, given the underlying economic weaknesses.
“Even next year’s interest rate hikes should be delayed as long as possible, hopefully until 2023,” Bishop said. There are many reasons for holding on at this time. The economy grew only 1.2% in the second quarter (Q2) – which may be an exaggeration as June mining data was rather high due to the late delivery of the data by the Mineral Resources Ministry and of Energy at Statistics South. Africa. Production remains well below pre-pandemic levels after the massive 7.0% economic contraction of 2020.
And in a significant setback, the economy is likely to contract this quarter, not least because of the wave of looting and violent unrest in July that was sparked after the imprisonment of former President Jacob Zuma.
In the last MPC in July, the SARB kept its GDP growth forecast for 2021 unchanged at 4.2%, but Gov. Lesetja Kganyago said he planned to revise them up – until the wave of looting breaks out. As the costs of chaos reverberate with the release of July economic data, it will be more than interesting to see what the central bank’s growth forecast is for the year when the MPC’s statement is released on September 23.
The latest indicator showed that retail sales in July fell 11.1% month-on-month from June, the biggest monthly drop since the industry cratered in April of last year. This gives a clear idea of the economic damage caused by the epidemic of lawlessness, which has killed more than 300 people.
Other datasets that will get the MPC’s full attention include second-quarter employment figures, which showed the unemployment rate to hit an all-time high of 34.4%, or 44.4% whether discouraged job seekers are included. We imagine the third quarter numbers will be even worse, signaling that poverty, hunger and inequality are all on the rise, further undermining an already frayed social fabric.
No wonder inflationary pressures remain subdued. In July, the CPI slowed to 4.6% – the middle of the SARB’s 3% to 6% target range – from 4.9% in June and 5.2% in May.
To top it off, the rand remains resilient, supported by record current account and trade balance surpluses, which are largely the product of searing commodity prices.
Against this background, some may wonder why the SARB is not cutting again.
The SARB must avoid interest rate hikes this year, even though monetary policy is extremely accommodating, as the economy is still fragile.
This story first appeared in our Daily Maverick 168 weekly newspaper which is available for free to Smart Pick n Pay shoppers at these Pick n Pay stores.