Reserve Bank expected to keep repo rate at record low

Economists expect Reserve Bank governor Lesetja Kganyago to hold rates steady in January after cutting them a cumulative 300 basis points in 2020
STEADY HAND: Economists expect Reserve Bank governor Lesetja Kganyago to hold rates steady in January after cutting them a cumulative 300 basis points in 2020
Image: FREDDY MAVUNDA

The SA Reserve Bank is expected to keep its repo rate at a record low 3.50% at its January 21 meeting, and for the rest of 2021, as the coronavirus pandemic rages and with inflation expected to remain benign, a Reuters poll found on Thursday.

Bank governor Lesetja Kganyago would hold rates steady, 17 of 20 economists said, after cutting them a cumulative 300 basis points (bps) in 2020 as the pandemic swept the world.

The remaining three analysts forecast a 25 bps cut.

Inflation, which turned much weaker in 2020 compared to previous years, is expected to average 3.8% in 2021, lower than the midpoint of the Bank’s comfort range of 3-6%.

“The [SA Reserve Bank] will remain accommodative for longer.

“As disinflation risks should prevail in 2021, accommodative monetary policy will be the only available option to offset tighter fiscal policy,” Alexey Pogorelov wrote in a Credit Suisse note to clients.

SA’s already overblown budget has been hamstrung by the coronavirus, setting the stage for difficult public sector wage and tax deliberations in the upcoming February budget, economists said.

“Therefore, we do not expect the monetary policy committee [MPC] to hike the policy rate in the coming years.

"Moreover, we say the MPC has room to cut the policy rate at least once, by 25 bps, to 3.25%, in 2021,” Pogorelov said.

SA’s economy was expected to grow 3.5% in 2021, the poll conducted this week showed, after a 7.4% contraction in 2020 predicted in a December poll.

The economy is expected to grow 2% in 2022.

Daily reported cases of the coronavirus in SA flared to 20,000 in the past week, surpassing levels seen during the first wave of the pandemic.

Some economists predicted even deeper cuts to the repo rate in coming months on expectations the Bank would be more sympathetic if the economy struggled to rebound from the pandemic.

Goldman Sachs analysts said the combination of significant spare capacity and rand strength would continue to weigh on inflation through 2021, leading to a persistent undershoot of the midpoint inflation target range and an additional 75 bps of easing.

Economists at the investment bank were one of the first few to expect disinflationary trends in SA and they expect rates to be cut to 2.75% in 2021 and stay there through 2023 due to continued weak inflation.

However, survey medians expect rates to be hiked to 4% in 2022 and to 4.5% in 2023. — Reuters

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