South Africa

South Africa Monetary Policy September 2020

South Africa: SARB stands pat in September

On 17 September, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) left the repurchase rate unchanged at its all-time low of 3.50%, after lowering it by 25 basis points in its previous meeting. The decision was not unanimous as two of the five-member committee voted for further easing, and it came as a surprise to market analysts, who had favored another cut.

The decision to hold the rate at its record low came against a backdrop of a battered economy and contained inflationary pressures. GDP contracted 51.0% on a seasonally-adjusted and annualized basis (SAAR) in the second quarter due to the fallout from the Covid-19 pandemic and the strict lockdown measures imposed to halt its spread. Moreover, although incoming data is showing signs of recovering activity as restrictions are eased, the road back to pre-pandemic output levels remains long. As such, the Bank cut its GDP forecast for this year and now sees an 8.2% year-on-year contraction, down from the 7.3% fall projected in July, with a slightly stronger rebound of 3.9% penciled in for 2021 (previously: +3.7% yoy). Turning to inflation, despite hitting a four-month high in July, inflationary pressures remain contained, held back by economic slack. Accordingly, the MPC downgraded its inflation forecast from 3.4% in 2020 to 3.3.%, and from 4.3% in 2021 to 4.0%. Furthermore, inflation is expected to remain below the midpoint of the 3.0%–6.0% target range this year, reflecting the subdued economic backdrop.

Looking ahead, despite the relatively dovish bias on the policy stance, as indicated by the forecast revisions and considering two MPC members favored another rate cut, the SARB projected no further rate cuts in the near term, hinting that the Bank is at the end of its easing cycle. Moreover, the risks to the inflation outlook were described as balanced rather than tilted to the downside, as was the case in the previous meeting.

Commenting on the potential direction of policy ahead, Andrew Matheny and Dylan Smith, economists at Goldman Sachs, noted:

“We maintain an inflation forecast of 3.0% for 2021, meaningfully below the SARB’s downwardly-revised forecast (4.0%) and consensus (3.6%). Accordingly, we continue to forecast a further 50bp of rate cuts from the SARB in H1 2021. With the dovish surprise to our expectations from today’s MPC decision as well as the downside surprise to Q2 growth, however, we see a significant risk of more front-loaded cuts, i.e., a cut at the November MPC meeting.”

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