S. Africa Central Bank Holds Rate, Signals Next Move May Be Up

(Bloomberg) -- South Africa’s central bank held its benchmark interest rate for a fourth straight meeting, with its projection model showing it could hike after the monetary policy committee’s next deliberation in May.

The MPC kept the repurchase rate at 3.5%, Governor Lesetja Kganyago said Thursday in an online briefing. The decision by the five members of the panel was unanimous, signaling a shift in sentiment after two members voted for cuts at the last three meetings.

The key rate remains at the lowest level since it was introduced in 1998. All 16 economists in a Bloomberg survey predicted the unchanged stance.

Key Insights

• The implied policy rate path of the central bank’s quarterly projection model still indicates two increases of 25 basis points this year, but those are now seen in the second and fourth quarters instead of the second and the third. The shift is due to somewhat lower inflation expected for 2022, Kganyago said. The MPC’s May meeting is the only one scheduled for the second quarter.
• Inflation is now expected to average 4.3% this year, compared with the MPC’s January estimate of 4%. That’s after it accounted for increases in global oil prices and a larger-than-expected domestic electricity tariff hike. The panel prefers to anchor price growth close to the 4.5% midpoint of the bank’s target range and sees it averaging 4.4% next year and 4.5% in 2023.
• While the central bank raised its economic growth forecast for 2021 to 3.8% from 3.6%, that’s largely in line with an improvement in prospects for the global economy. Domestically, the risk of a third wave of coronavirus infections and a reintroduction of stricter lockdown measures could weigh on output. The Reserve Bank sees gross domestic product expanding by 2.4% in 2022 and 2.5% the year after, unchanged from January.
• The unchanged stance is likely to draw criticism from politicians and labor unionists, who say the Reserve Bank should be doing more to support the economy and reduce unemployment that’s at a record high. GDP contracted by 7% in 2020 and the government only expects output to return to pre-pandemic levels in late 2023.

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