SA Reserve Bank leaves interest rates unchanged

The move was in line with market expectations, with the majority of economists in a Bloomberg poll expecting monetary policy committee to keep rates steady

19 November 2020 - 17:12
By Lynley Donnelly
Reserve Bank governor Lesetja Kganyago.
Image: FREDDY MAVUNDA Reserve Bank governor Lesetja Kganyago.

The SA Reserve Bank’s monetary policy committee (MPC) left the benchmark interest rate unchanged at 3.5% in its last scheduled meeting for the year on Thursday.

The move was in line with market expectations with the majority of 17 economists in a Bloomberg poll expecting the MPC to keep rates steady.

Two members of the MPC preferred a 25 basis point cut and three preferred to hold rates at the current level.

The bank revised its growth forecasts and is now expecting GDP to shrink 8.0% in 2020, compared to the -8.2% forecast at September’s meeting. It expects the economy to grow by 3.5% in 2021 and by 2.4% in 2022. 

The bank’s headline consumer price inflation forecast averages 3.2% in 2020 and is slightly lower than previously forecast at 3.9% in 2021 and remains at 4.4% in 2022.

The bank’s decision comes after a dire medium-term budget policy statement, which outlined the fragility of the state’s finances and a rising debt trajectory where debt to GDP is expected to hit more than 95% by 2025/2026.

The fiscal risk was viewed as one of the reasons that may keep the bank cautious on further rate cuts, as higher local rates are likely to make government debt more attractive to investors.

However, before the decision, some economists had seen scope for rate cuts as inflation remains subdued, with consumer price inflation in September slowing to 3% — the bottom of the bank’s target range of between 3% and 6%. 

Global conditions, including US election results and positive news on vaccine trials, have been largely supportive of the rand and other emerging markets in recent weeks, while monetary stimulus measures in developed countries are expected to continue.   

In an effort to support households and businesses through the worst of the pandemic crisis and lockdown, the bank has slashed the repo rates five times in 2020. At the current level it remains the lowest policy rate the bank has implemented in roughly 47 years. 

The decision comes before Friday’s ratings reviews from both Moody’s Investors Services and S&P Global. Both ratings agencies cut SA’s ratings earlier in 2020 due to souring prospects for both growth and SA’s finances. Moody’s has SA one notch below investment grade, on a negative outlook, while S&P has SA far deeper — or three notches — into junk status, on a stable outlook.