MPC Commentary

The South African Reserve Bank’s Monetary Policy Committee (MPC) decided to leave interest rates unchanged this month, having already lowered the Repo rate by a cumulative 3% so far this year.

Economists had mixed views regarding rate prospects ahead of the meeting, and the mixed sentiment was also reflected in the voting member split, with 3 members voting in favour of maintaining the level of interest rates, and 2 members voting in favour of a cut.

Interest rate policy has become markedly accommodative, both locally and abroad this year, to allow the economy to weather the difficult conditions which COVID-19 has given rise to. Economic growth has collapsed (the Reserve Bank now expects SA GDP to contract 8.2% in 2020), and consumers and businesses have found themselves under severe pressure, which lower rates have alleviated to some extent. Although there is a limit to what monetary policy alone can achieve, the stage is set for conditions to improve from here, with the Reserve Bank expecting GDP growth of 3.9% next year.

Unlike in developed market countries around the world, the MPC had plenty of room to cut rates coming into the crisis, and their swift action has led to interest rates now being at multi-decade lows. The United States Federal Reserve for example had far less room to cut, and with rates there at virtually zero, has had to resort to less conventional measures to provide support. With interest rates in the US likely to stay low for an extended period as indicated by the Fed’s forward guidance, the MPC could also find themselves in the position of maintaining a lower-for-longer monetary policy stance. It is worth also noting that the yield curve locally is very steep, and that we need to see some structural reforms materialise in order to address the long end of the curve, with the front end now anchored fairly low.

As always, the inflation backdrop is a key factor in formulating interest rate policy, and disinflationary pressures have resulted in the Consumer Price Index falling to very low levels, enabling the significant accommodation we’ve seen in this cycle. CPI fell below the Reserve Bank’s target range this year, but has potentially troughed, and the MPC expects moderately higher inflation going forward (though they have lowered their previous forecasts). The question is how tolerant the SARB might be to any prospect of higher inflation, compared to the US Fed, which under the current paradigm is explicit about their hopes of seeing inflation rise above their previous target levels.