MPC Commentary

Reza Hendrickse, Portfolio Manager at PPS Investments

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) once again left the repo rate unchanged at 3.5% this month. Rates have been kept on hold since the July 2020 cut, prior to which they had been cut aggressively to ease financial conditions in response to the COVID-19 crisis.

Similar to November last year, the Committee was divided, with 2 members in favour of a 25-basis point cut, while 3 voted in favour of keeping the repo rate unchanged.

The SARB has raised its expectation for 2021 global growth, anticipating that the vaccine rollout will improve growth prospects. Supportive monetary and fiscal policy will also strengthen the economic recovery. The Reserve Bank now expects the 2020 domestic economic contraction to have been -7.1%, compared to the -8.0% previously forecast, with better than expected third quarter growth offsetting the softening in the fourth quarter. The SARB’s economic growth forecast for this year is marginally better at 3.6%, decelerating to 2.4% in 2022.

Inflation remains relatively low at present, with the SARB expecting 2020’s average inflation rate of 3.3% to rise modestly to 4.0% this year, which is still below the midpoint on the target range. The risks to inflation appear balanced, however the range of inflation forecasts from economist for next 12 months is particularly wide, indicating a high degree of uncertainty regarding the outlook. Although higher inflation is not seen as a near term concern, neither locally or globally, the long-term consequence of extraordinarily easy monetary policy is likely to lead to imbalances down the line, as well as higher inflation.