Reserve Bank sends strong signal rate-cutting cycle is over

The repo rate-cutting cycle is over.

South African Reserve Bank (Sarb) governor Lesetja Kganyago gave the strongest signal yet that this is the case when he announced on Thursday the bank’s Monetary Policy Committee (MPC) had made a “unanimous decision” to keep the repo rate at 3.5%.


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It is the fourth consecutive time that the MPC opted to keep the key rate steady. But more notably, it is the first time in as many meetings that all members of the committee voted “hold”.

Read: Sarb holds repo rate at 3.5%

At the last MPC meeting in January, two of its five members voted for a cut.

Besides the unanimous decision at this week’s meeting, another clear sign the rate-cutting cycle has come to an end is Kganyago’s concluding remarks about possible rate hikes this year.

“The implied policy rate path of the [Sarb’s] Quarterly Projection Model [QPM] indicates an increase of 25 basis points in each of the second and fourth quarters of 2021. Compared to the previous meeting, the shift in the rate path from the third to the fourth quarter is due to somewhat lower inflation in 2022,” he said.

This means a rate hike could come as early as the next MPC meeting in May, though this remains unlikely considering government warnings of the prospects of a “third wave” of Covid-19 infections ahead of winter.

The Reserve Bank only has one planned MPC meeting in the second quarter of this year, unless it calls an emergency meeting, like it did last year in April in the wake of the pandemic and financial fallout from the initial “hard lockdown”.

Characteristically, Kganyago ended his MPC speech with a qualifier.

“As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” he said.

According to FXTM senior research analyst Lukman Otunuga, MPC members voted unanimously on this week’s repo rate decision for the first time since April last year.

“If anyone was unsure whether the Sarb’s easing cycle was well and truly over, Thursday’s monetary policy meeting and rate decision acted as final confirmation,” he said.

“Overall, the Sarb seemed optimistic over the economic outlook, with GDP expected to grow by 3.8% in 2021, up from the 3.6% forecast in January. Given how the Sarb’s model points to [repo] rates at 4% by the end of 2021, this has fuelled expectations around a hike as early as Q2,” he added.

“While inflation is seen averaging at 4.3% this year and 4.4% in 2022, its still between the 3% and 6% target range. Should higher oil prices and an increase in electricity costs result in accelerating inflation, the Sarb may be presented [with] a stronger argument to raise interest rates,” he pointed out.

Anchor Capital investment analyst Casey Delport also said that it was notable that the latest MPC decision was a unanimous one.

“This implies that MPC members who were previously in favour of further interest rate cuts are now becoming more hawkish in their outlook. Overall, the tone of the statement was more dovish than we had anticipated,” he said.

Amid rising food, fuel, and electricity prices, FNB chief economist Mamello Matikinca-Ngwenya believes inflation is expected to trend higher domestically in the coming months, albeit still anchored within the Sarb’s target band.

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“For this year, we expect inflation to average 4.4%, up from 3.3% last year,” she said following Kganyago’s MPC announcement on Thursday.

“At this stage, however, these developments are not enough to yield a change in the policy rate, given that the economy is still in need of support,” she added.

“Barring any major shocks to growth, we expect the Sarb to keep rates steady throughout the year,” Matikinca-Ngwenya said.

The latest MPC decision may have ended on a hawkish note, but Momentum economist Johann van Tonder also believes it is unlikely repo rates will be increased this year.

“Although the Sarb’s QPM forecasts an increase of 25 basis points in each of the second and fourth quarters of 2021, our analysis suggests no change in the repo rate in 2021,” he said.