Mixed committee preferences but interest rates remained steady at 3.5%

Highlights _________________________________________________________________________________

The South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) held interest rates steady at 3.5% at the November 2020 interest-rate-setting meeting (the last one scheduled for 2020) despite expecting average annual inflation to remain below the midpoint of the target into 2022. The MPC’s decision on interest rates was in line with 17 out of the 22 surveyed analysts (including ourselves) in the November 2020 Reuters Econometer poll, while only five analysts were expecting an interest rate cut of 25 basis points. In the run-up to the meeting, the forward-rate agreement (FRA) market priced in a 20% chance of a 25-basis-point cut. The FRA market is only looking for the first interest rate increase of 25 basis points beyond a 12-month horizon, while analyst expectations are more mixed.
The Sarb’s growth forecast for the local economy edged up to negative 8% from 8.2% for 2020 and is expected to increase by 3.5% in 2021 (previously 3.9%). The size of the forecasted negative output gap was revised to a smaller 6.3% for 2020 and it is expected to taper to 2.7% in 2022, from a previous forecast of 2.3%.
The Sarb nudged its headline inflation forecast lower to 3.2% for 2020 (previously 3.3%) and from 4.0% to 3.9% for 2021. The Sarb continues to view risks to the inflation trajectory as broadly balanced in the longer term, given the upside threat of administered prices (including electricity tariffs) and heightened fiscal risks balancing out muted currency pass-through, contained food inflation and a temporary expected dip in medical inflation in 2021.
Interest rate preferences by the MPC members remained varied, with three members favouring no move in interest rates, whereas two members indicated a preference for cutting interest rates by 25 basis points.
The Sarb has cut interest rates by 300 basis points since the start of the year and has utilised several instruments in its toolbox to encourage lending to firms and households as well as to improve liquidity in fixed income markets.
We suspect the Sarb is at the end of its interest rate cutting cycle. A dismal growth trajectory and depressed demand exerts downward pressure on inflation in the near term. However, the Sarb noted risks to longer term inflation expectations remain broadly balanced. In addition, the Sarb reiterated its concerns over the country’s fiscal and debt burden. We are of the view that additional easing is less likely from here, unless SA suffers another growth setback induced by a renewed country-wide tightening in lockdown restrictions or if there is another sharp dip in inflation. We expect the Sarb to consider interest rate hikes from the second half of 2021.