Economists see rates at record lows for longer amid Reserve Bank caution
MPC keeps benchmark interest rate steady even as it downgrades inflation forecast for 2021 slightly
In another split decision the Reserve Bank’s monetary policy committee (MPC) left the benchmark interest rate unchanged on Thursday, even as two members of the committee voted for a cut and it downgraded its inflation forecast for 2021 slightly.
Economists said the Bank’s caution could mean rates remain at record lows for longer, particularly if inflation proves lower than its forecasts and economic growth into next year disappoints. The decision not to act came even as the Bank described risks to inflation as being to the downside in the short term, citing low oil prices, contained food inflation and the lack of a pass-through from the rand’s weakness in 2020.
It said that the slow recovery will keep inflation below the midpoint of the Bank’s target range of between 3% and 6% for this year and next.
The rand, which had traded at its weakest level in almost a week, had erased its decline by the end of the day, trading little changed at R15.4664/$. The rand is down 9.44% in 2020 so far but has recovered from its worst losses, which pushed it to a low of R19.3580/$ in April.
Governor Lesetja Kganyago, however, said that additional exchange rate pressures could result from "heightened fiscal risks" and though there are "no demand side pressures evident, electricity and other administered prices remain a concern".
The Bank expects headline inflation to average 3.2% in 2020, marginally down from September’s forecast for 3.3%. It is also slightly lower than previously forecast for 2021 — at 3.9% — and remains at 4.4% in 2022.
The Bank revised its GDP forecast to a contraction of 8% for 2020, a slight improvement from September’s estimate for a decline of 8.2%. However, its expectations for the following years were marginally reduced to 3.5% growth in 2021 and 2.4% in 2022.
The Bank’s internal modelling tool — the quarterly projection model (QPM) — suggests two rate hikes in the second half of the year, but economists told Business Day that rates could stay low for longer.
"The decision indicates a central bank that wants to leave little to chance," said BNP Paribas economist Jeff Schultz.
Though the QPM still prices in two hikes of 25 basis points in the second half of 2021, it is likely overestimating inflation and growth in 2021, he said. Schultz is expecting revisions to these forecasts in upcoming meetings and, as a result, the Bank is "probably" not going to have to raise interest rates next year. "We think the strategy is probably now to want to try and keep policy rates low for longer," he said.
Old Mutual Investments chief economist Johann Els said the Bank could have cut, particularly given its "dovish" tone on inflation prospects.
The decision shored up his belief that rates are likely to remain at these levels for an extended period. If an upward cycle in rates begins "it will likely be a very slow up cycle".
Kganyago said the bank is still searching "for an additional member or two for the MPC". The appointment process had made progress, but there was"a disappointment at the very last moment".
Kganyago again stressed that monetary policy has eased financial conditions and supported households and firms through the economic fallout of Covid-19. At the current level it remains the lowest policy rate implemented by the Bank in roughly 47 years. But he warned that monetary policy alone cannot raise potential growth or reduce fiscal risks.
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