The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

At its November policy meeting, the Reserve Bank already warned that the economic outlook was looking less certain, with parts of the world seeing a resurgence in Covid-19 cases.

In the first line of the November statement, the monetary policy committee (MPC) predicted that “Covid-19 infections will occur in waves of higher and lower intensity, caused in large part by pandemic fatigue and lapses in safety protocols”. That assessment proved broadly accurate, except that the intensity of the resurgence has been more than most people predicted.

The European countries that are, collectively, SA’s biggest trading partners have gone into severe lockdowns that will slow growth. SA itself has tightened restrictions, though the government has tried to keep the economy moving. There’s no doubt restrictions, such as the closure of beaches and the prohibition of alcohol sales, will have killed off hopes of a recovery in tourism. Whether this will be big enough to make a material difference to the Bank’s GDP forecast will be revealed on Thursday.

While the average inflation rate for 2020 was the lowest in 16 years, confirming that Covid-19 depressed demand in the economy, this is a backward reading of little use for judging what the Bank will do on Thursday. By all accounts, it’s likely to be a close call, though the consensus is that it will keep the repo rate at 3.50%.

Its quarterly projection model previously forecast two rates increases in 2021. This will probably no longer be the case, given the weakening economy and lack of demand that’s likely to persist. Oil prices have jumped 38% since the last meeting and that, together with higher food and administered prices, could see the Bank upgrade its inflation forecast, giving itself room to keep rates on hold.

The November statement had a dovish tone, and would have worked just as well with a decision to cut rates. That indicates how close the Bank’s recent calls have been, which makes them hard to predict. It’s likely that a single vote will swing it this time as well.

The MPC noted in November that “pronounced levels of risk aversion are likely to persist through 2021”. That has proved prescient, despite a rosy picture at the time. Volatility has been the order of the day. After buying a net R6bn of government bonds in the last quarter of 2020, foreign investors had downloaded most of those by last week, pushing the rand weaker, well above R15/$.

In a sign of how fickle that sentiment can be, strong demand last week resulted in net purchases of more than R7bn, leading to net purchases of R2bn for 2021 so far. Having weakened as much as 6.8% to R15.66/$, the rand has once again dipped below R15/$, and was at R14.86/$ by 5.30pm on Wednesday. It has gained with other higher-yielding assets as the world waits for the start of Joe Biden’s US presidency and the hope of increased stimulus.

The outlook is far from certain and having cut the repo rate by 300 basis points in 2020, meaning SA’s borrowing costs are negative in real terms based on future expectations for inflation, the Bank might decide that lowering SA’s yield premium further is not prudent at this stage. In about a month, finance minister Tito Mboweni will unveil his budget. He’ll most likely confirm the Bank’s fears.

In November, the MPC said countries that would be particularly vulnerable were those “where economies fail to grow or run large external imbalances, fiscal deficits and high debt levels”. Unfortunately, that is a fairly accurate description of SA’s position and the MPC will likely argue that its best contribution will be to ensure stability at historically low rates.

That’s what it might do, but what should it do? We would urge it towards acting to support an economy that’s in need of an injection of confidence. As far as supporting businesses hit by the latest lockdown restrictions, the government is missing in action. A quarter of a percentage point might not sound like much, but at this point the economy needs all the help it can get and the Bank can help, with inflation firmly under control.

That doesn’t mean we are keeping our fingers crossed.


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