The repo rate stays at 3.5%, according to a unanimous decision by the South African Reserve Bank’s Monetary Policy Committee (MPC).
The committee decided to keep the rate at which the central bank lends money to commercial banks unchanged because it expects inflation to stay close to the midpoint over the forecast period.
Lesetja Kganyago, governor of the Reserve Bank, said on Thursday although there had been a steady improvement in vaccination rates, which will sustain confidence and global economic growth, the virus is only one of a series of current risks to the economic recovery that include rising inflation, weaker commodity export prices and the longer term impact of scarring from the pandemic and the July unrest.
The International Monetary Fund’s (IMF’s) forecast for global gross domestic product (GDP) for 2021 is 6.0% and the MPC forecasts that global growth in 2021 now sits at 6.2%, up from 6.1%. The MPC expects global growth of 4.4% for 2022 and 3.4% for 2023.
“Although policy settings in advanced economies remain accommodative, the spread of the Delta variant, higher global inflation, and uncertainty about the normalisation path for interest rates continue to cause financial market turmoil and capital flow volatility. Risk aversion persists where economies fail to take advantage of improved global prospects or to reduce large macroeconomic imbalances,” Kganyago said.
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Domestic economic growth of 4.2% in the first quarter and 4.7% in the second quarter of 2021 reflects better sectoral growth performances and robust terms of trade. Commodity prices have also been extraordinarily high, sustaining income gains despite somewhat higher oil prices.
More South Africans have re-entered the job market as economic activity resumed, but job losses suggest persistent adjustment and sustained weakness in some sectors. Household spending, on the other hand, remains healthy in line with better than expected salaries and wages, rising asset prices and low interest rates.
Kganyago said the Reserve Bank’s forecast for fixed investment was revised up for this year, but remains constrained and as a result of the GDP revisions by Statistics SA, is lower as a share of economic activity.
He says the economy is expected to grow by an upwardly revised 5.3% this year, despite the much larger negative effect on output that was previously estimated from the July unrest.
“Our revised estimate for third quarter economic growth is -1.2%, compared to the previous -0.5%.
“Output in the manufacturing sector fell by 8.0% in July alone. Mining was up 4.1%, while land freight transport fell by 5.0% and retail output was down by 11.2%. The July events and the pandemic are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns.”
GDP is expected to grow by 1.7% in 2022, down from 2.3% and by 1.8% in 2023, down from 2.4%.
“Overall, and after revisions, the risks to the medium-term domestic growth outlook are assessed to be balanced, as most of the bounce-back from the recovery is now in the past. High export prices are expected to fade, while very weak job creation will slow household consumption. Investment will remain constrained by the still limited energy supply and ongoing policy uncertainty. The faster vaccine rollout presents upside risks to the growth outlook.”
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Consumer price inflation
Headline consumer price inflation for 2021 is revised slightly higher to 4.4% from 4.3% and remains unchanged at 4.2% in 2022 and 4.5% in 2023. The forecast for core inflation is revised higher to 3.0% in 2021 from 2.9% and to 3.8% in 2022 from 3.7%. Core inflation is expected to be 4.3% in 2023, unchanged from the July forecast.
“The bank’s forecast reflects higher headline inflation for the rest of this year, before moderating in 2022. Compared to the July meeting, and taking into account higher household consumption and less investment from the recent GDP revisions, the output gap is narrower historically and over the forecast period.
“While economic activity continues to expand over the forecast period, a rise in core inflation is moderated by the current strength of the exchange rate and modest unit labour costs.”
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Kganyago said economic and financial conditions are expected to remain volatile for the foreseeable future.
“In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.
“The MPC will seek to look through temporary price shocks and focus on second round effects. As usual, the repo rate projection from the QPM [Quarterly Projection Model] remains a broad policy guide, changing from meeting to meeting in response to new data and risks.”