At its July 2021 meeting, the MPC members unanimously decided to hold the repo rate steady at 3.5%, leaving the prime rate at 7%. This is the sixth consecutive meeting at which the repo rate was left unchanged.
In his speech, Lesetja Kganyago, Governor of the South African Reserve Bank, said that the domestic economy grew by 4.6% in the first quarter of 2021, which was much stronger than the 2.7% expected at the time of the MPC’s last meeting in May.
“That outcome reflected better sectoral growth performances and robust terms of trade. Commodity prices have remained high, sustaining income gains despite higher oil prices,” said Kganyago.
“However, recent unrest and economic damage could have lasting effects on investor confidence and job creation. We estimate the unrest to have fully negated the better growth results from the first quarter, resulting in an unchanged estimate of 4.2% for growth in 2021.”
He said the Covid-19 virus continues to weigh on global prospects, despite steady improvements in vaccination rates, stronger investor confidence, and better global economic growth.
“Vaccination rates are lagging in many emerging markets and developing countries. Until populations develop sufficient immunity to curb virus transmission, waves of infection are likely to continue. As indicated by South Africa’s public health authorities, a third wave of virus infection is currently peaking. Additionally, by raising uncertainty and reducing investor confidence, the recent unrest in parts of the country is likely to slow our ongoing recovery.”
FNB Chief Economist, Mamello Matikinca-Ngwenya, says the MPC’s decision to keep the repo rate steady at 3.50% is in line with the bank’s and the market’s expectations.
“In the previous MPC meeting, the Quarterly Projection Model (QPM) projected a 50 bps hike in 2021, which may still happen during the September and November meetings,” says Matikinca-Ngwenya.
“Our view is that while the MPC has given guidance that interest rates will start rising, it will remain aware of the prevalent cyclical economic weakness and the need to provide as much monetary policy accommodation as possible, for as long as possible.”
Market view
Estate agency principals’ views of the MPC’s repo rate decision:
Tony Clarke, managing director of the Rawson Property Group, says: “As long as the economy remains under this current level of pressure, it makes sense for the SARB to support investment through accommodative interest rates. It’s possible that inflation could trigger an interest rate increase in the near future, but realistically, I don’t see this happening before the middle of 2022.” For the South African property market, Clarke says that the unchanged repo rate means that the exceptional buying conditions experienced over the last year will probably be continuing for some time.
Dr. Andrew Golding, chief executive of Pam Golding Property Group, says the MPC’s adoption of an accommodative approach was to be expected, given the vulnerability of South Africa’s economy in the wake of the recent unrest in Gauteng and KwaZulu-Natal. However, he believes a reduction in the repo rate would have provided some relief to individuals and businesses affected by the Covid-19 lockdown and recent events, as well as the increases in fuel and electricity costs and other utility tariffs. “Against a backdrop of a weaker rand and upside risks to inflation, some analysts believe interest rates will begin to rise later this year. However, the consensus view is that the current economic headwinds will delay the first hike until early-2022.”
Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, says the MPC’s decision is a prudent one. “Many people have entered the property market as a result of the record-low interest rates. Increasing the repo rate at this meeting could have had some concerning consequences for homeowners. Consumers are already feeling the pinch due to the recent looting and harsher lockdown restrictions during the third wave of Covid-19. “Although a cut of 25 basis points could have helped ease the economic burden in the months ahead, the MPC has acted wisely by at least keeping interest rates steady,” says Goslett.
Policy
Economic and financial conditions are likely to remain volatile for the foreseeable future, said Kganyago.
“The implied policy rate path of the Quarterly Projection Model (QPM) indicates an increase of 25 basis points in the fourth quarter of 2021 and each quarter of 2022. 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 remains a broad policy guide, changing from meeting to meeting in response to new data and risks.”
