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South Africa Reserve Bank repo rate forecast report January 2021

93% of economists say the South Africa Reserve Bank will hold the repo rate.

Key findings

  • 93% of economists say the South Africa Reserve Bank will hold
  • About one in three (36%) think the Bank should cut the rate
  • Close to half (47%) think that the repo rate is set to stay put until the first half of next year

Meet our panel

Carpe Diem Research Services, Independent Economist, Elize KrugerEfficient Group, Economist, Dawie RoodtBureau for Economic Research, Chief Economist, Hugo Pienaar
IQbusiness, Chief Economist, Head of Research, Sifiso SkenjanaSTANLIB, Economist, Ndivhuho NetshitenzheAntswisa Transaction Advisory Services, CEO and Chief Economist, Miyelani Mkhabela
University of the Witwatersrand Wits Business School, Professor, Jannie RossouwIntellidex, Head of Research, Peter Attard MontaltoEFConsult, Chief Economist, Frank Blackmore
University of the Western Cape, Professor of Economics, Matthew Kofi OcranInvestec ltd., Chief Economist, Annabel BishopAlexander Forbes, Chief Economist, Isaah Mhlanga
RMB, Economist, Mpho MolopyaneBNP Paribas, Chief Economist, Jeff SchultzOld Mutual, Chief Economist, Johann Els

The 19-21 January repo rate decision

The South Africa Reserve Bank’s (SARB) Monetary Policy Committee is set to hold the repo rate at the 19-21 January meeting, according to 93% of panellists on Finder’s SARB Repo Rate Forecast Report.

However, over a third of panellists (36%) think the Bank should cut the rate.

Alexander Forbes chief economist Isaah Mhlanga thinks the Bank should hold.

“The impact of past monetary policy decisions – 300bp reduction in rates in 2020 and reduction of regulatory capital for banks – provided much stimulus that is still working through the economy.

“More so, the economy is now on a recovery mode, though incomplete, and further monetary policy stimulus at this point is not going to help much as it works through the credit channel, which itself depends on job creation, which also, in turn, will take time as the economy recovers. Implementation of structural economic reforms combined with dealing with the COVID-19 health pandemic,” he says.

Investec chief economist Annabel Bishop agreed, believing the Bank will and should hold the rate.

“While interest rates are very low historically in SA, and are not likely to reach levels experienced in 2019 over the next few years, with not much change in interest rates anticipated for this year, such easy monetary conditions will not counteract markedly tighter lockdown restrictions.

Credit rating downgrades would place upwards pressure on interest rates and erode the benefits the economy is receiving from very low current interest rates, which includes increased appetite in purchases of residential property, an area which could see further growth in 2021. Credit rating downgrades reduce foreigners’ appetite for SA’s public debt, with foreign holdings of this debt dropping from 37.1% end of 2019, to 29.2% in September 2020. Domestic banks have absorbed these sales, but this will imperil the banking sector’s sustainability if default nears.

Efficient economist Dawie Roodt and University of the Western Cape professor of economics Matthew Kofi Ocran also say the Bank should hold the repo rate given little upside to changing the status quo.

“The Bank should do no harm, and stay put. Post-COVID recovery is entirely in the hands of Government at this stage,” Ocran explains.

Old Mutual chief economist Johann Els expects the rate to hold and says the window of opportunity for further rate cuts has likely closed in the minds of the MPC members.

“While there is room for the Reserve Bank to cut rates given recent rand and inflation outcomes – as well as the expected performance of the rand and inflation over the next few months – the window of opportunity for further rate cuts has probably closed in the minds of the MPC members.

“But I do expect [the] global environment (low USA interest rates for a long time; weak USA dollar, strong Chinese growth) to assist in the SA interest rates to stay at these low levels for a while. Even when an upcycle starts – some time in 2022 – the uptrend in SA interest rates will be very slow and measured.”

BER chief economist Hugo Pienaar is the only economist who says the Bank will and should cut the repo rate. He expects the repo rate to drop 25 basis points but recommends a greater cut of 50 basis points.

“With a benign inflation outlook, monetary policy has space to provide some moderate further stimulus to the economy at a time when fiscal policy is heavily constrained to do so,” he explains.

Intellidex head of research Peter Attard Montalto expects the Bank to hold but thinks a cut of 50 basis points would be appropriate to offset the lack of additional support from the government.

Carpe Diem Research Services independent economist Elize Kruger thinks the Bank should cut the interest rate by 25 basis points in response to the COVID-19 crisis.

“The SA economy is still bleeding amid the economic impact of the COVID-19 crisis, while consumer inflation remains well under control in the medium term forecast, thus a small window of opportunity has opened for further stimulation.”

When will the rate first increase?

The repo rate is set to stay put until the first half of next year, according to nearly half the panel (47%).

IQbusiness chief economist Sifiso Skenjana expects a rate hike within this timeline and says a rate increase will most likely be guided by the inflation price path.

“We are seeing early signs of tapering off on monetary easing/accommodative policy in some of the developed economies which may suggest that we may see higher levels of inflation in those economies by year end 2021.”

EFConsult chief economist Frank Blackmore and Elize Kruger say if headline inflation moves toward 5% the MPC would be motivated to increase the interest rate in the first half of next year.

One in five panellists (20%) expect the rate to hold even longer, forecasting the next rate increase to happen in the second half of next year.

BNP Paribas chief economist Jeff Schultz explains the scope for interest rate normalisation globally seems unlikely until the second half of 2022 given a number of developed market central banks have committed to an asymmetrical monetary response to their inflation targeting mandates.

“On the domestic front, we also don’t believe that the SARB will have to worry about significant inflation pressures in the economy, with our estimates pointing to CPI inflation averaging below its 4.5% midpoint target both this year (3.5% BNP est) and next (4.2% BNP est). Our expectation that SA’s large output gap only looks likely to close by 2023 also informs our call for SARB to only begin gradually normalising interest rates from H2 2022.”

One panellist, Isaah Mhlanga, says the rate won’t move until 2023.

“The economy will still be below pre-COVID-19 pandemic levels, the US Fed will still be on hold per the FOMC minutes and therefore global financial conditions will still be loose. More so, rising debt and debt service costs will constrain monetary policy to respond to any increase in inflation, the latter of which is unlikely in a depressed economy,” he says.

However, just over a quarter of panellists expect the rate to increase in this calendar year, with 13% expecting a rate hike in July and the other 13% expecting a rate increase in November.

STANLIB economist Ndivhuho Netshitenzhe forecasts a rate hike in November.

“SA consumer inflation is still expected to remain comfortably below the mid-point of the inflation target over the next 6 months, allowing the SARB to give some reprieve to consumers who are in an extremely vulnerable situation financially.

“Furthermore, given the low economic activity expected at the beginning of the year, along with the ongoing high levels of unemployment, the economy is less likely to see any substantial inflationary pressures build up from pent-up demand.”

Will the SARB be forced to buy more bonds?

An academic paper published last September raised the possibility of the SARB being forced to buy more bonds for some time to come, if not permanently and we asked our panel if they agreed.

The panel was evenly split with 50% saying the Bank will be forced to buy more bonds and 50% saying it won’t. Of those who said yes, the majority, including Schultz, think the Bank will only be forced to buy bonds for a short time.

“While we think that the SARB does still have room to buy SAGBs in the secondary market, it is only likely to do so in response to a further deterioration in economic conditions and/or evidence of market dislocations and pressures in the bond market,” he says.

“…The SARB is likely to keep as much powder dry as possible and assess the outlook for the economy and bond market first before making any preemptive purchases. Right now the bond market continues to function well, having recovered from the massive sell-off seen in March/April last year. This should limit the SARB’s willingness to aggressively re-enter its SAGB buying right now.”

Meanwhile, Antswisa Transaction Advisory Services CEO and chief economist Miyelani Mkhabela said the Bank would be required to buy bonds over the medium term and that it’s inadvertently funding the COVID-19 response.

“Reflecting on developed economies, they explored quantitative easing and that gave them economic recovery confidence targeted to be realised in the last quarter of 2022. I’m sceptical that South Africa will recover within five years, I forecast a decade-long recovery,” he comments.

Mhlanga thinks the Bank will need to buy bonds over the long term, arguing that bond-buying programs will become mainstream in emerging markets.

“Bond buying programs were unconventional monetary policy tools in the advanced world a decade ago and they are now mainstream tools and no longer unconventional. Bond buying programs are still unconventional in emerging markets like South Africa, however, over time, they will likely be mainstream tools along the path followed by advanced economies.”

Is the SARB inadvertently funding the COVID-19 response?

40% of panellists think the SARB is inadvertently funding part of the COVID-19 response through its bond buying program while 60% don’t.

Both RMB economist Mpho Molopyane and Netshitenzhe were in the majority who don’t think it’s inadvertently funding the response, with Molopyane noting that “The SARB has maintained that its bond-buying program was aimed at injecting liquidity to ensure adequate price discovery and market functioning.”

Netshitenzhe put it this way:

“I believe that the SARB remains an independent institution that continues to be driven by two objectives, ensuring price stability (through inflation targeting) and financial stability. Therefore, any further bond purchases by the SARB would be done in order to ensure financial market stability and not to fund ongoing government spending on COVID-19.”

Just 20% of the panel said they were concerned the SARB will lose control of price stability – Dawie Roodt and Wits Business School professor Jannie Rossouw and the remaining 80% said they were not.

Will the government increase the tax burden in the 2021/2022 National Budget?

Nearly three-quarters of the panel (73%) say the government will increase the tax burden in the 2021/22 National Budget; however, only a third of the panel (33%) think the tax burden should be increased.

Netshitenzhe was in the minority who do not think the government will or should increase the tax burden.

The only reasonable way [the] government can improve its fiscal situation and improve economic conditions is through sound policy implementation (emphasis on implementation), transparency in how money is spent and improving the efficiency in spending that money. That is, [the] government needs to systematically shift government spending away from consumption goods towards investment/infrastructure spending. This should gradually lift growth, confidence and potential tax revenues without the need to place a greater tax burden on households and businesses.

A few panellists expect income tax bracket creep to take place along with “sin taxes” like alcohol and tobacco. When asked what should be increased some panellists suggested wealth taxes and VAT.

Image: Getty

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