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South Africa Reserve Bank repo rate forecast report September 2020

82% of economists say the South Africa Reserve Bank will hold the rate but 36% call for a rate cut

Key findings

  • 82% of economists say the South Africa Reserve Bank will hold the rate but 36% call for a rate cut
  • 36% say the rate has reached its effective lower bound
  • Repo rate to increase in the second half of 2021, according to 64% of panellists

Expert forecasts ahead of the September decision

OrganisationName ForecastPreferenceComment
University of the Free StateDr Johan CoetzeeHoldHoldThe SARB will hold the interest rate change as it has a balancing act between ensuring competitiveness of the currency on the one hand and economic growth on the other. Although GDP figures for Q2 were slightly worse than expected, the elections in the US may be an important sideshow encouraging no rate change, especilaly if Trump is re-elected. Inflation is also picking up slightly and the economy has opened up somewhat amidst level 2 restrictions, so a hold is probably the most sensible decision in view waiting to see how things pan out.
EfficientDawie RoodtHoldHoldweve had enough monetary support now. we now need structural adjustments.
Carpe Diem Research ServicesElize KrugerHoldHold
University of JohannesburgIlse BothaHoldHoldAlthough another rate cut will be good for borrowers, people living off interest on savings are getting poorer. Inflation is currently within target and expectations are that it will remain within target for a while. Therefore another rate cut might be unlikely.
Antswisa Transaction Advisory ServicesMiyelani MkhabelaHoldHoldWe have passed the complexity management process and we need to focus on economic recovery and reforms, we need to see the viability of our inflation targeting and it’s perceived credibility.
IntellidexPeter Attard MontaltoHoldDecreaseThe 500bn stimulus package has largely failed to live up to its headline size and as such the MPC should provide as much stimulus as it can get away with in a least regret policy move that would see rates more negative for slightly longer and also see a crystalisation of the skew in risks from here of inflation to the downside. That said the MPC is viewing things as needing more stability for longer and a more balanced profile in inflation risks and hence is likely to keep rates unchanged albeit it will be a close call.
Rand Merchant BankMpho MolopyaneDecreaseDecrease2Q20 GDP print was worse than the SARB’s -40.1% q/q saa estimate at the time of the July MPC meeting, we expect the bank to revise its -7.3% GDP growth outlook for 2020 to reflect a deeper contraction. As a result, we expect the SARB to lower the policy rate by 25bp at the September MPC meeting support growth.
Department of EconomicsMatthew OcranDecreaseDecreaseThe release of the 2nd quarter GDP numbers provide evidence of an economy in self-induced comma with little prospective of recovery in the next 12 months, at least.
Investec.co.zaAnnabel BishopHoldHoldNo need to change rates
University of the WitwatersrandJannie RossouwHoldHoldThe rate of inflation has recently accelerated. The MPC will therefore leave rates unchanged to see whether the acceleration continues into the future. After all, the expected future trajectory of the rate of inflation determines the level of the repo rate
BERHugo PienaarHoldDecrease

The 17 September repo rate decision

The South Africa Reserve Bank (SARB) is set to hold the rate on 17 September, according to the majority of 11 economists on Finder’s panel (82%). However, 36% (4/11) think the Bank should actually decrease the rate from 25-50bps.

Senior lecturer in banking and finance at the University of the Free State, Dr Johan Coetzee, is part of the majority who thinks the rate will, and should, hold given the Bank needs to ensure the competitiveness of the rand as well as economic growth.

“Although GDP figures for Q2 were slightly worse than expected, the elections in the US may be an important sideshow encouraging no rate change, especially if Trump is re-elected,” he said.

“Inflation is also picking up slightly and the economy has opened up somewhat amidst level 2 restrictions, so a hold is probably the most sensible decision in view waiting to see how things pan out.”

Just two panellists (18%), economist at Rand Merchant Bank, Mpho Molopyane, and professor of economics at the University of Western Cape, Matthew Ocran, think the Bank will decrease the rate by 25bps given the weak 2Q20 GDP economic data.

“2Q20 GDP print was worse than the SARB’s -40.1% q/q saa estimate at the time of the July MPC (Monetary Policy Committee) meeting, we expect the bank to revise its -7.3% GDP growth outlook for 2020 to reflect a deeper contraction. As a result, we expect the SARB to lower the policy rate by 25bps at the September MPC meeting support growth,” said Molopyane.

Ocran put it this way:

“The release of the second quarter GDP numbers provide evidence of an economy in a self-induced coma with little prospect of recovery in the next 12 months, at least.”

Both chief economist at BER, Hugo Pienaar, and director and head of Capital Markets Research at Intellidex, Peter Attard Montalto, are also in favour of a rate decrease, despite forecasting a hold. Pienaar agrees with Molopyane and Ocran that the rate should drop 25bps, while Montalto called for a 50bps cut.

“The 500bn stimulus package has largely failed to live up to its headline size and as such the MPC should provide as much stimulus as it can get away with in a least regret policy move that would see rates more negative for slightly longer and also see a crystallisation of the skew in risks from here of inflation to the downside. That said the MPC is viewing things as needing more stability for longer and a more balanced profile in inflation risks and hence is likely to keep rates unchanged albeit it will be a close call,” he commented.

Montalto also noted that he thought the July rate cut should have been bigger, a sentiment shared by Pienaar.

“Inflation is expected to remain well contained, mostly below the midpoint of the SARB’s inflation target range on a 12-month view. In addition, the economy is reeling from the impact of a strict lockdown. If anything, the MPC had room to be more aggressive in July and cut by 50bps,” commented Pienaar.

The rate outlook

When asked if consumer inflation could be a deterrent for future rate cuts, the majority of panellists (55%) said no, while 36% said yes and one panellist, professor at the University of Johannesburg Ilse Bothe, said she was unsure.

Dr Coetzee is part of the 36% who say the inflation data will encourage the MPC to hold. He thinks that as long as the SARB centres the inflation target in its decision-making, it won’t consider further rate cuts.

“Having said this, although the latter part of their mandate ‘in the interest of balanced and sustainable economic growth in South Africa’ may take precedence during these unprecedented times, my view is that accommodation, if any, will not be substantial going forward,” he said.

Peter Attard Montalto dismissed the idea that the spike would deter the MPC from future rate cuts, noting that the July inflation rate was largely in line with their existing forecast and therefore wouldn’t be a big factor in its repo rate decisions for this year.

Chief economist at Investec.co.za Annabel Bishop agrees the MPC won’t be deterred.

“State administered price increases are high, such as electricity and water tariffs, municipal rates and taxes etc. and this keeps inflation higher, as does higher food prices in times of drought which is always a risk given SA is a dry country,” she said.

Matthew Ocran warned the sharp rise suggests that we’re getting close to an inflection point in the rate cycle, meaning further big cuts will actually worsen the inflation outlook.

Regardless of the inflation outlook, the panel is divided on whether the Monetary Policy Committee (MPC) even has any more firepower should it wish to cut rates further, with 36% saying the rate has reached its effective lower bound. Of the remaining panellists, 45% disagreed and 18% said they were unsure.

Interim head: Wits Business School at University of the Witwatersrand Jannie Rossouw thinks the rate has reached its effective lower bound.

“The repo rate cannot be used in isolation in an attempt to get South Africa out of its low-growth trajectory. Many more policy changes are necessary, for instance less regulation,” he said.

However even if the effectiveness of future rate cuts is uncertain, some panellists do think there’s scope for the benefits of earlier rate cuts to be passed on more fully to consumers. Over a quarter of panellists (27%) said they did not think the 300bps easing throughout the year had been adequately passed onto consumers, while 64% said they had and 9% said they were unsure.

CEO and chief economist at Antswisa Transaction Advisory Services, Miyelani Mkhabela, is part of the majority that believes the rate cuts have been adequately passed on and also does not think the rate has reached its effective lower bound. He commented that decreasing the repo rate is a great strategy for the monetary policy committee with calls for a more people-focused approach to statistics and economic indicators.

“… it is not clear whether South Africa can improve its economic performance through its adopted inflation targeting…In other words, we must restructure the South African economy to respond to the socioeconomic conditions and realise impact development, economic growth and job creation.

“The South African economic policy is unable to swallow the numbers of unemployed persons mainly youth and women. South Africa needs to refocus its monetary policy to target economic development holistically as inflation targeting hasn’t produced the results expected for the past two decades, leaving the country drowning in a recession and unmanageable unemployment with above 60 percent youth unemployment.”

The report also reveals consumers may not have the benefit of rock bottom rates for long. The panel suggested that the interest rate may increase in little over a year. 64% of the panel think the repo rate will increase in the second half of 2021, 9% the first half of 2022 and 27% the second half of 2022.

The risk of stagflation

Panellists were divided on whether there is a risk of stagflation; 55% (6 of 11) say there is no risk, while 45% (5 of 11) say there is a risk but to varying degrees. Four of those panellists say there is a small or moderate risk of stagflation, while one panellist, chief economist at Efficient Dawie Roodt, thinks there is a big risk. However, he added the caveat “not yet, but eventually”.

Coetzee says the risk is moderate but “very real”, provided the real economy does not recover on the back of the lockdown restrictions easing.

“My view is that the extent to which organised labour drives up real wages at the expense of labour productivity will play a significant part in driving this,” he says.

On the other side of the coin, Ocran says any threat of stagflation is non-existent.

“Even though output and employment prospects are expected to be weak for a considerable period of time, due to the delays in undertaking urgent reforms, inflation expectations are well-anchored. Therefore, the threat of stagflation is non-existent,” he says.

Independent economist Elize Kruger and Pienaar agree, noting weak domestic demand.

“Demand in the economy is so weak that retailers have limited pricing power so unlikely that we will see a broad based rise in consumer prices taking hold,” Pienaar says.

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