Interest rates on hold despite higher inflation expectations

  • The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) decided to keep the repo rate unchanged at 3.5%, following its two-day interest rate-setting meeting on 20 and 21 January 2021.
  • The Sarb revised its economic growth estimates for 2020 and the forecast for 2021 higher. Economic growth for 2020 is now estimated at negative 7.1% (negative 8% at its previous meeting in November 2020). The new projection for 2021 is 3.6%, up from the previous estimate of 3.5%. The estimate for 2022 is unchanged at 2.4%, while the first forecast for 2023 is 2.5%.
  • The Sarb expects the negative output gap to shrink due to the expected increase in actual economic growth exceeding the increase in potential growth. The output gap for 2021 is now negative 3.9% (previously negative 4.2%) and that of 2022 negative 2.3% (previously negative 2.7%).
  • The Sarb raised its headline consumer price inflation (CPI) forecast for 2021 to 4% (from 3.9%), and that of 2022 to 4.5% (from 4.4%). The forecast for 2023 is 4.6%.
  • Core CPI estimates for 2021 and 2022 are unchanged at 3.4% and 4% respectively.
  • The divergent interest rate views of MPC members continued at this meeting. Two members favoured a reduction of 25 basis points, while three members wanted the repo rate to remain unchanged.
  • It is important to keep in mind that the MPC is forward-looking when making interest rate decisions. The MPC is not required to compensate for missing the target in the past. Rather, the MPC is expected to ensure that the consumer price inflation rate is heading back to the target of 4.5% over time.
  • Given the new information, we are of the opinion that the MPC is likely to keep interest rates stable up to at least the third quarter of 2021.

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