THE South African Reserve Bank Monetary Policy Committee (MPC) decided to keep the repo rate at 3,5 %, with two members of the committee voting for a 25 basis points and a majority of three voting to keep rates on hold.
The Bank says its internal model that predicts the path of interest rates, the Quarterly Projection Model, shows that there will be no further rate cuts this year or next, with the next likely move to be a rate increase in the second half of next year..
Reserve Bank Governor Lesetja Kganyago started off by expressing relief that the COVID-19 pandemic has abated in South Africa, while a range of other countries are experiencing a surge.
“The economic effects of the crisis have been extensive and a recovery to pre-pandemic levels will take several years,” said Kganyago.
“At this stage, third and fourth quarter recoveries for 2020 are expected to be robust. However, the pace of growth into 2021 could be modest.”
Earlier this month, Statistics South Africa reported that second quarter GDP contracted by 51% compared to the second quarter of last year, with only agriculture showing positive growth.
Kganyago said the Bank had expected a 50% contraction over the period.
The Bank maintained its conservative economic growth projections.
“The Bank now forecasts a GDP contraction of 8.2% in 2020, compared to the 7.3% contraction forecast in July. The lower second quarter is followed by revised projections of a stronger expansion in the third and fourth quarters of 2020,” he said.
The Bank said in its statement. GDP is now expected to grow by 3.9% in 2021 and by 2.6% in 2022.
This week, the Organisation for Economic Cooperation and Development (OECD) announced that it expects South Africa’s economy to contract by 11,5 %.
The Bank expects the South African economy to be supported by relatively high commodity export price and a lower oil price.
The Bank now expects oil to average about $42 per barrel in 2020, rising to $47 per barrel in 2021 and $52 per barrel in 2022.
Kganyago was asked what the fact that 3 million people lost incomes during the lockdown meant for the interest rate path but refused to state that rates can aid the situations.
“Jobs are an outcome of economic activity,” he said, noting that the monetary policy aims to stimulate economic activity to ultimately create jobs.
Deputy Governor Rashad Cassim noted that heavy job losses, which are deemed a “demand shock” lead to “massive decline in income, which has a massive effect on consumption and therefore inflation.”
This suggests that job losses would automatically trigger a hold on rates or cuts if inflation falls sufficiently.
The committee defended the success of the Loan Guarantee Scheme which is administered by the major banks but underwritten by the central.
Last month, the National treasury reported that only 16,7% of the scheme had been taken up. Deputy Governor Kuben Naidoo explained that the scheme has since been tweaked to improve its uptake.
Changes include the removal f the R 300 million revenue threshold to allow any company to apply, the increase of the payment holiday from three to six months and allowing the loan to be used for the restart of businesses, rather than only funding existing operations.
(COMPILED BY INSIDE POLITICS STAFF)