South Africa’s central bank to keep rates at record low

Hauwa Mustapha

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South Africa’s central bank will keep its repo rate on hold next week as inflation remains benign but raise rates early next year to keep prices lower.

The economy was predicted to contract this quarter due to riots and the coronavirus pandemic, the poll taken in the past week showed, and all 20 economists surveyed expected rates to be kept at a record low 3.50% on 23rd September.

However, South Africa’s Reserve Bank was expected to raise rates by 25 basis points either in January or March to 3.75%, followed by another 25 basis-point hike in May and again in November to 4.25%.

Inflation was expected to average 4.4% this year and next, just below the mid-point of the Reserve Bank’s 3% to 6% target range.

South Africa’s central bank governor, Lesetja Kganyago, made the case last week for adopting an inflation “point target” of around 3% or 4% with a margin of error on either side, as opposed to the 3% to 6% target range used currently.

Consumer prices in Africa’s most industrialized nation have been going through a disinflationary phase for years before COVID-19 struck the world, but economists have agreed in recent months it had a transitory nature like other economies.

“One of the main differences we believe South Africa has managed to avoid the so-called ‘second round’ impacts of higher commodity prices into inflation is lower wage growth,” said Jeffrey Schultz, economist at BNP Paribas.

“Our research highlights this to be the single most important factor driving underlying price pressures in the economy. As a result, core inflation remains remarkably well behaved, and we see little impetus for this story changing anytime soon,” he added.

By lowering its inflation target towards those of higher income economies, South Africa will at least initially see pressure on interest rates, said Investec economist Annabel Bishop.

Growth in South Africa recovered to 1.2% in the second quarter from the previous three months, a better-than-expected outcome driven by sectors like communications, agriculture and mining.

However, the third quarter was expected to contract 0.6% on a seasonally adjusted but non-annualised basis due to arson and looting that erupted in July following the jailing of former president Jacob Zuma, as well as a severe third wave of COVID-19 infections.

South Africa’s full year GDP growth is expected at a median 4.9% this year, slowing to 2.1% next year.

The looting highlighted huge poverty experienced by many South Africans in day-to-day living.

“The crisis of unemployment in South Africa is growing and should be the core focus of government,” added Bishop.