Reserve Bank may keep rate cut in reserve

Rand has weakened and the global environment is more uncertain

17 January 2021 - 00:19 By HILARY JOFFE

After a dramatic year in which it halved interest rates, bought more than R41bn of bonds to keep the market liquid, and liberalised rules to keep banks lending in the face of the Covid pandemic, the Reserve Bank is set for a quieter 2021, starting with a likely "hold" on interest rates.And with growth prospects weakening and price pressures muted, most economists expect the benchmark repo rate to stay on hold at a record low 3.5% for the rest of 2021. That will keep short-term borrowing costs low and provide relief for households and companies in tough times, but won't necessarily help to drive the investment and growth SA needs, economists say. However, if the economic outlook gets much weaker, further cuts could be possible.Reuters found that 17 of 20 economists it polled predicted that the Bank's monetary policy committee would keep the repo rate unchanged at its monetary policy committee meeting this week. A Finder's economist panel said 93% of the econo-mists it surveyed expected the committee to hold rates - even though more than a third would like to see a rate cut. Almost three-quarters expected no increase in 2021. The market had priced in a 25-basis-point cut earlier this month, but that has shifted as the rand has weakened and the global environment is more uncertain.The committee slashed rates aggressively going into the Covid crisis, cutting by a cumulative 300 basis points in the first half of last year. It then opted to keep rates on hold for the last two meetings of the year, even though some of its members had initially preferred to cut.Stanlib economist Kevin Lings said the South African economy was weakening and could get weaker still. He has scaled back his growth forecast to just 1.5%-2% this year, after a likely decline of 7.5%-8% last year. However, the risks of cutting now outweigh the rewards and the committee might do better to use any space to cut interest rates later, when the vaccine begins to turn the cycle upwards and lowering rates might provide a springboard to stimulate the economy. "The risk is through the rand's vulnerability to our external account. There is no doubt that if we were to embark on more aggressive cutting, the currency would come under pressure, risking imported inflation," Lings said. "Rate cuts have helped at the margin, but they are just relieving the pressure and it is unlikely at the moment they will get an expansion in credit and fixed investment going."BNP Paribas economist Jeff Schultz expects another year of benign inflation dynamics, with headline consumer price inflation likely to average 3.5%. This would make 2021 the third successive year that the consumer price index has averaged below the 4.5% midpoint of SA's inflation target range. However, he said in a note: "We think the SARB will prefer to keep its foot steady on the accommodation pedal, though we do not rule out potential for additional modest interest rate cuts early this year, particularly if a more severe second wave brings with it renewed, lengthy, hard lockdown measures."Schultz expects that the rand, which on Friday traded at R15.24 to the dollar, will average R16/$ for 2021. But it could remain stronger for longer, depending on global activity and news flow.Though there will be pressure on the Bank to keep rates low for as long as possible, PwC economist Lullu Krugel expects that the inflation rate may be going up slowly during the course of this year and the Bank may have to start increasing rates by the year-end.Absa economist Miyelani Maluleke said in a note on Friday that the committee's central concern would likely be the negative effect on economic growth of the second wave of the pandemic. However, the 30% rise in crude oil prices and increases in food prices since its last meeting, as well as the weakening of the rand so far in 2021, could prompt caution among committee members about inflation dynamics.One economist who expects a 25-basis-point cut this week - and would favour a deeper, 50-basis-point cut - is the Bureau for Economic Research's Hugo Pienaar, whom Finder reported as saying: "With a benign inflation outlook, monetary policy has the space to provide some moderate further stimulus to the economy at a time when fiscal policy is heavily constrained to do so."

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