South Africa's central bank to hold repo at record low through 2021

JOHANNESBURG: South Africa's Reserve Bank will keep its repo rate at a record low of 3.5% at its March 25 meeting and at that same level until early 2022, with scant demand pressure to push up inflation, a Reuters poll found on Thursday.

The economy contracted 7.0% last year despite the Reserve Bank cutting interest rates by a cumulative 300 basis points to counteract the damage caused by pandemic-led lockdowns.

All but one economist out of 25 polled in the past week said the Reserve Bank would hold interest rates at 3.5%. The lone voice predicted a 25 basis points cut next week.

Economists expect a technical bounce in economies around the world to drive prices higher. But Francesca Beausang at Continuum Economics said that, within the Europe, Middle East and Africa region, South Africa had the weakest prospect for a buoyant recovery that would fuel a surge in inflation.

The US Federal Reserve on Wednesday projected a rapid jump in US economic growth and inflation this year as the coronavirus crisis wound down but it still pledged to keep its target interest rate near zero for years to come.

The South African Reserve Bank, or SARB, was expected to hold the repo rate steady in 2021, and then raise it by 25 basis points in January or March 2022, with another quarter percentage point hike in the second half of next year, economists forecast.

"Even then, a 25 basis points hike is within limits and would demonstrate that the SARB is considerate of the persistent economic weakness," said Mamello Matikinca-Ngwenya, chief economist at FNB. She expects a rise to just 3.75% in 2022.

"Inflation remains benign around the 4.5% mid-point in 2021 and 2022 and only becomes a concern in 2023," she added.

The poll suggested inflation would average 4.1% this year and quicken to 4.3% next year.

The SARB aims to keep inflation within a 3% to 6% range.

January inflation was 3.2% and economists said, given a relatively slow economic recovery, oil and food price rises would not generate major knock-on effects.

Beausang said that, while inflation would jump in April, it would be due to higher production costs, including a rising oil price, rather than surging consumer demand, adding that this meant a weakening rand would have a limited impact on inflation.

South Africa's economic growth was expected to rebound to 3.6% this year, slowing to 2.1% in 2022 and 2023, the poll found.

A huge impediment to growth - even before the coronavirus crisis - was state-owned utility Eskom's inability to generate a reliable power supply, taking a toll on output and undermining the ability of economists to forecast economic performance.

Eskom says electricity generation will remain volatile until a maintenance plan is completed in September.