What To Expect from This Week's SARB Meeting

  • Market Overview

What to expect from this week's South Africa Reserve Bank (SARB) meeting

Much of this week's economic attention in South Africa will be on the South African Reserve Bank's Monetary Policy Committee (MPC) meeting on Thursday (22 July). Last week we saw a country in turmoil as widespread looting in Kwazulu Natal and Gauteng dominated the news not only in South Africa but globally. These happenings were criminality at its worst, with the long-term effect being increased unemployment and dire ramifications for the country's Gross Domestic Product ( GDP ) as well as the expected uptick in headline inflation numbers.

The opinion of the experts

Analysts are predicting that the meeting will give a strong economic signal given the recent political turmoil as to the way forward for the economy. According to Peter Worthington, senior economist at Absa (JO: ABGJ ), the forthcoming MPC preview will be crucial. He added that in March 2021 the market was pencilling in an uptick in interest rates of 120 basis points over 16 months. Three and half months later and that probability will concertina to 140 bps of tightening over the following 12 months.

Nedbank published research report stated that although growth in the first quarter was better than anticipated, high-frequency data until May had remained subdued with industrial activity stalling due to power disruptions. Also, the bank highlighted that risks to the inflation forecast have shifted to the upside, owing to disruptions in the food and fuel supply chains, as well as higher insurance costs. It added that continued high levels of global inflation and oil costs will impact local inflation over the projected horizon.

Analysts at Stellenbosch University's Bureau for Economic Research (BER) have also stated that it anticipates that the central bank will make comments on the recent violence and looting in South Africa and what it implies for the economy. They added that the MPC would signal that its contribution to the economic recovery will be to maintain lower interest rates for longer.

A fragile economy – Differing opinions

According to a Finders survey of economists, the majority of economists polled forecast that the Reserve Bank will keep interest rates unchanged. Several panellists, including (JO: Standard Bank's ) Elna Moolman, suggested the rate will and should stay unchanged as long as the economy is in recovery mode. Jeff Schultz, the senior economist at (PA: BNP Paribas ) South Africa, had a slightly tighter timetable of hiking interest rates. They believe that the SARB would begin a gradual normalization cycle at its July MPC meeting, already increasing in September and November and raising the end-2021 repo rate to 4.00 percent.

SARB to err on the side of caution

The SARB has a tightrope to walk trying to balance an almost certain uptick in inflation in 2022, versus a weak economy and rising unemployment . Analysts’ therefore are of the opinion that South Africa's first interest rate increase will only occur in 2022, to allow the economy time to recover from last week's dramatic happenings. This will allow an already fragile economy to be supported by maintaining interest rates at multi-decade lows. The MPC may decide that by viewing the economy on a holistic basis, to err on the side of caution and defer any rate increases this year, and start the hiking cycle in 2022.

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