South Africa’s central bank to keep rates unchanged on July 22, hike in early 2022

PUBLISHED: Thu, 15 Jul 2021 10:21:43 GMT
Vuyani Ndaba
Reuters
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JOHANNESBURG, July 15 (Reuters) – South Africa’s central bank will keep its repo rate on hold next week as it looks through temporary high inflation and to support the economy, a Reuters poll found, but will kick-start its hiking cycle early next year to catch up with peers.

Adding to the economic devastation already wrought by the COVID-19 pandemic, riots and looting in recent days have left more than 70 people dead, hurt thousands of businesses and damaged major infrastructure in some of the worst civil unrest since the end of white minority rule in 1994.

Meanwhile, the unleashing of pent-up demand sent inflation to a 30-month high of 5.2% in May from 4.4%. However, this is considered transitory and core inflation – indicative of long-term trends – was still well within the Reserve Bank’s comfort level of 3-6 percent at 3.1% year-on-year.

All 30 economists in the July 9-14 Reuters poll were unanimous in saying the central bank would keep rates unchanged on July 22 at 3.50%, but as consumer inflation was expected to average around 4.3% this year and 4.4% next year, future rises were predicted.

Medians in the poll suggested rates would be hiked 25 basis points to 3.75% in either January or March as real rates are already in negative territory. The repo rate was expected at 4.00% by the end of next year and 4.50% by end-2023.

Generally, South Africa’s current uptrend in inflation, similar to the global backdrop, is transitory rather than a more lasting trend, according to a majority of economists polled.

Indeed, economists across the world agree the recent upward trend is primarily driven by the pandemic-induced low base of last year due to the shock from countries across the world shuttering vast swathes of their economies to try and contain the coronavirus.

“Consumer services inflation remain contained, and consumer goods inflation likely peaked in May and will shortly steadily moderate over the remaining months of 2021,” said Thanda Sithole, economist at First National Bank.

Economists have been concerned about imported inflation due to higher oil prices, albeit cushioned by a stronger rand in past months, although a compromise by Saudi Arabia and the United Arab Emirates over OPEC+ policy should unlock a deal to supply more crude to a tight oil market and cool soaring prices.

However, Sithole said the output gap remains wide, indicative of a lack of demand-pull inflationary pressures.

South Africa’s gross domestic product was expected to rebound and grow 4.3% this year, a 0.2 percentage points increase from last month’s median. But that comes after a 7.0% slump last year and not enough to address the record high 32.6% unemployment rate.

Growth was expected to slow to 2.2% next year and to 1.9% in 2023.

The full impact of the recent civil unrest is still unclear as Durban’s port has suffered major disruption, operations have been badly affected at the Richards Bay Port as has a national freight rail line, companies said on Wednesday.

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“If it comes to an end in the next day or so then the impact will be more muted compared with a scenario where it spreads to more areas of the country and last for weeks,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

“In Brazil, for example, strikes by truck drivers in May 2018 brought the country to a stand-still and resulted in a sharp (albeit temporary) drop in activity and a rise in inflation, even if supply disruptions did push up inflation, we suspect that the SARB would look through this.”

(Reporting and polling by Vuyani Ndaba)