Kganyago says Sarb needs support from fiscal and macro policy

The South African Reserve Bank left interest rates at 3.5% today (November 19), but its governor urged authorities to implement macroeconomic and fiscal policies to support the economy.

In a press conference, governor Lesetja Kganyago said the monetary policy committee was split in its decision: two members preferred a cut, and three voted to hold rates.

Since the start of the year, the central bank’s MPC has cut interest rates by 300 basis points; the latest cut occurred in July.

“The implied policy rate path of the Quarterly Projection Model indicates no further repo rate cuts in the near term, and two increases of 25 basis points in the third and fourth quarters of 2021,” the governor said.

During his remarks, Kganyago said South Africa’s recovery from the economic impacts of the pandemic would “take time”, given that infections would continue to occur “in waves of higher and lower intensity” depending on “lapses in safety protocol”.

The bank’s forecast for GDP in the third quarter of this year has been revised up to 50.3% quarter on quarter, seasonally adjusted and annualised. As a result, the central bank now expects South Africa to contract by 8% this year, instead of the 8.2% forecast in September.

But while growth prospects in the near term have marginally improved, the central bank’s forecasts for the future have been revised down as a result of lower investment. GDP is now expected to grow 3.5% in 2021 instead of 3.9%, and 2.4% in 2022 instead of 2.6%.

“Monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks,” Kganyago said. He noted cuts to the interest rate had improved the resilience of households and firms during the pandemic, while capital relief had helped banks continue to lend.

However, the governor urged authorities to implement additional macroeconomic policies and structural reforms “that lower costs generally, and increase investment opportunities, potential growth and job creation”.

Complementing the central bank’s actions in this way, Kganyago said, would help to “enhance the effectiveness” of monetary policy.

The central bank’s MPC also revised its inflation forecasts. Consumer price inflation is expected to be 3.2% in 2020, 3.9% in 2021 and 4.4% in 2022.

“The overall risks to the inflation outlook appear to be to the downside in the near term and balanced over the medium term,” Kganyago said. Given the slow recovery, the MPC expects inflation to remain below the midpoint of the 3–6% target until the end of 2021.