The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) last year slashed its key repo rate by 300 basis points to 3.5%, bringing the prime lending rate for businesses and consumers to 7%. That was a decisive response to the damage to the economy caused by the Covid-19 pandemic and the lockdowns to contain it. In the second quarter (Q2), when much commercial activity was brought to a virtual standstill, the economy contracted by 51%. For 2020 as a whole, the economy is expected to have contracted between 8% and 10%.

And with the second lethal wave of the pandemic sweeping across South Africa and the move back to lockdown Level 3, the outlook for 2021 is anything but rosy. The economy is now widely expected to contract in Q1, with overall growth for the year subdued.

Inflation also remains low by historical standards. The Consumer Price Index (CPI) in November, the last month for which we have data, was running at 3.2%, near the bottom of the SARB’s mandated 3% to 6% target range. December’s CPI rate will be published by Statistics South Africa on Wednesday, the day before the MPC decision, and it will almost certainly be moderate. 

While the rand has lost a bit of ground so far this year against the dollar, it is nowhere near the lows it hit in 2020. On the plus side for the rand, things look good for platinum group metals, notably rhodium, which has raced to fresh record highs above $20,000 an ounce. This has been driven in part by expectations of Chinese vehicle sales, suggesting that Chinese growth will be an engine for parts of South Africa’s economy.

Mamello Matikinca-Ngwenya, chief economist at FNB, told Business Maverick that “if you combine the inflation and growth stories” the conditions are ripe for another rate cut, and she expects one of 25 basis points at the meeting.

She pointed out that “the inflation risks are to the downside”. She said factors to watch on this front included medical aid costs and rental prices.

“We know that medical aid schemes have accrued a lot of savings due to reduced claims during the lockdown period,” she said, which puts them in a position to freeze premiums. Discovery, for example, signalled last year that there would be no increase in contributions for its members before July 2021. 

“Rental prices will remain weak and the price of rentals in the inflation basket is quite sizeable,” Matikinca-Ngwenya also noted. On the other hand, food inflation has been bubbling and was 5.9% in November, but expectations of a bumper maize harvest this year could contain such pressures. That would be welcome with hunger on the rise.

Another major trend that will influence the SARB is unemployment. The unemployment rate is over 40% by the widest definition and more jobs could well be shed in the year ahead.

“A number of companies are hanging by a thread and they will have to consider downsizing . Even big corporations will have to embark on this exercise,” Matikinca-Ngwenya said. 

So, the SARB seems to have plenty of reasons to cut. The vote at the last MPC was close, with three members opting to hold and two favouring a cut of 25 basis points. Since then, developments have tilted in favour of the doves.

The case to hold

That does not mean that the SARB will pull the trigger. It weighs this kind of stuff very carefully. The case to hold might include general uncertainty. I mean, seriously, does anyone think they know what the heck might happen in two weeks’ time? A hold could serve as a protective buffer for the rand in a fragile economic environment. And oil prices have also perked up.

Mike Schüssler of Economists.co.za notes that the difference between the repo rate and inflation is very close right now, at 3.5% to 3.2%, and that an emerging market can have a tough time pulling negative interest rates off.

“Why would I save? There is no incentive to save in a savings-poor country,” he told Business Maverick. He points out that this will make South Africa even more reliant on foreign capital for investment. “I think they will stay on hold. It is much more difficult in an emerging market to have negative interest rates.”

And, ultimately, there is only so much that monetary policy can accomplish. New car sales last year fell to a 20-year low despite interest rates being at levels that South Africans could only dream about this time last year. The retail sector remains subdued. Manufacturing output in November fell 3.5% year on year, its 18th consecutive month of decline. Attentive readers will note that Covid-19 was unheard of 18 months before that, and so the sector was already in the doldrums before the pandemic struck. That points to the many non-Covid challenges confronting the economy, including Eskom’s inability to keep the lights on reliably and government policy inertia. Lower rates certainly can help, but they are no panacea. BM/DM