17 May 2021 – The South African Reserve Bank (SARB) is expected to keep interest rates steady at 3.5 percent as the stronger rand and high commodity prices are supporting the economy amid accelerating consumer prices.
The SARB’s Monetary Policy Committee (MPC) will meet this week for the third time since the beginning of the year to determine the bank’s monetary policy.
The rand has strengthened significantly since the beginning of the year, while commodity prices such as copper and iron ore have experienced double-digit growth.
In the previous meeting, the MPC unanimously decided to leave rates unchanged, but warned that its implied policy rate path indicated an increase of 25 basis points in each of the second and fourth quarters of 2021.
Investec economist Kamilla Kaplan on Friday said they expected the SARB to keep the repo rate on hold, despite the estimated increase in consumer price inflation (CPI) in the coming months. The bank’s CPI forecast for 2021 is higher at 4.3 percent, but still between the 3 to 6 percent target range.
Kaplan said higher rates of inflation were not unique to South Africa, with consumer inflation set to rise globally on the base effects in the annual inflation measures. She said the SARB could be expected to look past this and reaffirm that the risks to the inflation outlook were balanced in view of the well-contained demand pressures.
“The recovery in economic growth to ’pre-pandemic output levels will take time’ according to the SARB,” Kaplan said. “Against this backdrop maintaining the repo rate at current levels would be an appropriate policy stance.”
Investec only expects the repo rate to rise by 25 basis points in November.
In March, the SARB said the rand remained below its estimated long-run equilibrium value in spite of generally favourable global conditions and considerable rand appreciation. It said the implied starting point for the rand forecast was R14.96 to the dollar.
But the rand has appreciated by at least 6 percent since the beginning of the year, breaking below the R14 mark to the dollar last week after having weakened to R15.54 to the greenback in March.
Anchor Capital’s co-chief investment officer Nolan Wapenaar said a confluence of factors were currently providing support to the rand. Wapenaar said a R14.50 to R15 against the dollar exchange rate was a reasonable range for the rand, in line with their purchasing power parity model to determine the fair value exchange rate.
He said the current confluence of US labour data, commodity prices rally, and Moody’s skipping South Africa’s rating, also meant that the pressure on the rand was to trade stronger than the implied fair range over the near term.
“It appears to us that the rand is poised to break convincingly stronger than R14/$1 at some point,” Wapenaar said. “In the long run, we believe that this is a good level at which to externalise some wealth, although we also expect that the rand may remain stronger than our fair value for a protracted period.” Source (BusinessReport)