JOHANNESBURG – THE RAND briefly dipped below the key R14 level against the dollar after the South African Reserve Bank (SARB) yesterday revised upwards its economic growth forecast as it announced that it had kept the repo rate on hold.
The SARB yesterday expressed optimism over the economic outlook, with the gross domestic product (GDP) now expected to expand 4.2 percent this year, up from 3.8 percent, despite the threat of a third wave of Covid-19.
SARB governor Lesetja Kganyago said the bank had also revised upwards its first-quarter growth forecast to 2.7 percent, from the 0.2 percent contraction previously forecast.
“The stronger growth forecast for 2021 reflects better sectoral growth performances and a more robust terms of trade in the first quarter of this year, Kganyago said.
“Household spending is expected to be healthy this year, in line with the easing of lockdown restrictions and low interest rates … Getting back to pre-pandemic output levels, however, will take time,” he said.
The SARB also unanimously voted to keep its benchmark repo rate unchanged at a record low of 3.5 percent for the fifth consecutive meeting in spite of rising inflation.
Headline consumer inflation currently stands at 4.4 percent, the highest inflation rate since February last year, but still remains within the bank’s target band. The unchanged repo rate was in line with market expectations, and was expected to provide stability in the financial markets.
Kganyago said the overall risks to inflation outlook appeared to be to the upside, mainly from global inflation and wage growth. He warned that interest rates could increase by 50 basis points before the end of the year, as the easing cycle has come to an end.
“The implied policy rate path of the Quarterly Projection Model indicates an increase of 25 basis points in each of the second and fourth quarters of 2021,” Kganyago said.
North West Business School’s Professor Raymond Parsons said the case for keeping borrowing costs low for as long as possible remained strong, given the current balance of risks in the economy.
Parsons said even a small premature rise in interest rates could jeopardise what is still a vulnerable economic recovery and should be avoided for as long as circumstances permit.
“The SARB has rightly judged it necessary to instead provide stability and credibility to a low level of borrowing costs for now,” Parsons said.
“Yet monetary policy cannot do the heavy lifting on economic growth.”
Casey Delport, an investment analyst at Anchor Capital, said the unchanged interest rate should assist in calming market concerns around inflation, while the SARB’s forecast for 2021 consumer price inflation was slightly lower at 4.2 percent, down from 4.3 percent, and for 2022 and 2023 unchanged at 4.4 percent and 4.5 percent, respectively.
Following the SARB’s statement, the rand strengthened 0.04 percent to R14 against the greenback as investors were encouraged by the growth forecast amid the weak dollar.
By 5pm, the rand was bid at R14 against the dollar, 4 cents higher than at the same time the previous day. The rand has appreciated by 4 percent on a trade-weighted basis since March.
FXTM’s Lukman Otunuga said the weakening of the dollar could provide the rand with further stimulus in the coming weeks.
“A weaker dollar could drag the rand below R14, with R13.80 and R13.65 acting as key levels of interest,” Otunuga said. “Although inflation remains within the 3 to 6 percent target band, consistent signs of rising price pressures could force the SARB to act sooner than later.”