The South African Reserve Bank (SARB) is expected to raise the policy rate by 25bps (basis points) to 3,75% in H2021 as domestic economic growth somewhat recovers and as inflation ticks up to an average of 4% over 2021.
This is coming as the country’s real GDP is set also seen expanding by 2,3% in 2021, after an estimated contraction of 8% in 2020, as global real GDP recovers.
An international research firm , Fitch solutions put a 5,4% global growth in 2021 against a 4% contraction in 2020.
In its Africa Monitor – April edition, Fitch said strengthening global demand should support South Africa’s key export sectors, including tourism, while the gradual rollout of a Covid-19 vaccine in South Africa should provide tailwinds to private consumption and business investment.
“In addition, while we expect the US Federal Reserve to keep its policy rate at 0.00% in 2021, limiting the pressure on the SARB to enact any hike to support South Africa’s interest rate differential and so constrain capital outflows, the SARB will seek to avoid a prolonged period of negative real rates.” noted Fitch.
This coming as the banks policy rate is seen remaining on hold over H121.
The South African Reserve Bank (SARB) held its benchmark policy rate at 3,50% at its January meeting and this was the third successive hold following 300 basis points of cuts between January and July 2020, and as was the case at the SARB’s September and November 2020 meetings.
According to Fitch , the hold reflects a continued balancing of risks, with inflation contained and growth recovering but still weak.
“Headline consumer price inflation averaged 3.3% in 2020 – the lowest rate since 2004 – with price pressures contained due to muted consumer demand and international commodity prices as a result of the economic impact of Covid-19. In addition, while the rand lost some 8% of its value against the US dollar between January 2020 and January 2021, pass-through effects remained slow, and the inflationary impact from currency depreciation remained relatively limited.” Fitch said
Meanwhile, growth has started to recover from Q220, when real GDP contracted by an unprecedented 51,7% q-o-q (on a seasonally adjusted and annualised basis), and 17.5% y-o-y.
In Q320 (most recent data available), real GDP expanded by 66,1% q-o-q (on a seasonally annualised and adjusted basis), as the easing of Covid-19 lockdown restrictions facilitated sharp increases in household consumption and gross fixed capital formation.
Nonetheless, real GDP remained on a contractionary trend in year-on-year terms, declining by 6.0%.
On the other hand, H2021 is expected to see could see President Cyril Ramaphosa face a substantial challenge to his leadership at the party’s national conference in 2022. “South African policymaking over the coming quarters will focus on the need to revitalise the economy following the severe recession in 2020. We expect real GDP to contract by 8.0% in 2020 given the impact of stringent lockdown measures designed to contain the local spread of Covid-19. Moreover, while we expect real GDP growth to recover to 2.3% in 2021, reflecting base effects and the rollout of Covid-19 vaccines from Q420, growth will remain weak relative to Sub-Saharan African and emerging market averages. This is largely due to pre-existing structural weaknesses and headwinds to private consumption arising from elevated levels of unemployment,” Itch said
It added that it believed that the economic necessity generated by the economic downturn will provide some tailwinds for reform.
With only limited scope for additional monetary and fiscal stimulus, restoring investor confidence and leveraging increased private-sector participation have been noted as are crucial elements of the government’s economic recovery plan, announced in October, that targets 3.0% annual average GDP growth over the next decade.