SARB keeps rates unchanged, here’s what that means for the economy

The South African Reserve Bank's Monetary Policy Committee made the decision to keep the repo rate unchanged at 3.5 per cent, citing concerns about the ongoing economic weakness. The decision comes at a time when the country is still grappling with the effects of the COVID-19 pandemic and slow vaccine rollout. The Central Bank highlighted that one of the key risks to the economic growth outlook is the potential for a third wave of infections. Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments, provided insights into the potential impact of a third wave on the country's economic forecasts. Van Papendorp emphasized the need to take a longer-term perspective, noting that the rebound in growth this year, projected at 3.8%, is largely due to the low base of comparison from the previous year's contraction of 7%. He cautioned that while a modest growth rate above 3% is likely if lockdown measures remain at a moderate level, any escalation in restrictions could lead to downward revisions in growth forecasts. The unanimity among NPC members in the decision to maintain rates signals a balanced outlook on the risks facing the economy. Van Papendorp suggested that the Reserve Bank may have completed its cutting cycle and is unlikely to implement further rate cuts unless there is a significant resurgence in COVID-19 cases. The global growth outlook, which has improved in recent months, is expected to benefit South Africa through enhanced export opportunities. However, challenges such as ongoing load shedding by the power utility Eskom have hindered the country's economic performance. Despite the positive global growth prospects, the recovery in South Africa remains contingent on the successful administration of vaccines both domestically and internationally. Van Papendorp stressed that uncertainties surrounding the efficacy and pace of vaccine distribution pose significant risks to economic forecasts. The vaccination efforts in different parts of the world have varied widely, with countries like the US making significant progress while emerging economies like South Africa face challenges in accessing an adequate vaccine supply. The disparity in vaccination rates across regions could impact global growth trajectories and, consequently, South Africa's economic recovery. As the country navigates the uncertainties posed by the evolving COVID-19 situation, government responses to potential waves of infections will play a crucial role in shaping the economic outlook. Van Papendorp's assessment underscores the need for a cautious approach to forecasting, with the understanding that the path to recovery is fraught with risks and uncertainties. The Reserve Bank's decision to maintain rates reflects a prudent stance in the face of ongoing challenges, signaling a readiness to act if needed to safeguard the country's economic stability.