South Africa central bank leaves main rate unchanged in close decision

JOHANNESBURG: South Africa's central bank left its main lending rate unchanged at 3.50% on Thursday as the consumer inflation outlook remains moderate and uncertainty lingers over the trajectory of coronavirus infections, Governor Lesetja Kganyago said.

The bank has lopped 300 basis points (bps) off interest rates since the beginning of 2020 to support an economy that was already in recession before COVID-19 hit. But it has now kept them on hold for two meetings in a row.

Three members of the bank's five-member monetary policy committee (MPC) favoured keeping rates on hold, while two voted for a 25 basis-point cut.

The decision, albeit close, was in-line with the market consensus and a recent poll by Reuters, where 17 of 22 economists surveyed saw the bank keeping rates steady.

As result the currency hardly reacted, trading at 15.50 per dollar soon after the decision, having traded at 15.53 just before.

Like other emerging market currencies, the usually volatile rand has rallied following Joe Biden's victory in the United States Presidential elections.

Kganyago warned that this had removed only one of the many headwinds faced by the currency.

In last month's budget speech the finance minister announced a much larger budget deficit and faster growth in public debt, while saying economic growth would remain weak and insufficient to mitigate record unemployment.

The typically conservative central bank has resisted calls to slash rates further and print money to plug the deficit. On Thursday it repeated that rate decisions would be data dependent, and "sensitive to the balance of risks to the outlook".

"Economic and financial conditions are expected to remain volatile for the foreseeable future, said Kganyago. He added that "COVID-19 infections will occur in waves of higher and lower intensity," making it difficult to say when the economy would return to growth.

South Africa has the highest rate of recorded COVID-19 cases on the continent, with more than 750,000 confirmed cases and over 20,000 related deaths. Some parts of the country are now experiencing "cluster outbreaks" after months of steady decline.

The bank now expects the economy to contract 8.0% in 2020, slightly better than its September forecast of an 8.2% contraction. It lowered its 2021 growth forecast to a 3.5% expansion from the 3.9% it saw two months ago.

It sees consumer inflation averaging 3.2% this year, and 3.9% next year, a touch lower than previous forecasts.