Unchanged interest rates a catalyst for sustainable economic activity

Jacques Celliers | CEO | First National Bank | mail me |

Against the backdrop of easing lockdown restrictions and a reassuring National Budget, the South African Reserve Bank’s (SARB) decision to keep the repo rate unchanged provides further impetus for more sustainable economic activity.

In our business, we’ve also observed increased economic activity among our Retail and Commercial customers. We expect the positive economic trajectory to gather pace in the months ahead, subject to the possibility of a third wave of COVID-19 and its impact on the economy.

Despite the positive signs, we urge customers to continue managing credit responsibly, coupled with reasonable financial buffers. As reported in our recent Interim results to end of December 2020, we have noted strong growth in deposits and even stronger growth in digital adoption.

The decision to keep policy rates unchanged was expected and should be read as the SARB’s attempt to strike a healthy balance between rising inflation risks and the relatively fragile growth outlook. In recent months we have seen growing signs of tightening global financial conditions and rising concerns over the medium- to long-term inflation outlook. Domestically, inflation is expected to trend higher in the coming months, albeit still anchored within the target band, amid rising food, fuel, and electricity prices.

For this year, we expect inflation to average 4.4%, up from 3.3% last year. At this stage, however, these developments are not enough to yield a change in the policy rate, given that the economy is still in need of support. Nevertheless, we expect GDP growth to rebound to 3.7% this year, following a deep contraction of 7.0% in 2020, supported by stronger global demand.

The risk to this view is a third wave of the virus, which will lead to further lockdown measures. Barring any major shocks to growth, we expect the SARB to keep rates steady throughout the year.