March 2021 MPC meeting – Shifting from dovish to dovish-cautious

MPC decision: The MPC decided to leave the repo rate unchanged at 3.50% for a fourth successive time. The decision was unanimous. This follows three meetings where two of the five members were in favour of a cut of 25bps.  The outcome was in line with ICIB and Bloomberg’s consensus repo rate forecast.  

Key issues we were watching

How many of the MPC members were in favour of rate cut/leaving the policy rate unchanged

The unanimous decision to keep rates on hold compared to the previous three meetings signals that the starting point of the analysis for the March MPC analysis has changed. These include an upward revision to global growth forecasts, an upward revision to the 2021 inflation forecast (from 4.0% to 4.3%), and an increase in global risk aversion even though global policy rates are likely to remain accommodative. The increase in global risk aversion pertains to a higher level of volatility for economic (the risk of a third wave) and financial conditions in the foreseeable future (which has resulted in a selloff in emerging market bonds).  The inflation forecast for 2022 was revised marginally lower to 4.4% from 4.5% and left unchanged for 2023 at 4.5%.

The overall risks to the inflation outlook are deemed to be balanced.

Upside risks:

  • Electricity and other administered prices.

    Higher oil prices with the forecast assuming a sideways movement from current levels.

    The meaningful moderation in medical insurance price inflation is likely to be temporary.

Downside risks:

  • The recent appreciation of the NEER and low pass through from a weaker currency (the starting point of the ZAR in the forecast was 14.96/$ compared to R15.70/$ in January).

    Food price inflation has been lower than expected due to a higher local crop production.


What about the implied policy rate that is expected to turn negative from Q2 onwards

A rising inflation trajectory from Q2 21 on account of base effects and the increase in the fuel price, which could see headline CPI inflation accelerate to 4.5% from February’s outcome of 2.9%, will result in a negative forward looking inflation adjusted policy rate, with the repo rate currently at 3.5%. We flagged this as one of the key considerations for the decision to keep rates unchanged at the previous two MPC meetings. In the Q&A session, Deputy Governor Rashad Cassim elaborated on the MPC’s assessment of a negative real rate which is influenced by (1) slack in the economy and (2) the output gap. An accommodative monetary policy is warranted at present in view of the lack of demand-pull pressures and a negative output gap (forecast at -3.5% in 2021 and -2.0% in 2022). A negative real policy rate will become of more concern when the economy starts to accelerate at a faster pace, leading to an earlier narrowing of the output gap. The SARB has raised its GDP growth forecast for 2021 from 3.6% to 3.8%. This however, factors in a contraction in growth in Q1 21 of 0.2%. This compares to January’s forecast of an expansion of 1.0%. Risks to GDP growth are assessed to be balanced with downside risks emanating from (1) energy supply; and (2) the vaccine rollout.

The implied policy path of the QPM model continues to factor in two rate hikes of 25bps each in 2021. The only change has been the timing of the first hike which has moved to Q2 21 from Q3 21 with the second rate hike in Q4 21. The model expects a further 100 bps in each of the following two years to take the repo rate to 6.0% by the end of 2023. This translates into a neutral real policy rate of 2.3%. The Governor of the Reserve Bank has stated on various occasions that the model is used as a guide only.


Conclusion: The tone of the statement is neutral in our view. While a negative real policy rate is currently warranted by the challenging economic backdrop, the 9 to 12 month forward outlook warrant an increase of around 65bps in implied rates relative to three month Jibar rate in our view. Our base case scenario is that rates could move sideways in 2021 with commencement of normalization in rates starting in Q1 22.