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Strong new measures to curb the spread of the coronavirus could slow but will not derail South Africa’s economic recovery, and the central bank will maintain an accommodative monetary policy to support growth, Vice Governor Kuben Naidoo said.
On Sunday, President Cyril Ramaphosa took the country one step forward until Alert Level 4, the second highest in the country, extending the curfew, reimposing a ban on the sale of alcohol and banning sit-down meals in restaurants. Other restrictions include limiting travel to and from Gauteng, the nation’s mall that has been hit hardest by a third wave of Covid-19 cases.
“The current regulations are going to have a negative impact on the recovery, but not derail it,” Naidoo said in an interview Monday. “I have a feeling that the economic recovery is continuing and will continue, but it will slow it down. It will be a speed bump on this road.
Last month, the central bank predicted that gross domestic product would rise 4.2% this year and that output would not return to pre-pandemic levels until 2023. Although the lockdown restrictions pose a risk for outlook, the bank could revise its 2021 forecast upward at its next monetary policy meeting scheduled for July 22, after the economy grew more than expected in the first quarter, Naidoo said.
Data shows that the economic impact of the second wave of infections, which peaked in January, was less severe than the first wave, suggesting that businesses, households and individuals have adjusted to lockdown restrictions, has he declared. Some consumption and trading activity has continued during the period and a similar situation is likely to occur in the coming weeks, Naidoo said.
In addition, the recent reforms announced by Ramaphosa are positive for growth and morale, although further steps can be taken to accelerate the pace of recovery, he said.
The bank’s monetary policy committee cut the key rate by three percentage points in 2020, including 275 basis points of easing in response to the impact of Covid-19 on the economy, taking it to an all-time high 3.5%. Since the start of 2021, none of the five MPC members have voted for further easing and the panel’s message has been that the next step will be in place.
The central bank’s quarterly projection model, which the MPC uses as a guide, this year shows two rate hikes of 25 basis points each and a policy rate of 6.11% in 2023.
READ: South Africa’s surge in inflation likely won’t lead to a rate hike
The timing of the first hike remains uncertain, with forward rate deals used to speculate on borrowing costs suggesting traders only see borrowing costs rise in the fourth quarter of this year, while nine of the 13 Bloomberg economists expect increases from the first quarter of 2022.
The stance of monetary policy will remain accommodative even as the bank hikes interest rates over the next two to three years, Naidoo said.
“There is no contradiction between hiking rate and have an accommodative monetary policy, ”Naidoo said. “At the moment, rates on a prospective basis are negative and quite strongly negative – even though we have raised them by 50 basis points, they remain negative. We cannot keep interest rates at 3.5% indefinitely.
– With the help of Khuleko Siwele