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The South African Reserve Bank’s Monetary Policy Committee (MPC) has voted to hold rates.

In its first meeting for 2021, the committee decided to keep the repo rate at 3.5% and the prime lending rate at 10%. The prime and base home loan rate remain at a historic low of 7.0%.

The bank was widely expected put a hold on rates, though some economists and analysts believe that there is still room for rate cuts.

Reserve Bank governor Lesetja Kganyago said that since the November MPC meeting, a second wave of Covid-19 infections has peaked in South Africa and in many other countries.

“It is expected that these waves of infection will continue until vaccine distribution is widespread and populations develop sufficient immunity to curb virus transmission,” he said.

Kganyago said that while Covid infections continue to dampen economic and growth prospects – the rollout of vaccines is expected to do the opposite, boosting the economy. The Reserve Bank has therefore revised its projected GDP growth numbers for 2021 higher, he said.

Should a vaccination plan be effectively implemented in South Africa, the economic benefits of a healthy population would outweigh the costs of the vaccine, he said.

However, this comes with the caveat that much of the local rollout plan remains uncertain, and with expected delays, recovery across different economies is likely to be out of sync and uneven.

Until the vaccination strategy is in effect, a third and subsequent waves of the virus remain big risk factors to economic growth, he said.

“Despite very robust terms of trade and stronger exports, getting back to pre-pandemic output levels will take time. Domestic GDP is expected to grow by 3.6% in 2021, 2.4% in 2022, and 2.5% in 2023,” he said.

Looking in the near-term, Kganyago said that the current level 3 lockdown conditions will keep growth in the first quarter muted. While the lockdown is not as strict as those seen previously, it will still have an impact on economic activity.

The bank’s headline consumer price inflation forecast has been revised higher to 4.0% for 2021 (from 3.9%), 4.5% for 2022 (from 4.4%), and 4.6% for 2023. Core inflation forecasts remain unchanged for 2021 and 2022 at 3.4% and 4.0%, respectively. The forecast for 2023 is 4.6%.

The overall risks to the inflation outlook appear to be balanced in the near and medium term.

Local food price inflation is higher, but expected to remain broadly contained. The committee additionally noted the significant but likely temporary reduction in medical insurance price inflation this year.

“Given low pass-through, risks to inflation from currency depreciation are expected to stay muted. However, additional exchange rate pressures could result from fiscal risks,” Kganyago said.

“While there are no demand side pressures evident, electricity and other administered prices remain serious concerns.”

Slow economic recovery will keep inflation below the bank’s mid-point of 4.5% in 2021, he said. Because of these factors, the bank decided to keep rates on hold.

Looking ahead, the implied policy rate path of the Quarterly Projection Model (QPM) indicates two increases of 25 basis points in the second and third quarters of 2021.

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