Client comment: MPC remains on hold as fiscal risks (again) flagged

As in September, the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) decided to keep the repo rate unchanged at a multi-decade low of 3.5% at the final policy meeting for the year. The onhold decision was in line with the market consensus and our expectation. The vote split was again three members in favour of the decision to keep the rate at the current level, while two members opted for a 25bps cut.

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Economic Prospects 2020Q4

Despite upgrades to the real GDP outlook, a difficult and protracted economic recovery remains the baseline scenario.

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Sentiment in the civil construction sector, as measured by the FNB/BER Civil Confidence Index, increased to a still low level of 11 in 2020Q3, from 5 in 2020Q2. Underpinning the low confidence was continued pressure on activity, which, while improved compared to 2020Q2, is likely well below the level recorded in 2019Q3.

The Absa Purchasing Managers’ Index (PMI) rose to a solid 60.9 index points in October, up from a revised 58.5 index points in September. The further increase at the start of the fourth quarter is an encouraging sign that the manufacturing sector continues to recover following a record contraction in April.

After falling from 18 to an all-time low of five in the second quarter, the RMB/BER BCI rebounded to 24 in the third quarter. Business confidence recovered in all the sectors making up the BCI. Given the close historical relationship between real GDP growth and the RMB/BER BCI, the third quarter survey results foreshadow an improvement in the third quarter relative to the second quarter.

The FNB/BER Consumer Confidence Index (CCI) increased from -33 to -23 in the third quarter. The partial recovery can be ascribed to increases in the household finances and time-to-buy durable goods sub-indices. The COVID-19 pandemic and related economic restrictions delivered a profound blow to consumers' willingness and ability to spend.