SARB worries about more rating actions, but limits scope for rate cuts

Sarb deputy governor Lesetja Kganyago. (Lisa Hnatowicz)
Sarb deputy governor Lesetja Kganyago. (Lisa Hnatowicz)

Johannesburg - The scope for interest-rate cuts in South Africa is limited even as the policy-tightening trajectory may be over, the central bank said.

Existing monetary-policy settings are “proving adequate to return inflation within the target range,” the SA Reserve Bank said in its semi-annual Monetary Policy Review released on Monday in Pretoria. Price-growth expectations remain “uncomfortably close to 6%. This limits the scope for rate cuts,” the central bank said.

The Monetary Policy Committee has kept the benchmark repurchase rate unchanged since last March after raising it by 200 basis points to 7% over two years to try to bring price growth back to within its target band of 3% to 6%. Inflation, which slowed to 6.3% in February, has been outside the target for six consecutive months and the central bank forecasts it will slow to less than 6% in the second quarter of the year.

Inflation is projected to remain within the target band “until the end of the forecast period,” the Reserve Bank said. “As such, the policy-rate trajectory may now have stabilised.”

The five-year breakeven rate, which measures investors’ expectations for consumer-price growth, has risen 23 basis points since reaching a near two-year low of 5.65% in March. This compares with a 14 basis-point drop in emerging market peer Turkey over the same period. While the rate remains below the inflation target, the rand has erased all its gains for 2017 after President Jacob Zuma recalled former Finance Minister Pravin Gordhan from an international investor roadshow in the UK and then fired him, driving up price expectations.

Political uncertainty

“The exchange rate is the biggest risk” to the inflation-forecast trajectory, the central bank said. “On balance, the risk to the exchange rate is that it will depreciate in the near term in response to increased political uncertainty, potentially accelerating inflation.”

The removal of Gordhan, who pushed for budget restraint and improved management at state companies, in a cabinet reshuffle on March 31, ignited South Africa’s worst political crisis in almost a decade and sparked calls from top officials for the president to resign.

S&P Global Ratings and Fitch Ratings both cut their assessments of South Africa’s credit to junk last week, citing the changes in the nation’s executive and policy uncertainty. Moody’s Investors Service put its rating, which is at the second-lowest investment grade level, on review for a downgrade.

The rand weakened more than the MPC’s assumptions after Gordhan was called back from London and the credit ratings were cut and the committee will publish new forecasts at its May meeting, Governor Lesetja Kganyago said in Pretoria. The junk credit will have far-reaching consequences, because it will affect the poor and the middle class and South Africa is now fighting from a weaker position when trying to market the country to foreigners, he said.

Negative outlook

The biggest risk to the nation’s financial markets is more ratings downgrades after S&P kept a negative outlook on its assessments, the Reserve Bank said in its report. Increasing uncertainty about future economic policy could prompt capital outflows in anticipation of more downgrades, which would push up borrowing costs and put the rand under more pressure, potentially accelerating inflation, the bank said.

The MPC left borrowing costs unchanged at its last six meetings, to support an economy which expanded 0.3% in 2016, the slowest pace since a 2009 recession. The central bank forecasts expansion of 1.2% this year.

The recent spike in uncertainty means the inflation rate could be higher, and economic growth worse, than projected, the Reserve Bank said Monday. The MPC will adjust its economic growth forecasts, said Chris Loewald, head of policy development and research at the central bank.

The rand weakened 1.3% to R13.93 per dollar by 07:30 on Tuesday. Yields on rand-denominated government bonds due December 2026 rose five basis point to 9%.

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