Central banks warns of rand risk

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Published May 26, 2017

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Johannesburg - The South African Reserve Bank left its key rate unchanged

for a seventh straight meeting as policy makers warned politics and ratings

downgrades could still knock the rand and scupper an improving inflation

outlook.

The Monetary Policy Committee maintained the benchmark

repurchase rate at 7 percent, Governor Lesetja Kganyago told reporters Thursday

in the capital, Pretoria.

The decision was in line with the estimates of all 21 economists in a Bloomberg

survey.

The key rate hasn’t changed for 14 months after the central

bank raised it by two percentage points since 2014. The MPC has had to contend

with swings in the rand after two ratings companies cut the debt of Africa’s most-industrialized economy to junk.

This came after President Jacob Zuma fired Pravin Gordhan as

finance minister, raising questions about political stability and stoking policy

uncertainty before the ruling African National Congress elects new leadership

in December.

Read also:  #Junkstatus: Pressure on the rand could hike inflation

“A reduction in rates would be possible should inflation

continue to surprise on the downside and the forecast over the policy horizon

be sustainably within the target range,” Kganyago said. “In the current

environment of high levels of uncertainty, the risks to the outlook could

easily deteriorate.”

Consumer inflation eased to 5.3 percent in April,

the slowest pace in 17 months and the first time it’s been in the 3

percent to 6 percent target range since August. Price growth in March and April

were below expectations, Kganyago said. The bank cut its forecast for the year

to 5.7 percent from 5.9 percent and sees inflation remaining within the target

range through 2019, he said.

As with the previous meeting, five MPC members voted for the

rate to stay unchanged and one favored a 25 basis-point cut, Kganyago said. “The

Reserve Bank will probably only ease policy next year, because the forecast

riskis so high this year,” Elna Moolman, an economist at Macquarie Group in Johannesburg, said by

phone. “It all comes down to the currency and the effect that will have on

inflation.”

The rand strengthened 0.4 percent to 12.8568 per dollar by

4:49 p.m. in Johannesburg

on Thursday. Yields on rand-denominated government bonds due December 2026 rose

one basis point to 8.51 percent.

Political Uncertainty

While the rand is at a stronger level than a year ago, the

outlook for the currency “and therefore the risks to the inflation outlook,

will be highly sensitive to unfolding domestic political uncertainty, as well

as decisions by the credit-ratings agencies,” Kganyago said.

South

Africa’s economy expanded by 0.3 percent

last year, the least since a 2009 recession. The MPC reduced its forecast for

growth this year to 1 percent from 1.2 percent, and trimmed the outlook for

2018 to 1.5 percent from 1.7 percent. The reduction is because of the

anticipated impact of the downgrades, he said.

Inflation expectations, as measured by the five-year

breakeven rate, are near the lowest in more than two years.

Forward-rate agreements, used to speculate on borrowing

costs, dropped as traders priced in a greater chance of policy easing.

Contracts starting in a year fell to 6.86 percent, showing expectations of 47

basis points of rate cuts by the end of the period.

“It would be very brave to cut rates in a year that a

reasonable person would expect that there would be turmoil, both locally and

internationally,” Nicky Weimar, an economist at Nedbank. in Johannesburg, said

by phone. “If there is a political resolution and the ANC heals itself, the

rand could come roaring back” and there could be scope for cutting rates.

BLOOMBERG

 

 

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