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 Reserve Bank said in its
semi-annual Monetary Policy Review released Monday in the capital, Pretoria.
Price-growth expectations remain “uncomfortably close to 6 percent. 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 percent over two years to try and bring price growth back to within its
target band of 3 percent to 6 percent. Inflation, which slowed to 6.3 percent
in February, has been outside the target for six consecutive months and the
central bank forecasts it will slow to less than 6 percent 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 stabilized.”
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 percent 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.
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S&P Global Ratings and Fitch Ratings both cut their
assessments of South Africa’s international 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 percent in 2016, the slowest
pace since a 2009 recession. The central bank forecasts an expansion of 1.2
percent 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 strengthened 0.4 percent to 13.8944 per dollar
by 8:10 a.m. in Johannesburg on Tuesday. Yields on rand-denominated government
bonds due December 2026 fell two basis point to 8.98 percent.