Analysis: Top drivers behind SARB’s decision

Reserve Bank Governor Lesetja Kganyago. File picture: Phill Magakoe/Independent Media

Reserve Bank Governor Lesetja Kganyago. File picture: Phill Magakoe/Independent Media

Published Nov 25, 2016

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Johannesburg - The inflation outlook and inflationary expectations are clearly the main concerns of Lesetja Kganyago, the South African Reserve Bank governor.

Kganyago made it clear yesterday at the monetary policy committee (MPC) meeting that the bank’s main duty was “to maintain financial stability, which includes, among other things, the regulation of the banking sector”.

Read also: Rand slips after hawkish tone from SARB

Independent economist Ulrich Joubert supports Kganyago’s decision to hold rates: “Although the weak performance of the domestic economy continues, the Reserve Bank is still focused on its mandate to bring and keep the inflation rate within the target range of between 3 percent and 6 percent.

“The forecast is that the average inflation rate could drop to below the 6 percent target in 2017, but that it will remain close to the upper level - actually too close for comfort, given all the uncertainties that still prevail in the domestic and international environment.”

An improved growth rate of the South African economy depends not only on an easing of the monetary policy, but also on some adjustments to many other policy aspects such as the labour dispensation, the education and training system, less intervention and prescriptions in and to the business sector and a stable political environment.

The big question raised yesterday was to what extent was the Reserve Bank’s decision to keep the repo rate unchanged at 7 percent influenced by the rating agencies?

Nedbank Group senior economist Nicky Weimar said: “I don’t think his decision was styled to please rating agencies, but rather to deal with our country’s realities.

“The outcome of the major rating agencies’ update matters to the MPC to the extent that it impacts on the rand, which is a key driver of inflation since South Africa is a net importer.”

Various economists argue that a downgrade has already been priced into the domestic bond market.

Weimar agreed: “We believe this may be true if only one rating agency downgrades South Africa to junk status; however, a double downgrade will probably be a different story.

“The bulk of foreign funding consists of long-term pension funds and passive investment funds, whose rules to prohibit investment in countries deemed on average to be sub-investment grade by two or more rating agencies.”

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