Johannesburg - South Africa’s Reserve Bank left borrowing costs unchanged for a fourth straight meeting even as it warned that risks to the rand and inflation may force it to re-assess its call that the policy-tightening cycle is near an end.
The six-member Monetary Policy Committee decided unanimously to leave the benchmark repurchase rate at 7 percent, Governor Lesetja Kganyago told reporters on Thursday in the capital, Pretoria. It didn’t discuss a rate cut and none of the members proposed raising the benchmark, he said. All 19 economists surveyed by Bloomberg forecast borrowing costs would stay unchanged.
“The MPC remains concerned that the inflation trajectory is uncomfortably close to the upper end of the target range,” Kganyago said. “While the committee retains the view that we may be close to the end of the hiking cycle, there may be a re-assessment of this position should the upside risks transpire.”
The MPC has kept the key lending rate on hold since March after raising it by 200 basis points since 2014 in a bid to limit price growth to between 3 percent and 6 percent. The economy that’s strained by a drought, weak demand in its main export partners and domestic and international political uncertainty. Slow economic growth is one of the key factors that rating companies such as Moody’s Investors Services, which will publish its assessment of the nation’s creditworthiness on Friday, have highlighted as risks.
While inflation quickened to an eight-month high of 6.4 percent in October as food prices surged by 12 percent from a year ago, price growth is projected to slow to within the central bank’s 3 percent to 6 percent target band by the second quarter of next year, Kganyago said. The MPC forecasts inflation will peak at an average of 6.6 percent this quarter and slow to 5.8 percent next year and 5.5 percent in 2018.
“They have left the door ajar in terms of hiking and there could be a possibility of hiking in the future” Thabi Leoka, an economist at Argon Asset Management in Johannesburg said by phone. “I don’t think they are comfortable with their inflation forecast and that it could be compromised. If inflation is significantly above their forecast, or if the currency remains weak and impacts on inflation, that will certainly drive the decision to a rate hike.”
Rand volatility
The rand slid the most in five years after Donald Trump was elected president on fears his spending plans could fuel US inflation and accelerate Federal Reserve rate increases. That boosted South African price expectations and stoked investors’ bets that domestic borrowing costs will have to climb. A decision by South Africa’s chief prosecutor to charge Finance Minister Pravin Gordhan with fraud -- before dropping the case three weeks later - contributed to the currency’s volatility.
The central bank kept its economic growth forecast for the year unchanged at 0.4 percent. Output will expand at 1.2 percent in 2017 and 1.6 percent the year after, according to the MPC.
The Reserve Bank would have to take into account the state of the domestic economy if it considers any further rate increases, Raymond Parsons, a professor at the North West University Business School in Potchefstroom, west of Johannesburg, said by phone.
“They have to bear in mind the kind of inflation we are dealing with,” he said. “It’s very much a cost-induced inflation. I think the bank accepts this and will be reluctant to act unless the circumstances change quite dramatically.”
Moody’s rates South Africa’s foreign-currency debt at two levels above junk, with a negative outlook, and S&P Global Ratings, which will publish its review on December 2, has the nation on the lowest investment-grade level, with a negative outlook. Officials from Fitch Ratings, which has a stable outlook on its BBB- rating and hasn’t set a date for its assessment, visited South Africa last week.
“The rand is expected to remain sensitive to changes in the stance of US monetary policy,” Kganyago said. “The rand will also remain sensitive to the sovereign ratings announcements due later this month and early in December.”
The currency was little changed at 14.1466 per dollar by 6.26pm in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 rose three basis points to 9.03 percent.
* With assistance from Amogelang Mbatha, Xola Potelwa, Thembisile Dzonzi, Simbarashe Gumbo and Liezel Hill
BLOOMBERG