Johannesburg - The South African Reserve Bank could resume its rate hiking cycle despite a poor growth outlook, its governor, Lesetja Kganyago, said last week.
The move could be a shock reversal of the signs by the bank, which kept interest rates on hold in the last two meetings of its monetary policy committee (MPC), giving out an indication that the bank would now focus more on development rather than inflation.
South africa is on the brink of its first recession after contracting 1.2 percent in the first quarter as key sectors shrunk due to severe drought and falling commodity prices.
Kganyago said the MPC would raise rates if inflation, fuelled in part by a weaker rand, remained elevated.
“Although the MPC remains ready to respond to renewed inflation pressures, it remains mindful of the weak state of the economy and will continue to support the economy.”
Diminished business
The rand has weakened nearly 20 percent against the dollar in the past 12 months as looming rate hikes in the US, the threat of a downgrades to “junk” status and diminished business and consumer activity locally weighed on its value.
“Although the MPC remains ready to respond to renewed inflation pressures, it remains mindful of the weak state of the economy,” Kganyago said.
Headline inflation has been higher than the Reserve Bank’s upper target of 6 percent since January, prompting it to lift lending rates by 200 basis points from early 2014 despite poor growth.
The bank sees growth averaging zero percent this year.
“The rand exchange rate has been sensitive to these developments, with elevated levels of volatility,” said Kganyago, adding the next round of rating reviews in December were key.
South Africa is also in a fiscal bind, with government’s plan to boost growth to an annual 4 percent to tame widespread unemployment, poverty and the growing cost of borrowing facing a number of obstacles.
Finance Minister Pravin Gordhan on Friday also warned state firms they would have to live without state bailouts of about $35 billion as Treasury focused on achieving the deep spending cuts it promised in the February budget.
“The key concern that ratings agencies and others would have is that as a result of levels of mismanagement, those guarantees shouldn’t be called out at any stage,” he said.
On Monday, Fitch announced it had downgraded the country’s local currency debt. Fitch and S&P Global Ratings have South Africa’s local and foreign currency debt ratings a step away from subinvestment.
A trade surplus of R12.5bn was recorded in June from an even larger surplus of R18.4bn in May.
The cumulative trade balance for the first half of the year was a R12.5bn surplus, from a deficit of R22.9bn over the same period last year.
BUSINESS REPORT