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Downgrades, weakening rand pose risk, says SARB

Politics

Pretoria - South Africa's central bank on Monday warned that the recent cabinet reshuffle that saw the finance minister fired and the country's credit relegated to "junk" could pressure the rand and accelerate inflation as inventors sold off local assets.

The rand has slipped nearly 12 percent since March 27 when President Jacob Zuma recalled then-finance minister Pravin Gordhan from an international roadshow, before firing him later that week.

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The South African Reserve Bank said it would stick to setting benchmark lending rates rather than intervene in the exchange markets. File picture: Philimon Bulawayo/Reuters

Last week S&P Global and Fitch cut the country's sovereign credit rating to subinvestment on the back of Gordhan's axing, both saying his departure raised the risk of a fiscal policy shift.

"Rising uncertainty about the future of economic policy could prompt capital outflows in anticipation of such downgrades," the Reserve Bank (SARB) said in its annual Monetary Policy Review.

The bank said the biggest risk to its policy aim of keeping consumer prices below 6 percent was the weakening exchange rate.

"Domestically the situation has been challenging ... it has been making policy-making very difficult," he told a news conference after the Reserve Bank (SARB) released the review.

In March the bank kept its benchmark repo rate unchanged at 7 percent, citing re-emerging risks to the exchange rate. It added then that it had reached the end of its tightening cycle which has seen it lift rates by a cumulative 200 basis points since 2014.

"The risk is that the rand could follow a more depreciated path than expected, which would, other things being equal, raise inflation," the bank said in the statement.

Prior to that meeting, forward rate agreements were pricing in at least one rate cut by 25 basis points in 2017, but on Monday the forward markets were pricing zero percent probability of a cut this year.

In response to questions from Reuters on Monday the bank said it would stick to setting benchmark lending rates rather than intervene in the exchange markets.

"We would consider becoming involved if the orderly functioning of the foreign exchange markets is under threat, guided by financial stability considerations," Deputy Governor of the Reserve Bank (SARB) Daniel Mminele said in emailed responses to questions. 

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