Johannesburg - The South African Reserve Bank’s warning this week that the recent cabinet reshuffle and the credit rating downgrade could put pressure on the rand and accelerate inflation has heightened the possibility of an interest rate hike, with one economic expert saying the bank would be right to act swiftly to curb high inflation.
Co-Pierre Georg of the University of Cape Town Graduate School of Business on Tuesday said South Africa was at the upper end of the target 3 to 6 percent inflation range. “The Reserve Bank would be right to react as swiftly as possible to the looming threat of high inflation Countries like Venezuela and Zimbabwe have shown us that inflation must be contained at manageable levels at all costs. Otherwise a downward economic spiral will ensue that is extremely difficult to escape,” said Georg.
He said the rand was likely to remain weak against the US dollar which added to inflationary pressures, because imported products would become expensive, thus fuelling consumer price inflation.
Governor Lesetja Kganyago on Monday said it was too early to ascertain if the downgrades would push the economy into a recession.
Treasury One currency dealer André Botha said the Reserve Bank would act if the inflation breached the target range. “But the bank needs to walk a fine line,” he said.
He said, contrary to his earlier expectation, the Reserve Bank was unlikely to cut interest rates by the end of this year, even though a rate hike was unlikely at the moment.
Do nothing
“A rate hike will depend on how inflation goes. If the Reserve Banks wants to keep inflation down at all costs, it will raise interest rates. But I think, for the moment, they do nothing,” he said.
MMI Holdings economist Sanisha Packirisamy said the probability of interest rate cuts was limited “at this stage.” She said South Africa was still vulnerable to a reversal in net portfolio flows, which were integral to the funding of South Africa’s current account deficit.
On prospects of an interest rate hike, she said: “Should fiscal prudence not be exercised and SA’s debt ratio continue to climb to more hazardous levels, we could very well see further downgrades being triggered. In this scenario, following a likely lower growth outcome, the currency could weaken further from current levels.
"If sustained at those weaker levels, inflation prospects could rise to a more uncomfortable level, urging the Reserve Bank to raise interest rates to defend its inflation-targeting mandate.”
Efficient Group economist Francois Stofberg said the extent of the short-term impact of the cabinet reshuffle and the ratings downgrades would depend on the rand’s resilience and the political aftermath of President Jacob Zuma’s decision to reshuffle his cabinet.
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“This will also translate into longer-term effects, so the next couple of months are crucial to both the economy’s performance and inflation. We’ll have to wait and see how, if at all, the political environment changes,” said Stofberg.
Meanwhile, Statistics South Africa yesterday said manufacturing production declined 3.6percent in February. Eight of the nine manufacturing categories contracted, with only motor vehicle parts and transport equipment rising 0.8percent year-on-year.
“While the data reflects broad domestic economic weakness, we had anticipated that improving global growth and recent buoyant [Purchasing Managers’ Index] readings would have offset softer local demand, particularly as far as export manufacturers were concerned,” said FNB senior industry economist Jason Muscat.
Muscat said that, without a significant turnaround in March, manufacturing was likely to contract in the first quarter of this year.
He said initial forecasts, which do not include March mining, manufacturing and retail trade data, suggested the possibility of a technical recession, following the 0.3 percent contraction in the fourth quarter of last year.
“A recession (in the first quarter of this year) would not have been the result of the recent cabinet reshuffle or the ratings downgrade, which suggests that there may be further contractions in the coming quarters given our expectations of lower business and consumer confidence in heightened political uncertainty,” said Muscat.