Johannesburg - Economists believe rating and political risks remain the key drivers of any tightening going forward after the Reserve Bank decided to keep interest rates on hold on Thursday.
“Should we see a sizeable, adverse rand reaction to any rating downgrade, or deterioration in the political backdrop, the prospect of further tightening is likely to increase. As it is, the Reserve Bank sees the current monetary policy stance as ‘accommodative’, implying little indication from the bank on how long we should take that for granted,” Razia Khan, the chief economist for Africa at Standard Chartered, said.
Read: SA's Reserve Bank sees tepid growth
Colen Garrow, an economist at Lefika Securities, said the decision by the Reserve Bank not to lift its policy rate was motivated by the economy’s poor performance, not by the inflation outlook alone, which stayed in an upward trajectory.
“Contributing data released so far suggest that South Africa may release its first contraction in annualised growth since the first quarter of 2014, when historic long strikes on platinum mines pushed the economy to the near-precipice of a recession.”
Reserve Bank governor Lesetja Kganyago said inflation and growth dynamics continued to highlight the policy predicament facing monetary policy. He said the monetary policy committee (MPC) faced the dilemma of upside risks to the inflation forecast.
Growth outlook
“The risks to the growth outlook are assessed to be on the downside, particularly in the short term, despite the revision of the forecast,” he said. “Both mining and agricultural sectors are expected to weigh heavily on the first quarter growth outcome, and the outlook is, therefore, dependent in part whether these sectors rebound in the coming quarters.“
Garrow said the MPC statement contained inferences to the gross domestic product growth for the first three months of this year, and one was that the Reserve Bank had revised its growth forecast for this year to 0.6 percent from 0.8 percent.
“Growth this low is hardly an incubator for rising price pressure. The decision, therefore, to put the repurchase rate on hold is overdue since the forces fanning price expectations and the higher trend in its biggest agitator – food inflation, stemming from crippling drought – cannot be influenced positively by monetary policy.”
He said apart from the customary references to inflation, reading between the lines had become an art in determining what views monetary policymakers had. “That five MPC members chose to maintain the policy rate at 7 percent… suggests that the Reserve Bank may draw criticism for the hike in rates it has made so far… It should be noted that the MPC has done a sterling job in protecting its inflation fighting credentials
.”
Garrow said challenges the Reserve Bank had to deal with in making a decision like that last week had little to do with monetary policy, but rather with the disruption labour had had on the supply sectors of the economy, tightness of regulation and protectionist trade policy, among other issues.
Ian Cruickshanks of the SA Institute of Race Relations said the economy was heading towards stagnation. He said South Africa would have its first credit downgrade by the end of the year.
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