MOODY’S says the government needs to improve the management of SOEs. Reuters
JOHANNESBURG – The rand took a slight breather yesterday after the SA Reserve Bank (Sarb) assumed a dovish tone following its monetary policy committee (MPC) signalling a potentially mooted credit rating review today by Moody’s.

The local currency moved from R14.75 against the dollar before Sarb governor Lesetja Kganyago announced that the MPC had taken a unanimous decision to keep the repo rate unchanged at 6.75percent after the markets digested the news.

Kganyago stressed that the risks to the inflation forecast were balanced - a stark contradiction from his position in January that risks would moderately swing upside.

“The MPC takes note of the recent inflation outcomes and welcomes the moderation in inflation expectations,” he said. “The overall risks to the inflation outlook are assessed to be more or less evenly balanced.”

Kganyago’s tone also showed that the Sarb was paying a lot of attention to the monetary positions of the European Central Bank and the US Fed, as well as the prospect of major central banks pursuing more accommodative policies.

He said inflation was expected to moderate from 5.4 to 4.8percent next year and from 5.4 to 5.2percent in 2020.

The Sarb also slashed its economic projections from the 1.7percent it predicted in January to 1.3percent, with a slight uptick of 1.8percent next year and 2percent in 2020.

The central bank said the reasons for the sluggish growth included electricity supply disruptions and an expected slowdown in the global economy.

“Electricity supply constraints and weak business confidence will likely limit near-term production and investment prospects,” he said.

NKC Africa said it expected interest rates to remain unchanged for the remainder of the year, given the favourable outlook of headline inflation.

“A slower pace of monetary policy normalisation that is now also expected in advanced economies should be an additional supporting factor,” NKC analyst Elize Kruger said.

North West University Business School economist Professor Raymond Parsons said the decision to keep interest rates unchanged mirrored the country’s economic conditions.

Parsons said both the economic and political factors presently called for a predictable period of stable interest rates, especiallyin view of inflationary expectations.

“With changing global economic conditions, it would also be wise for the Sarb to remain flexible regarding monetary policy and future trends in interest rates. In retrospect the hike in the repo rate in November 2018 was probably a mistake,” Parsons said..

The focus today now shifts to Moody’s rating review on South Africa’s sovereign credit rating.

Moody’s is the only one of the three big rating agencies to maintain the country’s rand-denominated debt at investment-grade level.

Tumisho Grater, economic strategist at Novare, said a downgrade could see the rand push above the R15.50 level against the US dollar.

“Over the years, credit rating agencies have expressed concerns over the country’s weak growth, the slow pace of implementing structural reforms, the increasing debt burden and contingent liabilities,” Grater said.

“In an already challenging environment, a downgrade would have negative consequences for the economy and, subsequently, public finances.”

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