Downgrades, weakening rand pose risk, says SARB

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

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

Published Apr 10, 2017

Share

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.

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. 

Reuters

Related Topics: