South Africa’s rate cut signals political pressure on Moody’s

South Africa's Reserve Bank Governor Lesetja Kganyago speaks during a television interview at the World Economic Forum on Africa 2017 meeting in Durban, South Africa, May 4, 2017. REUTERS/Rogan Ward

JOHANNESBURG  – The first interest rate cut in five years by South Africa’s central bank will likely boost the country’s economic growth potential, ratings firm Moody’s said, but warned that the policy decision also signalled growing political pressure on the bank.

South Africa’s main anti-graft watchdog recommended last month that the central bank mandate be changed to place more focus on growth and not just inflation and protecting the value of the currency, the rand.

The ruling African National Congress (ANC) party then proposed at a policy conference to nationalise the central bank.

Central bank governor Lesetja Kganyago has said the central bank remained independent and had not come under any pressure to cut rates.

Moody’s said in a note dated July 28 that the South African Reserve Bank’s (SARB) decision to cut rates by 25 basis points to 6.75 percent should support near-term growth by lowering the cost of investment, but also cited political pressure.

“Political pressures on the SARB to maintain expansionary monetary policies are likely to prevail, alongside heightened pressures for fiscal spending,” said Moody’s, which rates the country’s debt just one level above subinvestment with a negative outlook.

“The timing of the public protector’s report (that is, after a major cabinet reshuffle and before the ANC policy conference) points to growing political pressure for less independent monetary policy, a key pillar in our assessment of South Africa’s gradually deteriorating institutional strength.”

Reporting by Mfuneko Toyana; Editing by James Macharia

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