Seven of 20 economists in Bloomberg survey forecast reduction
Extent of universal downgrades on rand, bonds still unclearj
The South African Reserve Bank kept its benchmark lending rate unchanged for a third consecutive meeting as the risks of a credit-rating downgrade persist, muddying the outlook for the rand and inflation.
The central bank’s Monetary Policy Committee maintained the repurchase rate at 6.75 percent Thursday, in line with the estimates by all but seven of the 20 economists surveyed by Bloomberg.
The bank cut the rate for the first time in five years in July to support an economy that entered its second recession in almost a decade in the first quarter of 2017 and has struggled to mount a strong recovery. Inflation has been inside the target band for eight months and the rand — among the world’s most-volatile currencies — has strengthened since the ruling party elected Deputy President Cyril Ramaphosa as its new leader in December, spurring hope that policy uncertainty and political turbulence will dissipate.
“We do see an improved inflation and growth outlook thanks to a stronger performance in the currency but a lot of risk factors still exist, both on the political front as well as on the credit-ratings front,” said Jeffrey Schultz, BNP Paribas’s senior economist.
S&P Global Ratings and Fitch Ratings Ltd. cut the country’s debt to junk in 2017, and a reduction of rand bonds by Moody’s Investors Service could trigger an exclusion of the country’s rand debt from Citigroup Inc.’s World Government Bond Index.
The effect of this on rand bond yields “could be significant, but the extent to which a universal downgrade is already priced in remains unclear,” Governor Lesetja Kganyago told reporters in the capital, Pretoria. The government’s challenge is to “find ways to finance the deficit in a growth-positive manner, and at the same time convey a credible commitment to structural reforms.”
The bank expects inflation to remain within the target band of 3 percent to 6 percent until at least the end of 2019, reaching a low of 4.4 percent in the first quarter of this year. It lowered the forecast for average price growth this year to 4.9 percent from 5.2 percent announced at the November meeting, and decreased the 2019 estimate to 5.4 percent from 5.5 percent, Kganyago said.
“Inflation forecasts are low enough and if they materialize then there is enough scope to cut,” said Elna Moolman, an economist at Standard Bank Ltd. But “we are confronting very significant currency risks, which could impact on the inflation forecast.”
What Our Economists Say
The 2018 budget and associated responses from rating agencies could push down on the rand and lift import costs when it is announced in February. Today’s decision to keep rates on hold, rather than cutting, will provide some resistance to that pressure and moderate the impact on consumer prices. Despite gyrations in oil costs, the SARB still sees inflation settling in the higher end of the target interval. Bloomberg Economics sees the number of committee members voting for a cut rising from one to two or three in coming meetings, but for the majority to favor rates on hold.
-Mark Bohlund, Bloomberg Economics
South Africa’s currency has strengthened 3.6 percent since Dec. 18, when the ruling African National Congress elected Ramaphosa to succeed President Jacob Zuma as its new leader. This has caused price-growth expectations, as measured by the five-year breakeven rate, to fall. The rand has been the world’s most volatile currency over the past year after Nigeria’s naira and Tunisia’s dinar, data compiled by Bloomberg show.
The currency advanced 0.8 percent to 12.2050 per dollar by 4:27 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose 2 basis point to 8.50 percent.
Africa’s most industrialized economy exited the recession in the second quarter of last year. The MPC increased its 2017 economic growth forecast to 0.9 percent from 0.7 percent announced at its November meeting. It raised the 2018 estimate to 1.4 percent from 1.2 percent.
“They decided to take a wait-and-see approach to see what will happen with the rand,” said Busisiwe Radebe, an economist at Nedbank Group Ltd. “Implicit in what the governor was saying is that the bank doesn’t think the strong rand is going to remain this way for a very long time. Rates are going to stay flatter for longer.”
Click here to watch today’s SARB briefing, hosted by Governor Kganyago, in full.
— With assistance by Simbarashe Gumbo