Reserve Bank leaves interest rates unchanged

The Reserve Bank kept interest rates unchanged on Thursday‚ when the monetary policy committee (MPC) wrapped up its last meeting for the year.

That leaves the repo at 6.75%‚ where it has been since July’s cut of 25 basis points — the first cut in five years.

With a pair of possible credit rating downgrades hanging over SA‚ there was little expectation that the Bank would cut rates this time — unlike in September‚ when the decision to hold the repo steady came as a surprise to many.

While SA’s moribund economy could do with the potential stimulatory effects of a rate cut‚ the threat of the downgrades to junk constrains the Bank. Downgrades — which could come on Friday night‚ when Moody’s and S&P Global Ratings are expected to announce their decisions — would negatively affect the rand‚ which has a direct impact on inflation‚ and the bond market‚ affecting the price government pays to borrow money.

“Domestic event risks‚ including rating agency reviews and the economic policy implications of the ANC electoral conference‚ are likely to dominate rand movements over the coming weeks‚” Bank governor Lesetja Kganyago said on Thursday.

The rand had depreciated by 3.6% against the dollar since September‚ he said; by 3% against the euro and by 3.3% on a trade-weighted basis.

He ascribed this to uncertainty about the ANC’s December conference‚ concern about US monetary tightening‚ negative reaction to Finance Minister Malusi Gigaba’s medium-term budget policy statement‚ and concern about plans for free higher education and its effect on the fiscus.

“These latter two factors have raised the risk of sovereign ratings downgrades‚ a risk that has been hanging over the rand for some time‚” he said.

Inflation and growth

Consumer inflation slowed to 4.8% in September‚ Statistics SA reported on Wednesday. However‚ the Bank bases its monetary policy calls on the outlook for inflation up to two years out‚ not on historical data.

“Since the previous meeting of the monetary policy committee‚ upside risks to the inflation outlook have increased‚ mainly due to higher international oil prices and a weaker exchange rate‚” Kganyago said. Nonetheless‚ inflation “is expected to remain within the target range for the rest of the forecast period”.

He announced the following projections for average consumer price index (CPI) inflation rates:

• 2017: 5.3%
• 2018: 5.2%
• 2019: 5.5%

SA is out of step with a global economic recovery. In his medium-term budget policy statement last month‚ Finance Minister Malusi Gigaba announced a Treasury projection for 2017 economic growth that had almost halved‚ from 1.3% to 0.7%.

The Bank’s forecasts‚ however‚ were not much changed from September’s already-low projections.

It issued the following projections for gross domestic product (GDP) growth in the medium term:

• 2017: 0.7%
• 2018: 1.2%
• 2019: 1.5%

When the Bank stayed its hand in September‚ many economists said it had missed its window for a last stimulatory cut in the current cycle.

Kganyago on Thursday appeared to affirm this‚ saying “the less favourable path of fiscal consolidation could reduce the scope for further monetary policy accommodation”.

There would probably be “three interest rate increases of 25 basis points each by the end of 2019”‚ he said‚ compared with one increase previously.

Upside risks to inflation for 2018 and 2019 include a weaker exchange rate path‚ a higher international oil price‚ and higher average wage growth.