South Africa Central Bank Sees Limited Room for Further Easing

JOHANNESBURG (Capital Markets in Africa) – South Africa has little room for further interest-rate cuts unless the inflation outlook improves, the central bank said.

Monetary policy is still marginally accommodative and “the room for additional rate cuts remains limited in the absence of a more durable improvement” in the price-growth outlook, the central bank said in its annual report published on its website on Monday.

The Monetary Policy Committee kept its key rate unchanged at 6.5 percent last month, citing risks from higher oil prices, after easing in July and March. While the central bank forecasts inflation will stay in its 3 percent to 6 percent target band until at least the end of 2020, it has repeatedly said it prefers expectations close to the mid-point of the band.

South Africa lost its investment-grade credit rating last year after then-President Jacob Zuma changed his cabinet in March. While the ascent of Cyril Ramaphosa to the presidency initially boosted the rand, the currency is now back at the level it was before the change of leadership started in December.

“The mix of high political uncertainty, persistent fiscal deficits and credit-rating downgrades have continued to present upside risks to the inflation outlook,” the central bank said. “In such a context, the MPC has been forced to maintain a cautious approach.”

While price growth slowed to 4.4 percent in May, the rand’s plunge to its weakest in almost seven months may push up inflation and require rate increases, Deputy Governor Kuben Naidoo said in an interview last week. Forward-rate agreements starting in six months, used to speculate on borrowing costs, show traders are pricing a more-than 50 percent chance of a quarter point rate hike by the end of the year.

Nationalization ‘Expensive’
The Reserve Bank’s profit after tax rose to 2.4 billion rand ($178 million) in the year to March 31, from 1.4 billion rand in the prior period. The nation’s central bank is one of a few in the world that still has private shareholders and the ruling African National Congress last year adopted a motion that it should be government owned.

While this move has little to do with the central bank’s mandate to control inflation, nationalization would be expensive, Governor Lesetja Kganyago said in the annual report. This is because Reserve Bank shares trade for much less than what some shareholders are willing to sell for, he said.

In the six months through May Reserve Bank shares, which trade over the counter, sold for between 5.95 rand and 10 rand each. The central bank has 2 million shares outstanding and investors are allowed a maximum of 10,000 securities each, which gives them a prescribed maximum dividend of 1,000 rand, according to the Reserve Bank Act.

“The buying out of existing shareholders will therefore result in paying large sums of money to effect cosmetic changes that will have no bearing on the manner in which the SARB carries out its mandate or executes its policy responsibilities,” Kganyago said.

Source: Bloomberg Business News