South Africa Holds Rate, May Ease in Second Half of 2020

JOHANNESBURG(Capital Markers in Africa) – The South African Reserve Bank held its benchmark interest rate and signaled that it may only start easing again in the second half of next year.

The Monetary Policy Committee voted to keep the repurchase rate at 6.5%, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria. Three members of the five-person panel opted to maintain the rate while the rest preferred a 25 basis-point cut. The decision was in line with the estimates of all but four of the 16 economists in a Bloomberg survey.

While the economy is forecast to expand only 0.5% this year and inflation has been inside the central bank’s target range since April 2017, Kganyago said the MPC wants price-growth expectations anchored at the 4.5% midpoint of the band. Policy uncertainty and the deterioration in the country’s finances, as laid out by Finance Minister Tito Mboweni in the medium-term budget in October, adds to the central bank’s reluctance to ease.

“If this country is to bring down the long-term cost of capital, we have got to bring down the country risk premium,” Kganyago said.

The MPC cut its economic-growth forecasts through 2021 and says risks to the inflation outlook are more or less balanced. The central bank’s quarterly projection model now forecasts a repurchase rate of 6.3% by the end of 2020, compared with 6.4% presented in September. The model prices in a 25 basis-point cut in the third quarter of next year, but that could change in either direction, Kganyago said.

Inflation slowed to an almost nine-year low in October. In order to cut, the MPC wants to see a sustained decline in price growth and a decrease in the risk elements that it’s been highlighting, Deputy Governor Fundi Tshazibanasaid.

“What we have seen in recent months is more downside surprises,” to inflation, she said. “The conditions at the moment are not showing us that inflation is likely to continue to decline beyond what the QPM has highlighted.”

South Africa is at risk of losing its last investment-grade credit rating after Moody’s Investors Service changed its outlook on the nation’s debt assessment to negative and said it wants to see a “credible fiscal strategy to contain the rise in debt” in the budget review due February.

While the central bank had room to cut rates given the weak economy and improving inflation outlook, delays in plans to address high debt levels of the state-power utility, a worsening fiscal outlook and the prospects of the country losing its investment-grade credit rating prevented it from doing so, said Johann Els, chief economist at Old Mutual Investment Group in Cape Town. “Given that they are so risk-averse, they won’t cut until after the February budget.”

Risk Premium
Investors pay a premium for South African debt to compensate for the risk of holding it and this constrains monetary policy by raising the interest rate needed to stabilize inflation, the central bank said in its bi-annual Monetary Policy Review in October.

Using monetary policy to “compensate for government’s failures because you are trying to keep the debt portfolio cheaper, you are into the realm of what economists call fiscal dominance, and I do not think that is the way forward,” Kganyago said.

Source: Bloomberg Business News