South Africa | SARB Serves Economy Best With Price Stability, Mminele Says

Johannesburg, South Africa, Capital Markets in Africa: The Reserve Bank can best serve the South African economy by ensuring price stability, even if higher interest rates affect growth over the short term, Deputy Governor Daniel Mminele said.

“The long-term interests of the South African economy are served by focusing on that price stability mandate and avoiding any temptation to try and play a short run trade-off between inflation and growth,” Mminele said Friday in an interview at the World Economic Forum on Africa in the Rwandan capital, Kigali. “Monetary policy still continues to be supportive of the economy, but it is important that we keep a sharp eye on the need to counter inflation pressures.”

South Africa’s central bank Monetary Policy Committee has increased the benchmark rate four times since July to 7 percent, even as it cut its forecast for economic expansion this year to 0.8 percent. That would be the slowest pace of growth since a recession in 2009. While inflation slowed to 6.3 percent in March, the central bank forecasts it will only return to its 3 percent to 6 percent target band in the final quarter of 2017.

Factory and mining output, which together account for about a fifth of gross domestic product, contracted in March and unemployment surged to the highest in at least eight years in the first quarter of the year, according to data from the statistics office. The slump in the economy’s productive industries isn’t because of the Reserve Bank’s 125 basis points of rate hikes since July, Mminele said.

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“The factors that are holding back growth require other interventions beyond the scope of monetary policy, including structural reforms,” Mminele said. “I’ll be concerned if there were suggestions that what we are seeing now is linked to the SARB having been too aggressive with its policy stance.”

Forward-rate agreements starting in one month, used to bet on borrowing costs, show investors are pricing in only 5 basis points of increases on May 19.

Moody’s Investors Service’s affirmation of South Africa’s credit rating at two levels above junk after putting the assessment on review for a downgrade is encouraging and might help the economy to retain its investment-grade assessment from other rating companies, Mminele said.

“If you make an announcement to say you want to review this credit for a downgrade, you are almost saying you think you probably should downgrade and you just need to go and get confirmation,” Mminele said. “To end up with a different outcome is quite significant and I certainly was encouraged by some of the reasoning and they are quoting some of this collaboration” between the government and business leaders.

Finance Minister Pravin Gordhan met with business leaders in February and with investors in the U.K. and the U.S. in March to help mitigate the risk of losing the country’s investment-grade status. President Jacob Zuma set up a team of government, business and labor representatives in February to explore ways of responding to slower economic growth.

S&P Global Ratings and Fitch Ratings Ltd., which both have South Africa one level above junk, will assess the country over the next two weeks. S&P has a negative outlook on its BBB- credit rating and will announce its decision early next month.

The Reserve Bank hopes the Moody’s decision “might help others to say there are initiatives under way, there is a heightened sense of urgency there, there are higher quality dialogs that are taking place,” Mminele said. It might be a chance “for them to maybe carefully consider whether moving at this particular junction may not be premature.”

While the dialog between the government and business is positive, it’s important that there are tangible outcomes from those meetings, S&P Managing Director Konrad Reuss said in Johannesburg on Friday. Economic growth is the “crux at the moment,” he said.

Source: Bloomberg News