South Africa’s credit downgrades rule out repo rate cuts

JOHANNESBURG (Capital Markets in Africa) – South Africa’s debt downgrade to junk status and the finance minister’s recent dismissal mean interest rates will be on hold until 2020 at least, a Reuters poll found on Wednesday.

Economists in the poll, taken just a week after Fitch Ratings Agency and Standard & Poor’s downgraded South Africa to “junk”, pushed out rate cuts, ruled them out altogether or considered the possibility of hikes.

But the medians from the poll suggest rates will be on hold at 7.0 percent until at least 2020, the end of the forecast horizon. In last month’s poll a 25 basis point cut was expected early next year.

The South African Reserve Bank (SARB) left rates unchanged last month, saying the rand had re-emerged as a risk to inflation following an increase in domestic political uncertainty.

Christie Viljoen, economist at KPMG, said he did not think the SARB would tighten monetary policy.

“Rather, a likely upward adjustment in their inflation expectations will result in a delay in the eventual downward movement in lending rates,” he said.

The ratings downgrades followed a cabinet reshuffle at the end of March in which Pravin Gordhan was fired as finance minister. The Reserve Bank warned on Monday that the developments could put pressure on the rand and accelerate inflation.

A Reuters poll last week suggested the rand will be relatively stable against the dollar for the rest of this year as the impact of Gordhan’s shock dismissal and credit rating cuts were already priced in.

UNCHANGED INFLATION OUTLOOK

Inflation, which slowed to 6.3 percent in February, is expected to be within the Reserve Bank’s 3-6 percent comfort zone at 5.8 percent this year and then dip to 5.5 percent next year, unchanged from last month’s projections.

The Reserve Bank also said on Tuesday it was too early to tell whether the downgrades would push the economy into a recession.

Only one of the 27 economists polled predicted more than one quarter of contraction, and the economy is expected to grow 1.0 percent this year and 1.5 percent next. Last month’s forecasts were 1.1 percent and 1.7 percent respectively.

John Ashbourne at Capital Economics said it was certainly true that President Jacob Zuma’s cabinet reshuffle had prompted a lot of negative headlines. “But it’s far from clear that the recent scandal will have a lasting economic effect.”

South Africa has been supported by a current account deficit that narrowed to a near six-year low of 1.7 percent of GDP in the last quarter of 2016, prompting some economists to keep their expectations for rate cuts later this year.

Source: Reuters Africa News