South Africa’s Mminele Downplays Chance of Imminent Rate Cuts

JOHANNESBURG (Capital Markets in Africa) – Uncertainty limits the opportunity for rate cuts in South Africa even as inflation remains within the central bank’s target band, according to Deputy Governor Daniel Mminele.

The bank unexpectedly kept its key rate unchanged at 6.75 percent at its last policy meeting in September, concerned about higher inflation expectations. Price growth quickened to 4.8 percent in August, its fifth month within the central bank’s target range of 3 percent to 6 percent.

“Amid such elevated uncertainties, and despite the subdued nature of domestic demand, it is not clear how much space exists, if at all, for additional policy rate cuts,” Mminele said in a speech posted on the bank’s website on Monday. “The MPC feels a particularly strong need to reassess the balance of risks at every meeting. Consequently, monetary-policy decisions, now more than ever, have to be data-dependent.”

The rand has gained 2.6 percent against the dollar since the start of the year and has been the most volatile of major and emerging market currencies tracked by Bloomberg. The currency weakened 0.6 percent to 13.3983 per dollar by 12:11 p.m. on Tuesday after President Jacob Zuma announced a second cabinet reshuffle in seven months.

Mminele said that risks to the rand remain skewed toward depreciation due to both domestic and international factors.

Forward-rate agreements, used to speculate on borrowing costs, are pricing in 18 basis points of easing over the next 12 months. Lower-than-potential economic growth “must, however, be weighed against both the upside risks to inflation and the stubbornly high level of inflation expectations,” Mminele said.

Inflation Focus
South Africa’s anti-graft ombudsman Busisiwe Mkhwebane instructed the legislature in a June 19 report to change the constitution to make the Reserve Bank focus on the “socio-economic well-being of the citizens” rather than inflation. Her comments caused the rand to slide as the change was seen by investors as a threat to the lender’s independence. A court overturned her instruction after the central bank challenged it.

“The challenges that South Africa have had to face over the past few years — in particular the combination of slow growth and relatively high inflation — may have led some observers to question whether the current inflation target range remains relevant for the country at this stage,” Mminele said. “In my view, raising or even contemplating abandoning the inflation target band would be a misguided approach.”

Source: Bloomberg Business News