Reserve Bank holds interest rate at 6.75%
Strong exchange rate one of main drivers
A STRONGER exchange rate and the lower-than-expected electricity tariff decision were the main drivers behind an improved inflation and economic growth outlook which saw the SA Reserve Bank leave interest rates unchanged at 6.75 percent.
Governor Lesetja Kganyago said yesterday that against a positive inflation backdrop, the inflation forecast had improved, despite continued increases in international oil prices.
He said inflation was expected to drop to below the midpoint of the target range of 3 to 6 percent. However, he said inflation was expected to rise and hit 5.5 percent in the final quarter of next year.
Responding to a question, Kganyago would not say whether the improved outlook could lead to a rate cut later in the year.
He said that at each of its meetings, the Monetary Policy Committee (MPC) assessed the data and inflation outlook “and based on that, we will decide whether we hold, cut or hike. We will take every meeting as it comes. We remain data dependent”.
The bank has revised upwards its gross domestic product forecast for 2018 and 2019, from 1.2 percent and 1.5 percent to 1.4 percent and 1.6 percent respectively.
Kganyago said that despite the improved outlook, there were looming risks. These included a further ratings downgrade.
In November, Moody’s Investors Service placed South Africa on review for a downgrade.
Fiscal position Kganyago said a ratings action would depend on the government’s response to the deteriorating fiscal position and commitment to credible growth-enhancing policies.
“The response of the government to the intensifying fiscal challenges in the upcoming budget will be key to avoiding this event risk,” he said.
FNB chief economist Mamello Matikinca said yesterday that a ratings downgrade would precipitate capital outflows and a weakening currency. “We believe the (Reserve Bank) will wait until event risk subsides before pronouncing on any rate moves. Should event risk dissipate, we see scope for a rate cut this year.”
Craig Pheiffer, the chief investment strategist at Absa Stockbrokers and Portfolio Management, said yesterday that despite the positive inflation outlook, the bank was cognisant of the risk posed to inflation, through the currency, in light of Moody’s rating announcement next month and the Budget speech.
“Both of these events have the potential to move the currency markedly and any big swings in the currency would necessitate further adjustments to the inflation outlook. With these events imminent, the (bank) believed it prudent to maintain the interest rate status quo but, like any good central bank, it continued to highlight the risks to the positive inflation outlook,” said Pheiffer.
Professor Raymond Parsons of the University of North West said it remained to be seen whether next month’s national Budget would give an indication of how the government intended to narrow the budget deficit, salvage Eskom’s finances and avoid a universal junk status.
“The MPC statement implies that clear and definitive political leadership is now needed to ensure that the right economic decisions are taken soon.”