Cutting repo is no panacea, says Reserve Bank

Cutting interest rates is not the answer to dragging the economy out of recession because deep economic weakness and political turmoil need to be addressed first, a member of the Reserve Bank’s monetary policy committee (MPC) said yesterday.

Africa’s most developed economy fell into recession for the first time in eight years in the first quarter, piling pressure on scandal-plagued President Jacob Zuma.

Markets partly priced in an in- terest rate cut after the rand and inflation remained largely stable despite Standard & Poor’s Global Ratings and Fitch downgrading South Africa’s credit rating to “junk” in April.

But MPC member Brian Kahn said the central bank needed to act cautiously because further downgrades may have a more severe impact.

“We would not want to reduce rates and then be forced into a premature reversal of policy,” Kahn told a banking conference, adding the bank was likely to cut its growth forecast next month.

Moody’s is expected to announce its ratings decision soon.

If all three agencies cut their rating of local currency debt to “junk” it could knock 1% off economic growth and send inflation up by 0.6%, Kahn said.

Backroom rifts within the ANC were thrust into the open this week after more than 100 000 e-mails leaked to local media allegedly showed improper dealings in lucrative government contracts by business friends of Zuma.

Finance Minister Malusi Gigaba told parliament yesterday he was focused on growing the economy and aimed to trim the budget deficit to 3.3% from 3.8% in three years. –

We would not want to reduce rates and be forced into a ... reversal of policy.