Downgrade big blow, says Reserve Bank deputy
The downgrade of SA’s credit rating by S&P Global Ratings was a “serious setback” for the country, but it is too early to say whether it will require a rethink of monetary policy, Reserve Bank deputy governor Daniel Mminele said on Tuesday night.
It is the first reaction from the Reserve Bank to this week’s downgrade by S&P of SA’s longterm foreign-currency sovereign credit rating to subinvestment grade with a continuing negative outlook.
The cabinet reshuffle by President Jacob Zuma had interrupted the positive trends that were under way in the financial markets, Mminele said.
Financial markets would probably need more time to process the political events and their economic consequences fully, he said.
“It remains to be seen whether the recent market developments [the weakening of the rand/dollar exchange rate and bond yields] represent a reassessment or a repricing of the South African credit.
“It is similarly too early to draw any firm conclusions on how these developments will affect the Reserve Bank’s own inflation forecasts. The monetary policy committee has previously cautioned should some of the factors that had contributed to a more favourable outlook reverse and undermine the inflation outlook, it may reassess its views. The monetary policy committee stands ready to respond appropriately in line with its mandate.”
Last week, the committee kept interest rates on hold in the belief that it might have reached the end of the moderate tightening cycle. At the time it expected inflation to fall below 6% in the second quarter of 2017 and to remain within the target range for some time thereafter.
Mminele said SA would have to “redouble our efforts in providing assurance and communicating continued commitment to sound macroeconomic policies and their consistent and predictable implementation so as to reverse the current ratings trajectory. This will require a continued collaborative effort between the government, business and labour to boost domestic and international investor confidence,” he said.
Mminele said the Reserve Bank, the Treasury and the Financial Services Board would soon launch a comprehensive review of the conduct in the wholesale money, debt-capital, foreign-exchange, commodities and derivatives markets to strengthen market conduct.
The exercise, which would commence in May, would be similar to the fair-and-effective markets review conducted in the UK. It would look at the standards and practices in the wholesale financial markets, both regulated and unregulated, in terms of governance, accountability and incentives and will develop recommendations for conduct standards to enhance their integrity.
The review takes place amid the Competition Commission’s allegations of collusive practices by a number of banks in foreign exchange trading operations involving the rand.