Kganyago endorses Mboweni’s strategy
Bank resists pressure to cut rates as it downgrades longer-term economic growth forecasts
The Reserve Bank resisted pressure to cut interest rates even as it downgraded longer term economic growth forecasts, with governor Lesetja Kganyago throwing his weight behind finance minister Tito Mboweni’s efforts to initiate a debate on structural reforms in the government.
While only four of 18 economists surveyed by Bloomberg were expecting a rate cut, the decision still attracted criticism from analysts who think the Bank should do more to support an economy that is barely growing and has an unemployment rate that is approaching 30%.
Some analysts said that recent decisions by the European Central Bank to resume quantitative easing and the Federal Reserve’s rate cut on Wednesday created room for looser policy locally, without endangering the rand’s yield advantage and the Bank’s 3% to 6% inflation target.
“There is going to be a lot of criticism,” said Dawie Roodt, chief economist at Efficient Group. He said that he thought the decision was the correct one, given the risks. “We have loose fiscal policy, and monetary policy needs to counter that.
“Kganyago is cementing his credentials as a conservative central banker, and that’s a good thing. I love him for that.”
With the decision widely expected, the reaction from currency and bond markets was muted. At 5 pm on Thursday, the rand was unchanged at R14.68/$, leaving it with a gain of nearly 5% in the past month. It was 0.24% weaker at R16.2431/€ and 0.13% softer at R18.3479/£.
The yield on the benchmark R186 government bond was at 8.215%, unchanged from Wednesday.
Raymond Parsons, economist at North West University Business School and former deputy CEO of Business Unity SA, was less impressed. He said that the decision was “a lost opportunity” to provide a needed boost to business and consumer confidence.
“There is indeed room for a further interest-rate cut on the
basis of the monetary policy committee’s (MPC’s) own presentation of relevant data around the balance of risks.”
Kganyago reiterated that monetary policy alone could not provide the answer to the country’s lack of economic growth, saying he welcomed the debate sparked by Mboweni’s strategy paper released in August.
The paper, which aims to boost growth via microeconomic reforms covering everything from liberalising the visa regime to fixing Eskom, got a mixed reaction, coming in for severe criticism from ANC alliance partners Cosatu and the SACP. Other ministers have largely not commented on it.
“It is good that such a discussion is taking place,” said Kganyago.
He said the Bank has repeatedly raised the need for structural reforms to lift growth.
Fiscal risks and the potential for a credit rating downgrade by Moody’s Investors Service, which economists have said could lead to billions of rand leaving the country, “are always at the back of our minds”.
These are, however, “unknowns”, which were difficult for the Bank to factor into its actions, he said. Moody’s next credit ratings review is expected in November.
The Bank would deal with the effects of a downgrade should it take place, he said.
But the effect of a potential downgrade would be decided by the extent to which the market had priced the event in.
“If it is not in current prices you should expect outflows of capital and that will manifest itself in the exchange rate,” said Kganyago. But the Bank will respond only if second-round effects kick in.
The Bank revised its inflation forecast for 2019 down slightly to average 4.2%, from 4.4%. The projections for 2020 remain unchanged at 5.1%, with a small revision up for 2021 to 4.7%, from 4.6%.
The Bank wants to see inflation expectations as measured by the Bureau for Economic Research (BER) anchored closer to its midpoint target of 4.5%.
The BER announced just before the MPC statement that these have seen a reduction to 4.6% from 4.8% in 2019, with expectations for 2020 at 5% and 5.1% for 2021.
The Bank retained its growth forecasts at 0.6% for 2019, but revised down its forecasts for 2020 to 1.5%, from 1.8%, and 1.8% for 2021, down from 2%.
The decision was expected given the uncertainty around fiscal policy and the potential ratings action by Moody’s, said FNB chief economist Mamello Matikinca-Ngwenya.
There is, however, room to reduce rates she said, given the Fed reduction in rates on Wednesday, as well as further easing in Europe.