Rate cuts off the horizon now – Sarb

The scope for interest-rate cuts in South Africa is limited even though the policy-tightening trajectory may be over, the SA Reserve Bank (Sarb) says.

Existing monetary-policy settings are “proving adequate to return inflation within the target range”, the Reserve Bank says in its semi-annual Monetary Policy Review this week.

Price-growth expectations remain “uncomfortably close to 6%. This limits the scope for rate cuts”, the central bank said.

The Monetary Policy Committee has kept the benchmark repurchase rate unchanged since last March, after raising it by 200 basis points to 7% to try bring price growth back to within its target band of 3% to 6%.

Inflation slowed to 6.3% in February and the central bank forecasts it will slow to less than 6% in the second quarter of the year.

“The exchange rate is the biggest risk” to the inflation-forecast trajectory, Sarb said.

The rand weakened more than the MPC’s expectations after the recent dramatic Cabinet reshuffle and downgrades, governor Lesetja Kganyago said.

The junk rating would affect the poor and the middle class and South Africa was fighting from a weaker position in marketing the country to foreigners, he said.

Increasing uncertainty about economic policy could prompt capital outflows in anticipation of more downgrades, which would push up borrowing costs and put the rand under more pressure, potentially accelerating inflation, the bank said.

The rand strengthened 0.4% to 13.8944 per dollar by 8.10am yesterday. – Bloomberg

The exchange rate is the biggest risk to the inflation-forecast trajectory. SA Reserve Bank