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Analysts say Reserve Bank governor Lesetja Kganyago is unlikely to announce an interest rate cut this week.
Analysts say Reserve Bank governor Lesetja Kganyago is unlikely to announce an interest rate cut this week.

Interest rate cut unlikely amid risks to currency

ECONOMIC NEWS

By Hilary Joffe - May 22nd 2017, 10:01

Uncertainty about the rand exchange rate, as well as food prices, have put question marks over the sustainability of inflation drop. 

The Reserve Bank’s monetary policy committee is expected to keep interest rates on hold this week, with the high level of uncertainty and risks to the rand outweighing a better inflation outlook and weak economic growth prospects.

The committee last met in March, in the week between the recall of former finance minister Pravin Gordhan from an international road show and the Cabinet reshuffle which resulted in Gordhan being ousted and SA’s rating junked. It begins its three-day May meeting on Tuesday with the rand almost R1 weaker against the dollar than it was before the recall.

Favourable global sentiment towards emerging markets helped to prevent the currency taking a big hit from the downgrade, but the rand’s tumble on Thursday, on market concerns about Brazil, served as a reminder of its vulnerability.

Although economists expect inflation to come down below the top of the 3%-6% target range in 2017, uncertainty about the rand exchange rate, as well as food prices, have put question marks over the sustainability of this drop.

"The exceptionally high forecast risk for the remainder of the year … rules out any interest rate cuts this year," Macquarie economist Elna Moolman said, although there could be room for the Reserve Bank to cut rates "modestly" in 2018 if inflation retreated convincingly.

However, Bureau for Economic Research economist Hugo Pienaar said a rates cut was unlikely in the foreseeable future. The Bank would be cautious given the risk to capital flows posed by domestic events such as the October mini-budget and the ANC’s elective conference in December.

Although this was not the bureau’s baseline case, Pienaar said the rand could weaken to R16.66 to the dollar and the Bank could hike interest rates by 200 basis points if SA’s local currency rating was downgraded to junk status and it fell out of Citi’s World Government Bond index in the first quarter of 2018.

Investment Solutions economist Lesiba Mothata said the monetary policy committee meeting would be dominated by scenario analysis around the Moody’s downgrade and that it would not cut rates.

Stanlib economist Kevin Lings said the core of the economy was weak and lower food inflation would drive inflation back inside the target, to below 5% in 2017, supporting rate cuts. However, a cut would make SA more vulnerable to changes in global investor sentiment and the Bank would have to weigh up competing forces.

© BusinessLIVE MMXVII 

Read more about: sa economy | rand | inflation | food inflation

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