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Reserve Bank sees rising risk of downgrade to junk
Reserve Bank sees rising risk of downgrade to junk

Reserve Bank sees rising risk of downgrade to junk

ECONOMIC NEWS - Apr 5th 2016, 10:49

The risks of SA’s credit rating being downgraded had increased, but how the rand would react to a downgrade was uncertain, Reserve Bank deputy governor Daniel Mminele said on Monday night. 

Ratings agencies Fitch and Standard & Poor’s will review SA’s credit ratings in two months’ time and both agencies have SA just one level above sub-investment grade, or junk status.

"The risks of a downgrade have definitely increased," Mr Mminele said. "So, an element would be priced in already, but how much more of a reaction one might have at the time (of a downgrade) is not so clear. There could be … a little bit of a knee-jerk reaction when that actually happens."

The Bank released its monetary policy review on Monday at a forum in which the monetary policy committee engaged members of the public.

In a section on credit ratings in the review, the Bank noted that a downgrade of SA’s credit ratings to junk, would probably raise short-term rates by 80 basis points, while long-term bond yields would probably lift by a larger magnitude of 104 basis points.

Higher borrowing costs would have several negative effects: more government spending would go to debt-service costs, the private sector’s costs of investment would rise, and the rand would probably depreciate — exacerbating inflationary pressures, the Bank said.

Bank governor Lesetja Kganyago said, "SA does not have political instability at the moment, but political developments do affect financial markets."

Mr Kganyago said the Bank’s inflation outlook was worrying.

The review — an account of recent developments in monetary policy — said rising inflation made it necessary for SA to raise interest rates despite weak economic growth, as leaving inflation unchecked would only result in larger rate hikes in future.

"Tolerating additional inflation in the short run could require larger interest rate adjustments later, with proportionally greater costs for the economy," the Bank said.

The weak rand and higher food prices had caused a "marked deterioration" in the Bank’s inflation forecast, it said in the review, adding that rand weakness remained an inflation concern.

"This persistent and substantial rand depreciation is expected to generate higher inflation over the forecast period," it said.

The Bank raised rates by 50 basis points in January and by 25 basis points in March on rising inflation concerns. It forecasts inflation to average 6.6% this year and 6.4% next year.

"Monetary policy can accommodate temporary shocks that cause target breaches, but should respond if those shocks risk leaving inflation permanently higher, beyond the target range," it said.

Local prices were increasing fast because of a weak rand as well as shocks such as drought-related food price spikes and regular large increases in electricity prices.From DFM Publishers (Pty) Ltd 

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