Picture: REUTERS
Picture: REUTERS

Ratings agency Moody’s has come out in support of the Reserve Bank’s recent surprise decision to cut interest rates, saying that it was justified by economic circumstances and that the Bank’s independence remained strong despite political pressure.

But the agency, which has SA on review for a downgrade, said it remained concerned about the country’s deteriorating institutional strength and warned that without "decisive structural reforms" economic growth would remain subdued in the medium term and would continue to put pressure on ratings.

The comments came in a report Moody’s issued on Monday titled "Policy rate cut supports near-term growth recovery, but structural constraints still impede medium-term outlook", in which it noted that the rate cut marked an important reversal in SA’s monetary policy stance and it should support short-term cyclical growth.

In June, Moody’s flagged the gradual deterioration of SA’s institutions as one of the factors that could lead to a downgrade, along with low growth and fiscal pressures. SA’s independent monetary policy has been a key pillar in Moody’s assessment of SA’s institutional strength.

Moody’s lead sovereign analyst for SA, Zuzana Brixiova, said in an interview on Monday the rate cut had been "perfectly justified by economic circumstances and in the realm of very reasonable action", with inflation falling faster than expected, very low growth and contracting fiscal policy creating room for cyclical stimulus.

However, the cut coincided with political pressures on the Bank. Brixiova said the timing of the public protector’s comments on the Bank’s mandate and of the call at the ANC conference for state ownership of the Bank pointed to growing political pressure for less independent monetary policy.

The report said the Bank’s decision should support near-term growth, but slow progress with structural reforms would impede potential growth.

"The Reserve Bank’s efforts to revive business confidence and investment are likely to have a material impact on medium-term growth only if accompanied by credible fiscal adjustment and structural reforms that would raise investment," the report said.

It said it concurred with the Bank that monetary policy alone could not solve "the structural growth constraints that the economy has been experiencing for a number of years".


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