Reserve Bank governor Lesetja Kganyago. Picture: FREDDY MAVUNDA
Reserve Bank governor Lesetja Kganyago. Picture: FREDDY MAVUNDA

The Reserve Bank delivered disappointing news on Thursday, when it kept interest rates on hold, defying expectations for a cut of 25 basis points.

Bank governor Lesetja Kganyago cited heightened uncertainties in the economy, and upside risks to inflation from a potential 20% electricity tariff hike that Eskom is seeking, and the knock-on effects of that.

Looming US interest rate hikes, which would put pressure on the rand, were also a concern.

With anaemic growth and slowing inflation, 18 of 26 economists polled by Reuters had expected a 25-basis-points cut, and the other eight thought there would be no move.

The Bank cut the repo rate for the first time in five years in July, to 6.75% from 7%.

Bonds were slightly weaker on Thursday afternoon, but the rand strengthened to R13.29/$ from R13.40/$ before the announcement.

Announcing the monetary policy committee’s (MPC’s) decision, Kganyago said on Thursday: “The inflation forecast has increased marginally since the previous meeting of the MPC, with increased uncertainty regarding a number of the main drivers.”

The Bank’s forecasts for both inflation and economic growth for the next three years were either unchanged or very slightly higher.

“Inflation has moderated in the emerging economies and remains benign in most advanced economies.” Kganyago said.

“The [US Federal Reserve] statement yesterday confirmed the gradual pace of reduction of its balance sheet and the normalisation of its policy rate.

“Along with continued accommodative policies by the European Central Bank, this is expected to contribute to the continuation of favourable prospects for capital flows to emerging economies.”

Despite an improved global growth outlook, global inflation pressures remained benign, particularly in advanced economies, he said.

But: “The domestic economic growth outlook remains constrained despite the higher than expected growth outcome of 2.5% in the second quarter of this year,” he said.

“This broad-based improvement, while welcome, is not expected to have a significant impact on the annual growth outcome.”

Lacklustre growth has become a perennial problem in SA, eroding the ability to ameliorate high unemployment, putting pressure on the fiscus and revenue collection, and weakening business and investment confidence.


This week, the World Bank halved its growth forecast for SA to 0.6% for 2017, echoing the government’s own forecasts, and on Thursday the Bank put its forecast for GDP growth for 2017 at 0.6%, up a tick from 0.5% forecast in July. This would accelerate to 1.2% in 2018, the new forecast said, unchanged from July; with the 2019 growth forecast also unchanged, at 1.5%.

But credit-rating agencies and other observers have pointed out that the Bank’s ability to stoke growth is limited without the government tackling structural impediments, including inflexible labour markets and policy uncertainty.

In recent months, the Bank has had to defend its inflation-targeting mandate after coming under attack by Public Protector Busisiwe Mkhwebane.

Inflation has been moderating in 2017, thanks mainly to food inflation sinking comfortably into single digits, after spending nearly a year above 10%.

“Food price inflation is forecast to reach a low turning point of 4.8% in the first quarter of 2018 and to average 7.3% in 2017, and 5.2% in 2018 and 5.6% in 2019,” Kganyago said on Thursday.

“There may be some downside risk to this forecast in light of the August food inflation outcomes. The electricity tariff assumption remains unchanged at 8% from July next year, but there may be some upside risk to this assumption, given Eskom's recent application to Nersa.”

The consumer price index (CPI) rose 4.8% in August, Statistics SA said on Wednesday, its fifth month within the Bank’s 3%-6% target band.

The Bank now expects inflation to average 5.3% in 2017, unchanged from July; 5% in 2018, up slightly from 4.9% forecast in July; and 5.3% in 2019, also slightly higher than the 5.2% forecast in July.

The Bank put the 2017 inflation peak at 5.3% in the second quarter.

“The rand remains sensitive to political developments, weak economic growth prospects and the risk of further sovereign ratings downgrades,” Kganyago said. “However, it has been supported by persistent trade account surpluses and associated narrowing of the current account deficit.”

Fuel prices were one of the factors in the uptick in inflation in August. The governor noted that the domestic price of 95 octane petrol had increased by a cumulative 86c a litre since August, mainly due to higher international product prices, with a further moderate increase expected in October.

But the Bank was not overly concerned about a $5 increase in international oil prices since the previous meeting, “as the flexibility of US shale oil production is expected to provide a ceiling to prices”.

Low confidence

Kganyago said a particular concern for the economy's prospects was a 6.9% decline in private sector fixed investment, “reflecting the low levels of business confidence”.

This was expected to persist thanks to political and policy uncertainty, he said. “These investment trends do not bode well for employment creation in the economy.”

The Bank expected household consumption growth of about 1% this year, he said. The underlying drivers of household consumption expenditure remain unchanged. Lower inflation, lower interest rates and higher real wage income growth are expected to provide some support for consumption.

Asked whether investors had priced in potential future credit rating downgrades, Kganyago said: "It will be really good if they’ve priced it in because if they’ve priced it in and it doesn’t happen it will be a positive response for SA. If they have not priced it in … we are in all sorts of troubles because then we must figure out what must happen … does it lead to second-round effects? If it leads to second-round effects, monetary policy must react."


On the KPMG saga, Kganyago said: “We have noted with concern the regrettable auditing practices and serious errors of judgement that occurred at KPMG, which led to enormous damage being inflicted on certain individuals, organisations and the country as a whole.

“South Africa has over many years been ranked highly because of among other factors that strength of our auditing standards and the soundness of our banks.

“As the regulator of banks, the SARB would obviously be concerned about any developments that question auditing standards or could potentially cast a shadow on the quality and reliability of sets of audited financial statements.

“Each of the big four banks in SA is required to have two auditors and KPMG is one of two auditors in three of big four banks. KPMG is sole auditor of two other banks and a number of insurance companies. One of the banks is one of the big five and the other is not.

“The SARB has noted the commitment of the new management to fully own up to the previous malpractices and to engage with relevant parties.

He said announcements about an independent investigation represented “important first steps in regaining public trust”.

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