Rand gains as Reserve Bank holds repo rate at 6.75%, as expected
Reserve Bank governor Lesetja Kganyago warns of continued political risk and the possibility that Moody’s could downgrade SA’s credit rating in February
The Reserve Bank kept interest rates unchanged on Thursday, when the monetary policy committee (MPC) wrapped up its first meeting of 2018.
With a number of risk events on the horizon, the decision was expected by the majority of analysts, and leaves the repo rate at 6.75%, where it has been since the July 2017 cut of 25 basis points — the first cut in five years.
Reserve Bank governor Lesetja Kganyago said that since the previous meeting of the MPC, the rand had appreciated by 13.1% against the dollar, by 9.6% against the euro, and by 10.6% to the pound on a trade-weighted basis.
He did warn, however, that “in the near term, the rand is expected to remain sensitive to sentiment generated by political developments. The lingering prospect of a credit-ratings downgrade to sub-investment grade by Moody’s [also] continues to weigh on the longer-term outlook for the rand.”
Within a few minutes of the decision being announced, the rand strengthened to R12.19 to the dollar, from R12.27 prior to the governor's speech.
A Bloomberg consensus of 19 economists and analysts showed that 13 expected rates to be unchanged, while five forecast a cut of 25 basis points, with one predicting a 50-basis-point drop.
Prior to the MPC meeting, Standard Bank trader Warrick Butler said there was no way the Reserve Bank was going to cut rates a month before a crucial sovereign-rating announcement by Moody’s, “especially in light of the budget speech the day before and the cost implications of the new, free-education policy announced in December”.
Finance Minister Malusi Gigaba is set to deliver the annual budget speech in Parliament on February 21. In his medium-term budget policy statement in October last year, Gigaba highlighted a R50bn budget deficit, without detailing any plans to resolve the issue.
In what was widely considered a political move, President Jacob Zuma announced free higher education in December, but gave no details on where the money to pay for it would come from.
Before the announcement, Absa Stockbrokers and Portfolio Management chief investment strategist Craig Pheiffer said that even with an improved inflation outlook, the MPC would be wary of event risk from both the Moody’s credit rating announcement next month, as well as the budget in late February.
Consumer inflation has slowed in recent months but higher oil prices present a risk to this scenario.
Kganyago said consumer price inflation (CPI) was expected to have averaged 5.3% in 2017.
He said the risks to the inflation outlook had dissipated somewhat, and gave the following projections for the next two years:
• 2018: 4.9%, from 5.2% previously
• 2019: 5.4%, from 5.5% previously
Kganyago said improved outlook on inflation was due to rand appreciation, and Eskom only being allowed a far lower tariff increase from what it had requested. “Near-term inflation is expected to remain close to the mid-point of the target range,” he said.
Despite optimism over Cyril Ramaphosa’s election as ANC president, SA’s economic growth rate is expected to rise only gradually over the next few years.
Kganyago said GDP growth appeared to be showing signs of improvement, but this was off a low base.
“The outlook is also likely to be affected positively should the recent political developments lead to a sustained boost in business and consumer confidence,” he said.
The Bank’s forecasts for GDP growth in the medium term are:
• 2017: 0.9%, from 0.7% previously
• 2018: 1.4%, from 1.2% previously
• 2019: 1.6%, unchanged from the previous forecast