Lesetja Kganyago. Picture: REUTERS/ROGAN WARD
Lesetja Kganyago. Picture: REUTERS/ROGAN WARD

We have earned our credibility and will protect it — this was Reserve Bank governor Lesetja Kganyago’s emphatic response when asked whether the Bank had been under pressure or was concerned about its credibility following its unexpected decision to cut interest rates.

And if anything demonstrated how solid is the credibility that the Bank has built under Kganyago and predecessors Gill Marcus and Tito Mboweni, it was the orderly way in which the rand exchange rate responded to Thursday’s rate cut.

The rand weakened to above R13 to the dollar on news of the decision – which was entirely to be expected. The market had been taken by surprise. The political context was one in which the public protector had, bizarrely, called for the Bank’s price stability mandate to be replaced with a welfare-related mandate and in which there were renewed calls for the Bank to be nationalised. There were bound to be concerns in the market about what prompted the cut. However, the rand rapidly rebounded as the market digested the news and by Friday was comfortably back below R13.

Certainly growth and welfare concerns loomed large in the decision, with the Bank’s growth forecast more than halved to 0.5% for 2017, rising to just 1.2% in 2018 and 1.5% in 2019. As Kganyago and his team made clear, a 25-basis-point rate cut isn’t going to do much to boost that. But it does provide support at the margin, and in an economy so weak any little bit helps.

Not that weak growth would in itself have justified a rate cut, if inflation were still a big concern. But on its inflation numbers alone, it is hard to see how the committee could have justified any decision other than a cut.

The issue now is whether this is the start of the long-awaited cutting cycle

The real surprise was how far the Bank has revised down its inflation forecast. It now expects inflation to average 5.3% in 2017, 4.9% in 2018 and 5.2% in 2019. That is a significant downward shift from 5.7%, 5.3% and 5.5% when the committee last met in May and it reflects the fact that inflation has been coming in lower than expected, so the base is lower, but also that the Bank now expects lower oil prices, lower expected electricity tariff increases and a stronger rand. Importantly, too, the Bank sees core inflation coming down to below 5% — so underlying price pressures in the economy are really muted, which is not that surprising given very weak demand.

It was that much lower inflation outlook that prompted the cut in interest rates. The issue now is whether this is the start of the long-awaited cutting cycle. This is the first cut since July 2012 and the committee should not normally be starting to cut unless it expects to carry on that way for a while.

The trouble is that the outlook is still highly uncertain and the risks to the exchange rate and to inflation have by no means gone away. Chief of those is the risk that SA will shoot itself in the political foot again. Even if global investors continue to love emerging markets (which can’t be assumed), there are surely limits to how much they will tolerate dodgy political outcomes in SA.

There is also a high probability of a downgrade to SA’s local currency ratings by mid-2018, which is likely to cause sizeable capital outflows and put pressure on the rand, especially if the global environment is not that favourable at the time.

No wonder then that two of the committee’s six members were reluctant to start on the cutting cycle now, and that Kganyago cautioned that the committee would not hesitate to reverse its decision if the risks materialised and the inflation outlook deteriorated.

The committee’s decision was the right one for now and if anything it reinforces the Bank’s credibility. But no one should be welcoming a cut in the context of an economy that is so weak or a political environment that remains so fraught — nor should they necessarily rely on any further cuts.

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