Reserve Bank warns of Trump effect

The Reserve Bank has sounded a warning that it might have to resort to further interest rate hikes if US monetary policy in the Trump era hits the rand hard and drives up inflation.

Ahead of Moody’s update on SA’s credit rating due on Friday and that of S&P Global Ratings next Friday, the Bank’s monetary policy committee, which kept interest rates on hold, also warned that the rand remained sensitive to the sovereign ratings announcements.

The rand has tended to be highly responsive to US monetary policy, and while the Federal Reserve is widely expected to hike interest rates at its December meeting, uncertainty about president-elect Donald Trump’s economic policies has raised the prospect that the Fed might have to keep hiking, which could see the dollar strengthening further and emerging market currencies coming under pressure.

Reserve Bank governor Lesetja Kganyago said on Thursday the high degree of uncertainty on the economic policies of the new US administration would persist for some time, creating a challenging and volatile environment for emerging markets.

With the Bank’s core inflation forecast improving slightly, the committee said it was still of the view that the end of the interest rate hiking cycle might be "close". But it said it might have to reassess this if upside risks materialised.

It made it clear, too, that the inflation trajectory was still "uncomfortably close" to the top of the 3%-6% target range. The rate is expected to average 5.8% in 2017 and 5.4% in 2018.

Kganyago also said that where previously the committee had felt the risks to inflation were balanced, now they were on the upside.

"What the Bank is saying … is we have no scope to absorb a currency shock because inflation is at the top of the target range — and we have no idea what is going to happen," said Old Mutual Wealth Management chief economist Rian le Roux.

Le Roux said he would not be surprised if Moody’s were to downgrade SA’s foreign currency rating by one notch but it was the outlook that mattered.

If Moody’s downgraded but moved SA’s rating from negative to stable, that would be a positive message that the agency was not threatening to downgrade us again.

S&P might look to sound a warning note by downgrading SA’s local currency rating, which is three notches above subinvestment grade, while leaving the foreign currency rating unchanged, Le Roux said.

But Standard Bank senior economist Kim Silberman said there was not much chance of a Moody’s downgrade.

S&P was still a risk because it had been explicit that it wanted structural reforms that were finalised and in implementation stage.