In a close call, the SA Reserve Bank erred on the side of caution and decided to keep interest rates on hold despite expressing “serious concern” about the deteriorating economy.
Two of the five-member monetary policy committee (MPC) wanted an immediate cut in the repo rate, but it was left at 6.5%, said governor Lesetja Kganyago.
The governor said that the central bank’s modelling suggested a reduction in the third quarter of 2020.
Critics may see the Bank’s call as a lost opportunity to support an economy that it says will grow only 0.5% in 2019, which is well below levels needed to make a dent in record unemployment levels of close to 30%.
The Bank was probably swayed, said analysts, by concern about a potential downgrade by Moody’s Investors Service after finance minister Tito Mboweni presents his budget in February 2020.
The government is under pressure to show progress in its efforts to fix its finances, with debt projected to approach 80% of GDP within the next decade.
The ratings agency, the only major one with SA on investment-grade, changed the country’s outlook in October from stable to negative, putting SA on track for a downgrade in the next 12 to 18 months.
Such a downgrade could lead to capital outflows, a weaker rand and higher borrowing costs for government.
Thursday’s repo-rate decision was widely expected, and the reaction from the rand and bond markets was muted.
At 6.20pm, the rand had firmed 0.62% to R14.6923/$, 0.62% to R16.2632/€ and 0.66% to R18.969/£. Before the rate announcement, the rand was up 0.9% to the dollar.
The R2030 government bond was weaker with the yield rising one basis point to 9.075%. Bond yields move inversely to their prices.
“The combination of heightened concerns around domestic fiscal policy, the subsequent Moody’s decision to downgrade our credit rating outlook from stable to negative, as well as the rising global economic risks outweigh the mitigating factors of low domestic growth and inflation outcomes,” said Siphamandla Mkhwanazi, FNB senior economist.
The decision was seen as a tough call for the central bank after consumer inflation surprised on the downside and has been within the 3% to 6% target range for 30 months.
However, the MPC expects inflation to accelerate in 2020 and average 5.1%.
This was the last monetary policy decision of 2019.
The decision came after the dismal medium-term budget policy statement in October that outlined a dramatic deterioration in government debt levels and a bigger budget deficit.
“Very clearly the fact that the ratings agencies reacted in the manner that they had reacted suggests that they have concerns about the MTBPS (medium-term budget policy statement).
“If the ratings agencies have a concern, those will then begin to factor into the country risk premium,” Kganyago said in response to a question after the Bank’s announcement.
The Bank targets future inflation when determining policy, and MPC members said current projections did not support a case for an immediate rate cut.
But the central bank had missed an opportunity to support a stagnant economy during a period of benign inflation, said Imraan Valodia, dean of commerce, law and management at Wits University.
Advisory panel
“We badly needed a drop in the rate,” said Valodia, who is also a member of President Cyril Ramaphosa’s economic advisory panel.
“I take some comfort from the fact that the committee was divided, perhaps they will drop the rate at the next meeting.”
Inflation expectations measured by the Bureau for Economic Research, showed that expectations for headline inflation are down slightly for 2019 to 4.6%, from 4.8%.
Expectations for 2020 remain unchanged at 5% and eased from 5.2% to 5.1% for 2021, reaching the lowest levels since 2007.
The bank had not seen evidence that inflation would continue to slow and the impediments to growth were structural in nature, said deputy governor Fundi Tshazibana.
That the MPC was split may be a signal that at the next meeting there might be quite a vigorous debate particularly if the rand remains fairly firm and the oil price remains under control”, said Nedbank chief economist Dennis Dykes.
With Odwa Mjo
donnellyl@businesslive.co.za and mnyandal@businesslive.co.za
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