South Africa’s central bank kept the repurchase rate at which it lends to commercial banks at 6.75 percent on Thursday, citing dissipated risks to the inflation outlook partly due to a stronger rand currency.
But Reserve Bank governor Lesetja Kganyago warned that the lingering prospect of a credit ratings downgrade to sub-investment grade by Moody’s continued to weigh on the longer term outlook for the rand, as it could trigger the exclusion of South African government bonds from the prestigious World Government Bond Index.
He noted that the rand had appreciated following Deputy President Cyril Ramaphosa’s election to lead the ruling African National Congress (ANC) in December, while a lower-than-expected tariff increase granted to power utility Eskom had also eased inflation pressures.
” In light of the recent developments and the balance of risks, the MPC has decided that it would be appropriate to maintain the current monetary policy stance at this stage,” Kganyago told a news conference after its monetary policy committee (MPC) concluded its first meeting of the year.
Economic analysts say respected former businessman Ramaphosa’s election as new ANC boss, which leaves him well placed to succeed President Jacob Zuma as the country’s leader, will ease concerns over rampant corruption involving senior government officials.
But on Thursday Kganyago warned that ratings agencies — which have been concerned about policy uncertainty and the financial woes of state owned companies – would keenly watch the national budget in February for evidence of the government’s commitment to reining in its deficit.
Fitch and S&P Global cut South Africa’s sovereign rating to speculative grade last year due to weak economic growth and after an abrupt cabinet reshuffle which saw Zuma fire the finance minister. Moody’s still rates the country at investment grade, but just barely, and has placed it on review for a downgrade.
“The response of government to the intensifying fiscal challenges in the upcoming budget will be key,” Kganyago said.
“The pressures are now even more intense, with several state-owned enterprises facing financial risks. The challenge for government will be to find ways to finance the deficit in a growth positive manner, and at the same time convey a credible commitment to structural reforms that can raise the potential growth of the economy.”
The central bank said domestic growth prospects were showing signs of improvement, although off a low base, and raised its gross domestic product (GDP) expansion forecast for 2018 and 2019 to 1.4 percent and 1.6 percent respectively from 1.2 percent and 1.5 percent.
– African News Agency (ANA)