Central bank holds rate as fiscal risks loom

South Africa’s central bank kept its benchmark interest rate unchanged and may only continue its easing when uncertainties about government finances and the nation’s credit ratings have been cleared up.

The Monetary Policy Committee voted unanimously to maintain the repurchase rate at 6.5%, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria. The decision was in line with the forecast of all but four of the 18 economists in a Bloomberg survey.

Read: Sarb keeps interest rate on hold

 
The Reserve Bank cut its inflation forecast for this year and economic-growth projections for 2020 and 2021, which would suggest room to ease. However, it’s steering policy in an economy that faces uncertainties, from fiscal risks caused by Eskom to the possibility of losing its last investment-grade credit rating from Moody’s Investors Service.

Finance Minister Tito Mboweni will present the medium-term budget on October 30 and is expected to confirm a wider deficit. The central bank also hasn’t factored in the impact of a surge in crude prices on inflation after the weekend’s attack on Saudi Arabian oil infrastructure, Kganyago said.

“The fiscal risk is of course the currency risk associated with fiscal policy being seen to do much worse in South Africa,” said Gina Schoeman, an economist at Citigroup South Africa. “In the event that happens the Reserve Bank would have to deal with the inflation risk from the currency and that’s what makes them so cagey at this point.”

Still, the statement left the door open for another rate cut should the currency get through the mid-term budget and a scheduled Nov. 1 review by Moody’s “relatively unscathed,” Schoeman said.

Forward-rate agreements, used to speculation on borrowing costs, surged after the announcement and are now pricing in only 16 basis points of easing by the end of the year, down from 25 basis points before Thursday’s decision.

“There’s plenty of reasons to believe rates will stay on hold for 2019,” said Simon Harvey, a London-based currency analyst at Monex Europe Ltd. “Rates will only become adjusted if an economic growth target becomes part of the Reserve Bank’s mandate or if demand pressures drop off substantially and drag on inflation.”

Target midpoint

The central bank’s quarterly projection model doesn’t price in more rate cuts this year and projects a repurchase rate of 6.6% by year-end. Inflation has been at or below 4.5% since December and while the official target is a range of 3% to 6%, the MPC has made it clear it wants the gauge close to the midpoint.

“Monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point of the inflation target range in the interest of balanced and sustainable growth.” Kganyago said. “In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the assessment of the balance of risks to the outlook, and will seek to look-through temporary price shocks.”

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