Reserve Bank's Kganyago announces interest rate hike
In the midst of heightening political turmoil, the South African Reserve Bank governor Lesetja Kganyago focused to the business at hand in announcing the decision to hike the repo rate to 7%.
The Monetary Policy Committee (MPC) announced it would hike the repo rate by 25 basis points to 7%. The prime lending rate will rise to 10.50%.
The committee was concerned about the breach of the upper end of the inflation target (set at 6%) for a protracted period and decided further tightening was required.
The governor could however not ignore the political turmoil that has intensified in recent days, and in fact noted it had an impact on the domestic currency.
Factors that offset positive movements in the exchange rate included “the weak domestic growth outcome and higher inflation outlook; the increased risk of a sovereign ratings downgrade; and domestic political developments which have had a significant impact on the rand in the past few days in particular,” Kganyago said.
Most recently, Deputy Finance Minister Mcebisi Jonas on Wednesday said that he had been offered the position of finance minister by the controversial Gupta family, who are seen as having close ties to President Jacob Zuma. While Jonas said he declined the offer, then finance minister Nhlanhla Nene was suddenly removed and replaced with little-known parliamentary back-bencher Desmond van Rooyen.
At the time, the rand slid rapidly and government’s cost of borrowing rose, forcing the President to quickly reappoint Pravin Gordhan to the post of Finance Minister. Gordhan has been busied by an intensifying a stand-off with the Directorate for Priority Crime Investigation, known as the Hawks. Asked by a reporter if any of them had been offered a government job by non-government actors, members of the MPC chuckled. While President Jacob Zuma faced tough questions in Cape Town’s parliament about his involvement with the Guptas and the removal of Nene, Kganyago delivered the MPC rates decision in Pretoria.
“Since the previous meeting of the Monetary Policy Committee, headline inflation has exceeded the upper end of the target range as pressures from higher food prices in particular have intensified. Although the longer-term inflation outlook has improved somewhat, inflation is still expected to remain outside the target range for an extended period, and upside risks remain,” Kganyago said.
“The domestic economic growth prospects remain fragile following a fairly broad-based weakening in the final quarter of last year, while global economic prospects remain uncertain.”
Asked about how prominently politics played into the rates decision, the governor said: “The MPC does not deliberate on political developments. We apply our minds to exchange rate and what is driving it. And we determined it was being driven by domestic political developments.”
The weak rand had played into higher food prices, which had pushed up inflation, Kganyago said.
The year-on-year inflation rate increased markedly in January to 6.2 per cent, up from 5.2 per cent in December. However, core inflation, which excludes food, has also been in the upper end of the target range at 5.6% in January. Producer price inflation for final manufactured goods was also indicative of increased cost pressures, having increased from 4.8 per cent in December 2015 to 7.6 per cent in January, the governor said.
“Food prices have been accelerating faster than previously expected, due to the weaker exchange rate and the intensification of the drought, resulting in an upward revision to the food price forecast,” said Kganyago. The Reserve Bank now expects inflation to average 6.6 per cent and 6.4 per cent in 2016 and 2017.
The international economic outlook remains challenging following a marked decline in global growth in the fourth quarter of 2015. In South Africa “annual economic growth of 1.3 per cent in 2015 was in line with the Bank’s expectations, but the forecasts for 2016 and 2017 have been revised down from 0.9 per cent and 1.6 per cent, to 0.8 per cent and 1.4 per cent,” Kganyago said. “Growth of 1.8 per cent is forecast for 2018”.
Kganyago said the Reserve Bank has not yet met with Moody’s (a credit rating agency currently on a visit to South Africa to reassess its credit rating), but that they definitely would. Reserve Bank Deputy Governor Daniel Mminele said a downgrade by Moody’s would simply bring their credit rating for South Africa in line with that of two other agencies. He said it would be difficult to say what impact it might have. Backing the finance minister’s 2016 budget delivered in February, Kganyago said the fiscal consolidation path mapped out, if realised, “can be expected to moderate inflation somewhat while improving South Africa’s credit metrics and confidence in general”.