The Reserve Bank unexpectedly kept its benchmark lending rate unchanged because it’s concerned about higher inflation expectations. The rand rallied.
The central bank’s monetary policy committee maintained the key repurchase rate at 6.75% on Thursday. Only four of the 24 economists surveyed by Bloomberg had predicted the hold, while the rest expected a reduction.
“The MPC remains concerned that inflation expectations of business people and trade unions remains above or close to 6% for the next two years even though our own forecast and those of most analysts expect inflation to be much closer to 5%,” governor Lesetja Kganyago told reporters.
The central bank lowered the key lending rate in July for the first time in five years as inflation moved back into its target band in April and the economy fell into its second recession in a decade in the first quarter of the year. While GDP expanded in the three months though June, economic growth for the year is projected to be close to last year’s 0.3%.
Forward-rate agreements, used to speculate on borrowing costs, rose after the announcement. Contracts starting in three months, which on Wednesday still priced in 29 basis points of easing over the period, rose to show only 12 basis points of cutting is expected.
The bank expects inflation to remain within the target band of 3-6% until at least the end of 2019 while price growth will average 5.3% this year, decelerating to 5% in 2018.
S&P Global Ratings and Fitch Ratings cut South Africa’s credit assessments to junk in April after President Jacob Zuma removed Pravin Gordhan as finance minister. That decision raised concern that national treasury decisions would be become more political.
“The MPC wants to come across as cautious, especially with the credit-rating risk on the horizon,” Jeffrey Schultz, an economist at BNP Paribas South Africa in Johannesburg who estimated a 25 basis point reduction, said by phone. “It’s quite surprising to us that the bank didn’t take the opportunity to cut, especially when that window is closing given the outlook.”
The rand has been the most volatile of major and emerging market currencies tracked by Bloomberg this year. The currency pared an earlier decline of as much a 0.6% to gain 0.4% to R13.27/US$ by 4.11pm in Johannesburg on Thursday. Yields on rand-denominated government bonds due in December 2026 rose five basis point to 8.45%.
South African stocks gave up their gains after the decision, with the benchmark index falling as much as 0.3% after rising 0.4%. Companies that benefit from rand weakness, banks and retailers were among the biggest contributors to the decline.
The currency remains a key risk to inflation, Kganyago said.
The rand is “sensitive to political developments, weak economic growth prospects and the risk of further sovereign ratings downgrades,” he said.
The economy expanded an annualised 2.5% in the second quarter. The MPC raised its growth forecast for 2017 to 0.6% from 0.5%, while keeping its 2018 forecast at 1.2%. The MPC sees the risks to these forecasts “to be slightly on the downside”, Kganyago said. — Reported by Arabile Gumede, Amogelang Mbatha and Colleen Goko, with assistance from Simbarashe Gumbo and John Viljoen, (c) 2017 Bloomberg LP