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Cape Town – While the South African Reserve Bank (Sarb) expects better growth and lower inflation in coming years, governor Lesetja Kganyago says he is prepared for any shocks.
Speaking at the South African Summer Macro Conference on Friday, Kganyago said it is possible that a shock could make the positive scenario of better growth and lower inflation seem "fanciful and obsolete”.
“That is part of the job,” he said. “There are usually surprises, and we are always ready to adjust policy in line with new developments.”
This speech comes a day after he announced that the repo rate would remain unchanged at 7% (prime lending rate at 10.5%).
READ: Sarb holds interest rate steady
It also comes on the day that Moody's will announce its ratings review of South Africa (currently two notches above sub-investment grade) and a week before S&P announces its review (one level above junk status with a negative outlook).
Any downgrade could cause shocks to the rand and markets.
Despite higher-than-expected headline inflation at 6.4% in October, the Sarb kept interest rates unchanged amid low economic growth and subdued consumer spending.
“We would like to see inflation expectations moderate so that they are more comfortably within the inflation target range, to help us permanently and structurally lower inflation and therefore interest rates,” Kganyago said on Friday. “We expect lower inflation to yield benefits, including for growth.
“Achieving lower rates as soon as possible may not have benign consequences for inflation expectations and competitiveness,” he said. “Given our current forecast trajectory, we may be closer to the end of the hiking cycle, but the bar for cutting rates is very high".
Regarding possible shocks to the system, which could include a ratings downgrade, Kganyago looked at what policies should take place if “the punches do not land”.
“The answer is to get inflation down into the target range and prepare for another period of sustainable growth,” he said, referring to the Sarb’s 3% to 6% inflation range.
“For all the talk of policy dilemmas, of short-term growth and inflation trade-offs, we should remember that in the long run low inflation and growth reinforce each other,” he said.
“The world’s most successful economies have both, and the worst failures have neither. We should look forward to inflation trending lower and growth moving higher, a positive prospect which implies no great dilemma for the central bank.”
About the ratings
- Moody’s investment grade of South Africa is at Baa2 for local and foreign currencies with a negative outlook. The rating is two notches above sub-investment (also referred to as junk) grade.
- S&P has South Africa’s credit rating assigned as BBB+ (local currency) and BBB- (foreign currency) – one level above junk status with a negative outlook.
- Fitch rates South Africa at BBB (local currency) and BBB- (foreign currency) – also one notch above sub-investment grade, but with a stable outlook.
