Thursday, 13 April 2017 11:49

Interest rate cuts ruled out after downgrade

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The downgrading of South Africa's debt to junk status and the firing of Pravin Gordhan as finance minister mean that interest rates will be on hold until 2020 at least, a poll of economists predicted yesterday.

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In the poll, conducted a week after the Fitch and S&P Global downgradings, the economists said rate cuts would be postponed, ruled them out altogether or said increases were not impossible.

But the medians from the poll suggest rates will be on hold at 7% until at least 2020, the end of the forecast horizon. In last month's poll a 25 basis point cut was expected early next year.

The Reserve Bank left rates unchanged last month, saying the rand had re-emerged as a risk to inflation after increased domestic political uncertainty.

Christie Viljoen, an economist at KPMG, did not think the Bank would tighten monetary policy.

"A likely upward adjustment in its inflation expectations will result in a delay in the eventual downward movement in lending rates," he said.

The ratings downgrades followed a cabinet reshuffle at the end of March in which Gordhan was fired as finance minister. The Reserve Bank warned on Monday that political developments could put pressure on the rand and accelerate inflation.

Last week's poll suggested that the rand will be relatively stable against the dollar this year because the effects of Gordhan's shock dismissal, and of the credit rating cuts, had already been priced in.

Inflation, which slowed to 6.3% in February, is expected to be within the Reserve Bank's 3%-6% comfort zone at 5.8% this year and then dip to 5.5% next year, unchanged from last month's projections.

The bank also said on Tuesday that it was too early to tell whether the downgrades would push the economy into recession.

Only one of 27 economists polled predicted more than one quarter of contraction, and the economy is expected to grow by 1% this year and 1.5% next.

John Ashbourne, at Capital Economics, said the cabinet reshuffle had prompted adverse headlines.

"But it's far from clear that the recent scandal will have a lasting economic effect."

Last modified on Thursday, 13 April 2017 12:43

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