Bar for South African Rate Cuts Remains High, Mminele Says

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  • No guarantee that reduced risks to inflation will persist
  • Policy must remain dependent on data, vigilance is needed

The bar for interest-rate cuts in South Africa remains high even as the Reserve Bank may be close to the end of its policy tightening cycle, Deputy Governor Daniel Mminele said.

“There is no guarantee that the causes of the reduced risks to the inflation outlook will persist in coming quarters,” Mminele said in a copy of a speech posted on the central bank’s website Tuesday. “Some of the factors which have had a favorable impact on the inflation outlook could reverse quickly, in which case the view that we are close to the end of the tightening cycle would need to be reassessed.”

Daniel Mminele

Photographer: Dean Hutton/Bloomberg

The central bank’s Monetary Policy Committee left its benchmark repurchase rate unchanged at 7 percent last week for the third straight meeting to help support an economy forecast to expand at the slowest pace since a 2009 recession due to weak export demand, the worst drought in more than a century and low commodity prices. The MPC reduced the peak for its inflation forecast and now projects price growth will return to its 3 percent to 6 percent target band on a sustainable basis earlier than previously projected.

“In light of the new forecast, we may be close to the end of the tightening cycle,” Mminele said. “Policy must remain dependent on forthcoming data and events, and continued vigilance is warranted.”

Inflation slowed to 5.9 percent in August, the lowest rate this year. Price-growth expectations remain near the upper end of the target band and show no obvious sensitivity to slowing economic growth, Mminele said. Africa’s most-industrialized economy will probably expand 0.4 percent this year compared with 1.3 percent in 2015, according to central bank forecasts.

The rand has gained 14 percent this year against the U.S. dollar, despite a slump after a report on Aug. 23 that Finance Minister Pravin Gordhan is being investigated by a special police unit for establishing a surveillance unit during his tenure at the state tax agency. The gap on the current account, the broadest measure of trade in goods and services, also narrowed to 3.1 percent in the second quarter as the nation’s exports received a boost from the delayed impact of the rand’s 25 percent decline against the dollar last year.

“South Africa is likely to continue running significant, structural current account deficits in the near- to medium-term future,” Mminele said. “The South African rand remains at risk of sudden changes in global investor sentiment.”

The rand strengthened 0.9 percent to 13.5626 per dollar by 2:30 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose 2 basis points to 8.65 percent.