SARB: Repo rate not likely to decrease soon

Governor of the South African Reserve Bank (SARB) Lesetja Kganyago told Bloomberg in an interview last week, that South Africa may be at the end of its rate hiking cycle. However, this does not mean that the interest rate will start to decrease any time soon. The interview was held at the World Economic Forum on Africa conference in Durban.

Kganyago said in the interview: “We could be coming to the end of our hiking cycle. That you are coming to the end of the hiking cycle does not mean that you are commencing a cutting cycle.”

At the most recent Monetary Policy Committee (MPC) meeting in March, the repo rate was held at 7%. At the time, Kganyago said: “The MPC is of the view that we may have reached the end of the tightening cycle. However the Committee would like to see a more sustained improvement in the inflation outlook before reducing rates. This assessment may, however, change if the inflation outlook and the risks to the outlook deteriorate.”

However, two credit ratings agencies, Fitch Ratings and Standard & Poor’s (S&P) recently downgraded the country to junk status. Several financial institutions were subsequently downgraded by S&P too. Recently appointed Minister of Finance Malusi Gigaba is making attempts to show that the country’s financial policies have not changed in a bid to prevent ratings agency Moody’s from downgrading the country to junk status too. Moody’s is set to make their announcement in the coming weeks.

Andre Botha, dealer at TreasuryOne, noted that while Gigaba spoke of radical economic transformation, as well as of the many action plans of former Finance Minister Pravin Gordhan, it is unclear whether these plans will be implemented. Botha added that locally the Rand performance is looking to political issues rather than economic issues for direction.

The uncertainty that junk status present may see SARB holding off on lowering the repo rate for some time, as the country struggles to work its way out of junk status.