The independence of the South African Reserve Bank (Sarb) is enshrined in the constitution and if it was ever under threat South Africans can rest assured that the “good men and women at the Reserve Bank will defend that independence as enshrined in the Constitution,” Sarb governor, Lesetja Kganyago stressed on Thursday.
“We have never felt that our independence is under threat,” Kganyago said in response to a question, following recent revelations over the extent to which the Gupta family has allegedly tried to interfere in political appointments.
Speaking at the close of the South African Reserve Bank (Sarb) Monetary Policy Committee’s (MPC) three-day meeting, Kganyago explained that the President, in consultation with the minister of finance and the Sarb board, appoints him and the deputy governors of the Bank.
“Those are the only three authorities involved in these appointments,” Kganyago said.
Earlier this week, Sarb deputy governor, Daniel Mminele said that, following the events of “9/12” (ie the sacking of former finance minister, Nhlanla Nene on December 9), foreign investors had asked questions around central bank independence and he had “allayed” those fears.
Mminele said on Thursday that foreign investors – who he met with as part of an international road show led by finance minister, Pravin Gordhan last week – wanted to get a sense of what the Sarb thought about the “policy dilemma” of needing to counter inflation pressures in an environment of weaker growth.
The Reserve Bank’s MPC elected to increase the repo rate by 25 basis points (bp) to 7% at the conclusion of its March meeting on Thursday.
This follows a 50-bp hike in January, meaning the Sarb has raised the repo rate by a cumulative 200 basis points since January 2014.
Thursday’s hike follows ongoing concerns around rising inflation. Although the inflation forecast has moderated somewhat since the MPC’s January meeting, it remains outside the Sarb’s 3-6% target range and is expected to average 6.6% in 2016 and 6.4% in 2017.
“The protracted, albeit lower, breach remains a serious concern,” Kganyago said in his Thursday address. “The main risk factors relate to the exchange rate and food prices.”
Kganyago said that domestic political developments remained a risk to the exchange rate and had significantly impacted the rand in the past few days in particular. No doubt referring to the very public battle between finance minister, Pravin Gordhan and the Hawks, Kganyago would not be drawn on this particular issue during a Q&A session with media.
He said the volatility of the currency remains a concern. “Since the previous meeting of the MPC, the rand traded in a wide range of between around R16.40 and R15.07 against the US dollar,” Kganyago said.
‘Business, investor confidence needed’
“While the current account was adequately financed in the fourth quarter, the lack of portfolio capital flows remains a concern, despite expectations of some improvement of flows to emerging markets in 2016,” Kganyago noted.
According to JSE data, non-residents have been net purchasers of bonds to the value of around R6 billion since the beginning of the year, but net sellers of South African equities to the value of around R20 billion.
Since the current account deficit is financed by capital flows, investor confidence was “very important”, Kganyago highlighted.
“More importantly, domestic investments are driven by confidence. The more you create a policy environment that reinforces positive sentiment towards the country, the better it is to improve business confidence,” he said.
“Growth remains constrained by low investment growth and low domestic consumption,” Kganyago continued, adding that in the face of weak global demand, exports were not receiving an uplift either.
The Sarb has revised downwards its domestic economic growth outlook for 2016 from 0.9% to 0.8%.
Modelling the impact of a ratings downgrade to junk on capital flows and the rand is difficult, since it is unclear to what degree it is already priced into markets, Mminele said.
“Some of the investors are not too perturbed by what ratings agencies say. They conduct their own analysis and assessment of what guides investment, while others have specific mandates. Quite a number of them do not necessarily require all three [major ratings agencies] to be at investment grade, two will suffice,” he said.
The Bank has yet to meet with ratings agency Moody’s, which is in the country for its annual review.
The rand gained ground after falling to levels above R16/$ on Wednesday, and was trading at R15.31 following the Sarb’s interest rate decision.
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