Kganyago plays down talk of imminent SA rate cut

By Rene Vollgraaff, Francine Lacqua and Guy Johnson
Lesetja Kganyago, new SARB Governor
South African Reserve Bank Governor, Lesetja Kganyago

(Bloomberg) — South African Reserve Bank Governor Lesetja Kganyago said policy makers want to assess the impact of lower oil prices on the wider economy before making a call on whether to cut interest rates.

While plunging oil prices have improved the inflation outlook, the central bank wants to see the “second-round effect” on prices, Kganyago said in an interview with Bloomberg TV on Wednesday at the World Economic Forum in Davos.

The almost 60 percent drop in the crude price since June helped to push inflation back within the Reserve Bank’s 3 percent to 6 percent target band, despite a weaker rand. That’s fueling speculation policy makers may hold off raising interest rates for the rest of the year or possibly reduce them.

“Markets do overshoot,” Kganyago said. Markets “have done so in the past.”

Forward rate agreements, used to bet on borrowing costs, starting in one month climbed as much as 11 basis points after Kganyago began speaking and were trading at 6.04 percent by 1:22 p.m. in Johannesburg.

“Maybe he’s given them a dose of reality,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. Kganyago’s comments indicate the policy rate may be maintained at the next central bank meeting on Jan. 29 and again in March, Nalla said.

“Beyond that, it really is dictated by how low these energy prices do go,” he said.

Market Overreaction

The Reserve Bank has kept its benchmark repurchase rate unchanged since raising it to 5.75 percent in July. The bank has maintained that it’s in a rate-tightening cycle.

Kganyago “is saying that the market was overreacting in expecting a rate cut next week,” Moshabele Modise, an investment analyst at Citadel Investment Services, said by phone from Cape Town.

Consumer prices rose 5.3 percent in December from a year ago, compared with 5.8 percent in November. That was slower than estimated and sent one-month FRAs down seven basis points on the day as traders priced in a greater chance of a cut in borrowing costs.

The rand has weakened about 10 percent against the dollar since the start of last year and was trading as low as 11.5332 today.

Inflation expectations are still anchored at the top of the Reserve Bank’s target band, Kganyago said. Currency depreciation has made the slowdown in price rises less dramatic, he said.

“You have had basically the exchange rate becoming a shock absorber and absorbing part of the decline in the oil price,” he said. – BLOOMBERG

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