South Africa’s central bank wary of cutting rates in spite of recession

CUTTING interest rates is not the answer to dragging South Africa’s economy out of recession because deep economic weakness and political turmoil need to be addressed, an official said on Thursday.

Brian Kahn, a member of the central bank’s monetary policy committee told a banking conference in Johannesburg that the central bank needed to act cautiously due to the downgrades.

Kahn said further downgrades caused by political uncertainty may have a more severe impact on markets.

“We would not want to reduce rates and then be forced into a premature reversal of policy,” Kahn said, adding that the bank was likely to cut its growth forecast in July.

“If all three agencies cut their rating of local currency debt to “junk” it could knock one per cent off economic growth and send inflation up by 0.6 per cent,” Kahn said.

South Africa fell into recession for the first time in eight years in the first quarter, piling pressure on scandal-plagued President Jacob Zuma, whose leadership has been challenged within the ruling African National Congress.

Fitch said on Thursday it sees South Africa missing the revenue and deficit forecasts set out in a February budget, adding that infighting within the ANC remained a key risk to its sovereign credit rating.

“Politics have weakened business confidence substantially and this will continue for some time,” Fitch director Jan Friederich said.

Backroom rifts within the ANC have been thrust into the open this week after more than 100,000 emails leaked to local media allegedly showed improper dealings in lucrative government contracts by business friends of Zuma.

“Political instability is expected to continue up to and beyond an ANC conference in December when a successor to Zuma as party leader will be chosen,’’ Fitch’s Friederich said.

Zuma can remain head of state until a 2019 election but the ANC’s Secretary General, Gwede Mantashe told Reuters on Wednesday that he could be removed next year.

Finance Minister Malusi Gigaba told parliament on Thursday he was focused on growing the economy and aims to trim the budget deficit to 3.3 per cent from 3.8 per cent in three years.

Growth in South Africa’s key mining sector slowed sharply in April while manufacturing contracted much more than expected, data showed on Thursday.