* Rand has weakened nearly 12 percent since March 27
* S&P, Fitch have downgraded South African credit to junk
* Bank says will not intervene directly to support rand
* Bank says too early to say if downgrades will cause
(Adds governor's comments on recession)
By Mfuneko Toyana
PRETORIA, April 10 South Africa's central bank
on Monday warned that a recent cabinet reshuffle that saw the
finance minister fired and the country's credit rating relegated
to "junk" could put pressure the rand and accelerate inflation
as inventors sold off local assets.
The rand has dropped nearly 12 percent since March
27, when President Jacob Zuma recalled then-finance minister
Pravin Gordhan from an international roadshow, then fired him
later that week.
In response, S&P Global Ratings and Fitch cut the country's
sovereign credit rating to sub-investment grade, both saying
Gordhan's departure raised the risk of a fiscal policy shift.
The central bank governor said it was too early to tell
whether the downgrades would push the economy in to a recession.
"It's too early to tell if we are in a recession," South
African Reserve Bank (SARB) Governor Lesetja Kganyago said at
the release of the regulator's Monetary Policy Review.
"The environment is pretty fluid ... With the downgrades, we
expect the cost of capital to rise, and that rising cost of
capital could force businesses that wanted to invest to rethink
some of their projects. That will have an impact on growth."
In March, the bank kept its benchmark repo rate unchanged at
7 percent, citing re-emerging risks to the exchange rate. It
added then that it had reached the end of its tightening cycle,
which has seen it raise rates a total of 200 basis points since
"Domestically the situation has been challenging ... it has
been making policy-making very difficult," Kganyago told a news
conference after the bank released its Monetary Policy Review.
The bank said in its review, released twice a year, that the
biggest risk to its policy aim of keeping consumer prices below
6 percent was the weakening exchange rate.
"Rising uncertainty about the future of economic policy
could prompt capital outflows in anticipation of such
downgrades," the bank said in the report.
"The risk is that the rand could follow a more depreciated
path than expected, which would, other things being equal, raise
inflation," the bank said in the statement.
Before that meeting, forward rate agreements were pricing in
at least one rate cut by 25 basis points in 2017, but on Monday
the forward markets were pricing zero percent probability of a
cut this year .
In response to questions from Reuters on Monday, the bank
said it would stick to setting benchmark lending rates rather
than intervene in the exchange markets.
"We would consider becoming involved if the orderly
functioning of the foreign exchange markets is under threat,
guided by financial stability considerations," Deputy Governor
of the Reserve Bank (SARB) Daniel Mminele said in emailed
responses to questions.
(Editing by James Macharia, editing by Larry King)