May 16, 2017 / 2:01 PM / 2 months ago

S.Africa's central bank governor says raising rates won't lure investment

3 Min Read

JOHANNESBURG, May 16 (Reuters) - South Africa's central bank governor Lesetja Kganyago said on Tuesday that raising lending rates would do little to attract new investments to the country after its credit rating was downgraded to junk.

Kganyago, due to announce his first rates decision since S&P Global Ratings and Fitch cut South Africa's credit score to sub-investment grade in April, told online publication The Conversation that the Reserve Bank (SARB) would stick to targeting inflation of 3 to 6 percent.

"Raising the repo rate by itself would do little to attract new investments," Kganyago was quoted as saying.

"But failure to deal with the inflationary consequences of currency depreciation, which pushes up import prices and potentially all prices, would also push up both short and long term borrowing costs," Kganyago said.

The currency plunged more than 12 percent in the wake of President Jacob Zuma's decision in late March to recall Pravin Gordhan from meetings with investors overseas and then fire him as finance minister a week later.

Price growth in March slowed to 6.1 percent. Statistics South Africa publishes April CPI on May 24, with a Reuters poll forecasting inflation at 5.6 percent. In March the bank kept rates unchanged for an eighth straight meeting, saying it had reached the end of its tightening cycle, which has seen it raise rates a total of 200 basis points (bps) since 2014.

But following the cabinet reshuffle and downgrades Kganyago said pressure on the rand, and accelerated inflation as inventors sold off local assets, could force the regulator to put off cutting rates.

The bank's policy committee meets for three days starting next Monday and is due to announce its rates decision on Thursday.

Forward markets rates on Tuesday were pricing in a zero percent chance of a hike next week and a 9 percent probability of a 25 basis point cut. For meetings in July and September, markets see a 21 percent and 50 percent probability of a 25 bps hike.

Michelle Wohlberg, fixed income specialist at Rand Merchant Bank, said a rate move in either direction would be "pulling the trigger too quickly", with the bank likely to consider cutting once South Africa's credit rating path was clear.

"They're waiting for things to settle down and for Moody's to come out with their rating report. And once CPI prints in-line they'll start thinking about cutting," Wohlberg said

Moody's, which put the country on review for a downgrade after the cabinet reshuffle, is due to meet local investors and policy makers this month. (Reporting by Mfuneko Toyana; Editing by Mark Trevelyan)

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