JOHANNESBURG (Reuters) – 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 first, a member of the central bank’s monetary policy committee said on Thursday.
Africa’s most developed economy 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.
Markets partly priced in an interest rate cut after the rand and inflation remained largely stable despite S&P Global Ratings and Fitch downgrading South Africa’s credit rating to “junk” in April.
But MPC member Brian Kahn said the central bank needed to act cautiously because 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 told a banking conference, adding the bank was likely to cut its growth forecast in July.
Moody’s is expected to announce its ratings decision this week.
If all three agencies cut their rating of local currency debt to “junk” it could knock one percent off economic growth and send inflation up by 0.6 percent, Kahn said.
Fitch said on Thursday it sees South Africa missing the revenue and deficit forecasts set out in a February budget and that infighting within the ANC remained a key risk to its sovereign credit rating.