The rand firmed in morning trade against the dollar on Friday after the Reserve Bank revised its 2018 forecast for growth in gross domestic product (GDP) .<\/p>\n
The central bank\u2019s Monetary Policy Committee maintained the repurchase rate at 6.75 % Thursday, for a third consecutive meeting, and in line with the estimates by all but seven of the 20 economists surveyed by Bloomberg.<\/p>\n
The SARB revised its forecast for GDP growth up from 0.7% to 0.9% for 2017; while forecasts for 2018 and 2019 were adjusted to 1.4% and 1.6% respectively, up from 1.2% and 1.5% previously.<\/p>\n
By 07h45 on Friday morning, the rand held firm against a weaker dollar – trading at levels last seen in mid-2015, having climbing more than a percent following the rate announcement.<\/p>\n
Bloomberg reported that inflation has been inside the target band for eight months and the rand – among the world\u2019s most-volatile currencies – has strengthened since the ruling party elected deputy president Cyril Ramaphosa as its new leader in December, spurring hope that policy uncertainty and political turbulence will dissipate.<\/p>\n
\u201cWe do see an improved inflation and growth outlook thanks to a stronger performance in the currency but a lot of risk factors still exist, both on the political front as well as on the credit-ratings front,\u201d Jeffrey Schultz, BNP Paribas\u2019s senior economist told Bloomberg.<\/p>\n
S&P Global Ratings and Fitch Ratings cut the country\u2019s debt to junk in 2017, and a reduction of rand bonds by Moody\u2019s Investors Service could trigger an exclusion of the country\u2019s rand debt from Citigroup Inc\u2019s World Government Bond Index.<\/p>\n
The effect of this on rand bond yields \u201ccould be significant, but the extent to which a universal downgrade is already priced in remains unclear,\u201d Governor Lesetja Kganyago told reporters. The government\u2019s challenge is to \u201cfind ways to finance the deficit in a growth-positive manner, and at the same time convey a credible commitment to structural reforms.\u201d<\/p>\n
The bank expects inflation to remain within the target band of 3% to 6% until at least the end of 2019, reaching a low of 4.4% in the first quarter of this year.<\/p>\n
\u201cInflation forecasts are low enough and if they materialise then there is enough scope to cut,\u201d said Elna Moolman, an economist at Standard Bank. But \u201cwe are confronting very significant currency risks, which could impact on the inflation forecast.\u201d<\/p>\n
Busisiwe Radebe, an economist at Nedbank Group told Bloomberg that the Reserve Bank has decided to take a wait an see approach. \u201cImplicit in what the governor was saying is that the bank doesn\u2019t think the strong rand is going to remain this way for a very long time. Rates are going to stay flatter for longer.\u201d<\/p>\n
Bianca Botes, corporate treasury management at Peregrine Treasury Solutions said the rand may have some difficulty breaching lower technical levels.\u00a0 “The MPC has highlighted that there are some key risks remaining within South Africa, even though positive sentiment has been restored by the election of Cyril Ramaphosa as President of the ANC.<\/p>\n
“The financial situation of the State Owned Entities (SOEs) is one of the country\u2019s biggest concerns, with Eskom remaining particularly in focus. The question of where funding will come from to address SOEs financial difficulties, and the pressure that this will put on the fiscus moving into 2018 is one of the primary concerns that we will need to watch closely this year,” Botes said.<\/p>\n