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Reserve Bank says downgrades, weakening rand pose risk

The bank says the biggest risk to its policy aim of keeping consumer prices below 6% was the weakening exchange rate.

South African rand.  Picture: Christa Eybers/EWN

The South African Reserve Bank (SARB) on Monday warned that the recent Cabinet reshuffle that saw the finance minister fired and the country's credit relegated to "junk" could pressure the rand and accelerate inflation as investors sold off local assets.

"Rising uncertainty about the future of economic policy could prompt capital outflows in anticipation of such downgrades," the SARB said in its annual Monetary Policy Review.

The bank said the biggest risk to its policy aim of keeping consumer prices below 6% was the weakening exchange rate.

The rand has slipped nearly 12% since March 27 when President Jacob Zuma suddenly recalled then Finance minister Pravin Gordhan from an international roadshow before firing him a week later.

Days later Zuma announced a shake-up of his Cabinet, firing Gordhan, his deputy Mcebisi Jonas, Transport Minister Dipuo Peters, Energy Minister Tina Joemat-Pettersson, Tourism Minister Derek Hanekom and Public Administration Minister Ngoako Ramathlodi.

Less than a week later ratings agency Standard & Poor's (S&P) Global downgrading South Africa's sovereign credit rating to BB+, in effect lowering the country to junk status.

On Friday, Fitch followed S&P in downgrading South Africa's rating to junk.

Before Zuma's dramatic axing of Gordhan and Jonas, economists had predicted that the Reserve Bank would cut interest rates during the course of 2017 as the rand has been strengthening against the US dollar, while inflation was dropping and approaching the Bank's target range of between 3% and 6%.

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