South African Reserve Bank Keeps Main Repo Rate on Hold -- Update

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JOHANNESBURG--The South African Reserve Bank kept its main interest rate on hold Thursday, a day before key ratings agencies are due to issue decisions on the country's creditworthiness.

Following the final meeting of the bank's monetary policy committee, Governor Lesetja Kganyago said the repo rate would remain at 6.75%, citing upward pressure on inflation from higher oil prices and a weakening currency.

The bank expects Africa's most developed economy to grow 0.7% this year, up slightly from its previous forecast. However, it lowered its estimate for 2018 to 1.2% from 1.3% and cut its 2019 forecast to 1.5% from 1.7%.

Annual inflation is expected to remain within the 3% to 6% target range in the coming years, reaching 5.2% this year, 5.2% next year and 5.5% in 2019, the bank said.

Pressure on the South African economy and its rand currency has been rising since the committee's last meeting in September.

In his midterm budget review last month, Finance Minister Malusi Gigaba said the government would run a deficit of 4.3% of gross domestic product in the 2017/18 fiscal year, well above the 3.1% targeted in the original spending plan.

The higher deficit, along with speculation that South Africa could soon abolish university fees, hit the rand, which slipped sharply against the dollar and other major currencies, although it has recovered somewhat in recent days.

"These...two factors have raised the risk of sovereign ratings downgrades, a risk that has been hanging over the rand for some time," Mr. Kganyago said, referring to the bigger projected deficit and the prospect of increased government costs for higher education.

Both S&P Global Ratings and Moody's Investors Service are due to release their latest assessment of South Africa's creditworthiness Friday. In April S&P downgraded the country's foreign-currency debt to junk but kept its local-currency rating at BBB-, one notch above junk. Moody's currently rates South Africa at Baa3, its lowest investment-grade rating.

Analysts at RMB warned Thursday that further downgrades, especially of the local-currency debt, could push investors to sell off some $10 billion in South African debt.

Further pressure on the rand could come from the December conference of the African National Congress, when the ruling party will choose a new leader to succeed President Jacob Zuma.

"Domestic-event risks, including rating-agency reviews and the economic-policy implications of the ANC electoral conference are likely to dominate rand movements over the coming weeks," Mr. Kganyago said.

Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com

(END) Dow Jones Newswires

November 23, 2017 09:42 ET (14:42 GMT)