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Central bank head confident South Africa can weather global interest rate rises

South Africa is financially strong enough to weather a post-pandemic rise in global interest rates, its central bank governor has said, despite concerns that investors might pull their money out of riskier emerging markets if yields rise elsewhere.

Africa’s most industrialised economy has been buoyed by high commodity prices and can cope if the US Federal Reserve and other major central banks raise rates sooner than expected as they exit pandemic stimulus measures, Lesetja Kganyago told the Financial Times.

Investors have bet on a faster end to the Fed’s $120bn monthly asset purchases and sooner rate rises as US inflation has jumped in recent months, to as much as 5 per cent in May.

In 2013 similar bets on a move towards tapering the purchases caused the South African rand and other top emerging market currencies to tumble, as higher yields on US Treasuries enticed investors away from riskier assets. This so-called taper tantrum still haunts Fed policymakers.

“We shouldn’t worry about a taper tantrum,” Kganyago said. “We could worry about a data tantrum”, or investors reading too much into the latest economic data as a signal of imminent rate rises, he added.

“South Africa is less vulnerable this year than it was last year” when the pandemic sent the economy into a tailspin and gross domestic product fell 7 per cent, and central banks are also better at signalling their intentions in advance than in 2013, Kganyago said.

In 2013 South Africa was among a set of “fragile five” economies that were especially exposed to capital flight because they had both budget and trade deficits that depended on foreign financing.

But last year South Africa recorded its biggest positive trade balance this century as demand for imports fell in the pandemic and lockdowns, and prices for commodities produced by South African mines, particularly platinum, surged on signs that the global economy was reopening.

The central bank expects South Africa to record another current account surplus this year. President Cyril Ramaphosa’s government is also expected to post a smaller budget deficit than originally expected for the current fiscal year, at about 11 per cent of GDP versus the almost 15 per cent that had been forecast.

Line chart of Annual change in consumer prices (%) showing South Africa's inflation rate has ticked up in recent months

Economists expect the South African Reserve Bank to keep rates at a near all-time low of 3.5 per cent this year as the country battles further waves of coronavirus infections and the economy, which is already struggling with massive unemployment, struggles to return to growth.

According to official figures released on Wednesday, South Africa’s consumer price inflation accelerated to more than 5 per cent in May, although a core measure was about 3 per cent.

Kganyago said there was a “compelling case” in the long run for lowering the bank’s current price stability target, which aims for inflation between 3 per cent and 6 per cent.

In the years since the inflation objective was first set in 2001, almost all other major economies have revised their own targets down “because globally, inflation has moved lower and countries want to maintain competitiveness”, Kganyago said. “For South Africa to remain competitive, it is important that our inflation is in line with those of the countries that we compete with,” he added.

This year marks the South African Reserve Bank’s centenary and a quarter of a century since its independence was enshrined in the post-apartheid constitution. In recent years South Africa’s economic stagnation has made the central bank a target of radicals in the ruling African National Congress who want the state to give it more direction in boosting growth.

Debate on the bank’s future role is welcome but “we guard jealously this independence”, said Kganyago.


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