The central bank governor is confident that South Africa can withstand the test of rising global interest rates

The governor of the South African Central Bank stated that although there are concerns that investors may withdraw funds from riskier emerging markets if yields elsewhere rise, South Africa’s financial strength is sufficient to withstand the rise in global interest rates after the pandemic.

Africa’s most industrialized economies are boosted by high commodity prices, if the Federal Reserve and other major central banks can cope Raise interest rates earlier than expected When they withdrew from the pandemic stimulus, Lesetja Kganyago told the Financial Times.

Investors bet that the Fed will end its $120 billion monthly asset purchase plan sooner and raise interest rates sooner as the U.S. inflation rate has soared to as high as 5% in May in recent months.

In 2013, similar bets on downsizing purchases caused the South African rand and other major emerging market currencies to plummet, as rising US Treasury yields attracted investors to stay away from riskier assets. This so-called “shrinking panic” still plagues Fed policymakers.

“We shouldn’t worry about losing our temper gradually,” Kganyago said. He added that “we may be worried about data riots” or investors may over-interpret the latest economic data because this is a signal that interest rates are about to rise.

Kganyago said, “South Africa is not as fragile this year as last year,” when the pandemic put the economy in trouble, GDP fell by 7%, and compared to 2013, central banks were better at expressing their intentions in advance. .

In 2013, South Africa was one of a group of “fragile five countries” and was particularly vulnerable to capital flight because their budgets and trade deficits depended on foreign financing.

But last year South Africa recorded the largest positive trade balance of the century, as import demand fell due to the pandemic and blockade, and the prices of commodities (especially platinum) produced by South African mines soared due to signs that the global economy is reopening.

The Central Bank expects South Africa to record a current account surplus again this year. The budget deficit of President Cyril Ramaphosa’s government for this fiscal year is also expected to be lower than the initial forecast, accounting for about 11% of GDP, compared with the previous forecast close to 15%.

The line chart of annual changes in consumer prices (%) shows that South Africa's inflation rate has risen in recent months

Economists predict that the Reserve Bank of South Africa will maintain interest rates at 3.5% this year, close to the lowest level in history, because the country is battling further waves of coronavirus infections, and the economy, which is already battling mass unemployment, will struggle to resume growth. .

According to official data released on Wednesday, consumer price inflation in South Africa accelerated to more than 5% in May, but the core indicator was about 3%.

Kganyago said that in the long run, there is a “convincing reason” to lower the bank’s current price stability target, which aims for an inflation rate between 3% and 6%.

Kganyago stated that in the years since the inflation target was first set in 2001, almost all other major economies have lowered their targets, “because global inflation has fallen, countries want to remain competitive.” “In order for South Africa to remain competitive, it is important that our inflation rate is consistent with the inflation rate of the countries we compete with,” he added.

This year marks the 100th anniversary of the establishment of the Reserve Bank of South Africa, and it is also a quarter of a century since its independence was stipulated in the Constitution after apartheid. In recent years, South Africa’s economic stagnation has made the central bank a target for radicals in the ruling African National Congress, who hope that the country will give more guidance in promoting growth.

Kganyago said that the debate about the future role of banks is welcome, but “we guard this independence carefully.”

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