ECONOMIC STABILITY
…South African central bank doesn't see disruption from global policy normalisation
JOHANNESBURG - South African financial markets are unlikely to be severely disrupted as global central banks normalise policy, and a balanced inflation outlook means domestic interest rates can stay low, says Governor Lesetja Kganyago.
Kganyago said in an interview that even if capital outflows did materialise as other central banks taper asset purchases or raise rates, the South African Reserve Bank’s focus was on inflation.
“Our inflation is contained. Monetary policy will not come with a stance that tries to stem capital outflows. ... For as long as inflation on a forward-looking basis is contained, there’s no need to adjust policy,” he said.
Consumer inflation collapsed to as low as 2.1 percent last year as the Covid-19 pandemic shuttered most businesses, and it has only risen gradually since.
In February, the latest month for which price data are available, inflation was at 2.9 percent year on year, below the central bank’s target range of three percent to six percent.
The central bank of Africa’s most industrialised nation slashed lending rates by 300 basis points to a record low of 3.5 percent in 2020 to soften the impact of Covid-19, but it has kept them on hold at its last four policy meetings.
Central banks in other emerging markets like Turkey, Russia and Brazil have recently raised lending rates, partly to fight higher inflation. There are indications that the U.S. Federal
Reserve and other developed market central banks are moving closer to a point where they could tighten policy.
Kganyago said he believed the high yield on South African bonds would keep investors interested.
The yield on the benchmark 2030 government bond spiked as high as 13 percent when the pandemic reached South Africa, but it has since eased back to around nine percent
“Foreign investors are well- rewarded in South Africa at the moment. Our bond yields are significantly higher than bond yields in the advanced economies, and we are higher than many emerging market economies in real terms,” Kganyago said.
The Reserve Bank launched a bond-buying programme in response to the pandemic, purchasing government debt in the secondary market.
It however resisted political pressure from various quarters to buy government debt in the primary market, defending its inflation-targeting policy. –