South Africa’s central bank chief signals caution over rate cuts

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South Africa must continue to fight inflation even as central banks in other emerging markets move to cut interest rates, the country’s central bank governor has said.

The head of South Africa’s Reserve Bank, Lesetja Kganyago, told the Financial Times in an interview that “the work of taming inflation is not yet done” in Africa’s most industrial economy, even as other central banks signaled believe that the worst of the price increases is over.

Chile and Brazil are among emerging market central banks that have increased the pace of rate cuts, after generally leading advanced economies in tightening monetary policy in recent years as global inflation began to rise.

But policymakers in other developing economies, including the Philippines and India, have so far held back due to concerns about potential upward pressures on inflation, such as the disruption of Red Sea trade following a series of attacks by Yemen’s Houthi rebels against commercial shipping.

The caution reflects similar uncertainty at the US Federal Reserve and other central banks in developed countries.

Policymakers in South Africa, which has kept rates unchanged in recent meetings after a series of hikes from late 2021 onwards, needed to see more data showing inflation was approaching half an official target of between 3% and 6% before changing course. Kganyago said.

Previously, inflation in the country – currently at 5.1% – appeared to be falling, only to rise again, he said, adding: “The arrival of a swallow does not make a summer.”

“It is not surprising” that Brazil was the first emerging market to start cutting because the Latin American nation’s rates remained relatively high in real terms, giving the country’s central bank “policy space,” Kganyago said.

Even after several reductions, Brazil’s key rate stands at 11.25%, with inflation at 4.5% in January.

In South Africa, by contrast, “our real repo rate is just around 300 basis points” given the current inflation rate, Kganyago added.

The central bank has forecast the economy will grow just 1% this year and is under pressure to ease policy.

South Africa has been hit hard by years of rolling power blackouts and port and rail blockades imposed by the beleaguered state energy and freight monopolies Eskom and Transnet.

“The growth challenges South Africa faces have nothing to do with the demand side,” but instead reflect structural and supply-side problems, Kganyago said.

As the economy struggles, polls suggest President Cyril Ramaphosa’s African National Congress will battle to maintain its 30-year electoral majority in upcoming polls. The vote is scheduled for April or May, although no specific date has been set.

The central bank chief also said discussions continue with South Africa’s Treasury over whether and how to tap into a government gold and foreign exchange account held at the bank, which has risen to around R500 billion (over $25 billion ) due to the decline of the rand against the country’s major currencies. recent years.

But he warned that any such transfer should preserve the central bank’s operational independence.

Some investors have called for South Africa to use some of the account’s profits to repay government debt. Since these profits are mostly unrealized on hard-to-sell assets, they suggested financing the transfers by printing equivalent sums of money. These should then be absorbed to prevent liquidity from fueling inflation.

If the reserve bank had to bear the cost of the mop-up by paying interest to banks to hold the money, it would soon exhaust its available capital of more than R20 billion, Kganyago said.

“Our law does not allow us to have negative equity, which means we should be capitalized,” he said. This could involve the Treasury setting conditions for the bank that enhance its independence, she added.

David Omojomolo, Africa economist at Capital Economics, said: “Other central banks have been able to operate with negative equity positions, but it is not clear that investors would look kindly on this in South Africa given the fiscal constraints.”

Video: Eskom: How corruption and crime have turned off the lights in South Africa | FT film

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