The head of the central bank is confident that South Africa can withstand the rise in global interest rates

Its central bank governor has said South Africa has enough financial strength to face rising global interest rates after the pandemic, despite concerns that investors could withdraw money from riskier emerging markets if yields rise elsewhere.

Africa’s more industrialized economy has been buoyed by higher commodity prices and can cope with the state of the US Federal Reserve and other major central banks. Raising rates faster than expected As they are out of pandemic stimulus measures, Lisitja Kganiago told the Financial Times.

Investors bet a quicker end to the $120 billion Fed monthly asset purchases, and a quick rate hike with US inflation rising in recent months, to 5 per cent in May.

In 2013, similar bets on a move toward tapering sent the South African rand and other emerging market currencies lower, as higher yields on US Treasuries lured investors away from riskier assets. The so-called tapering tantrum continues to haunt Fed policymakers.

“We shouldn’t worry about a tapering tantrum,” Kaganiago said. “We can worry about a data tantrum,” he added, or investors read too much into the latest economic data as a sign of an impending rise in interest rates.

“South Africa is less vulnerable this year than it was last year,” Kganyago said, when the pandemic deteriorated the economy and dropped GDP by 7 percent, and central banks are also better at signaling their intentions in advance than in 2013.

In 2013, South Africa was among a group of “Fragile Five” economies that were particularly vulnerable to capital flight because they had budget deficits and trade deficits that depended on foreign funding.

But last year, South Africa recorded its largest positive trade balance this century as import demand fell amid the pandemic and lockdowns, and the prices of goods produced by South African mines, especially platinum, rose amid signs of the global economy reopening.

The central bank expects South Africa to post another current account surplus this year. President Cyril Ramaphosa’s government is also expected to run a smaller budget deficit than originally forecast for the current fiscal year, at around 11 percent of GDP versus about 15 percent projected.

Line chart of annual change in consumer prices (%) showing that South Africa's inflation rate has risen in recent months

Economists expect South Africa’s Reserve Bank to keep interest rates at an all-time low of 3.5 percent this year, as the country grapples with other waves of coronavirus infections and the economy, already suffering from massive unemployment, struggles to return to growth.

According to official figures released on Wednesday, consumer price inflation in South Africa accelerated to more than 5 per cent in May, although the base measure was around 3 per cent.

Kganyago said there is a “compelling case” for the long-term to lower the bank’s current price stability target, which aims for inflation between 3 percent and 6 percent.

In the years since the inflation target was first set in 2001, almost all major economies have revised their targets down, “because inflation globally has fallen to a lower level and countries want to stay competitive,” Kaganiago said. “For South Africa to remain competitive, it is important that our inflation is in line with that of the countries we compete with,” he added.

This year marks the centenary of the Reserve Bank of South Africa and the quarter 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 for extremists in the ruling African National Congress who want the country to give it more direction to boost growth.

Debate about the bank’s future role is welcome, Kaganiago said, but “we are zealously guarding this independence.”

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