Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
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.
South African Reserve Bank chief Lesetja Kganyago told the Financial Times in an interview that “the job of taming inflation is not yet done” in Africa’s most industrial economy, despite central bank peers elsewhere signalling that they believe the worst of price rises are over.
Chile and Brazil are among the emerging-market central banks that have increased the pace of rate cuts, after generally being ahead of advanced economies in tightening monetary policy in recent years as global inflation began to surge.
But policymakers in other developing economies, including the Philippines and India, have so far held back amid worries about potential upward pressures on inflation, such as the trade disruption in the Red Sea following a spate of attacks by Yemen’s Houthi rebels on commercial shipping.
The caution reflects similar uncertainty in the US Federal Reserve and other developed-world central banks.
Policymakers in South Africa, which has held rates in recent meetings after a series of increases from late 2021 onwards, needed to see more data showing inflation was moving closer to the middle of an official 3 per cent to 6 per cent target before changing tack, Kganyago said.
Inflation in the country — currently at 5.1 per cent — had previously seemed to be falling, only to rise again, he said, adding: “The arrival of one swallow does not make a summer.”
It was “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 benchmark rate is 11.25 per cent, with inflation at 4.5 per cent in January.
In South Africa, by contrast, “our real repo rate is just about 300 basis points” given the current inflation rate, Kganyago added.
The central bank has forecast that the economy will grow barely 1 per cent this year and it is under pressure to loosen policy.
South Africa has been hit hard by years of rolling power blackouts and port and rail blockages imposed by the troubled Eskom and Transnet power and freight state monopolies.
“The growth challenges that South Africa is facing are nothing to do with the demand side” but instead reflected supply-side and structural problems, Kganyago said.
As the economy struggles, polls suggest President Cyril Ramaphosa’s African National Congress will battle to retain its three-decade electoral majority in upcoming polls. The vote is due as soon as April or May, although no firm date has been set.
The central bank chief also said discussions were continuing with South Africa’s treasury on whether and how to tap a government gold and foreign exchange account held at the bank that has swelled to about R500bn (over $25bn) because of the rand’s drop against leading currencies in recent years.
But he cautioned that any such transfer would need to preserve the central bank’s operational independence.
Some investors have called on South Africa to use part of the account’s profits to pay down government debt. Because these profits are mostly unrealised on assets that are hard to sell, they have suggested funding the transfers through printing equivalent sums of money. These would then have to be mopped up to prevent the liquidity stoking inflation.
If the reserve bank bore the cost of mopping up by paying interest to banks to hold on to money, it would soon run out of its available capital of more than R20bn, Kganyago said.
“Our law does not allow us to run negative equity, which means we would need to be capitalised,” he said. That could involve the treasury setting conditions on the bank, which prized its independence, he added.
David Omojomolo, Africa economist at Capital Economics, said: “Other central banks have been able to operate with negative equity positions, but it’s not clear investors would look kindly on this in South Africa given the fiscal constraints.”
