South Africa’s ability to maintain its investment-grade credit rating is key to stabilising inflation expectations, Deputy Central Bank Governor Francois Groepe said on Thursday.
The South African Reserve Bank has hiked the key benchmark rate – now standing at 7 percent – by a cumulative 200 basis points since January 2014 in a bid to bring inflation within its target band of between 3 and 6 percent, despite slow growth.
Inflation in Africa’s most industrialised country stands at 6.1 percent, and the bank sees growth at only 0.6 percent this year, compared with 1.3 percent in 2015.
South Africa dodged ratings downgrades from Moody’s, S&P Global Ratings and Fitch, but the agencies warned that weak growth remained a risk before further reviews due by December.
“A sovereign rating can have an impact on monetary policy because of how it influences the availability and cost of external financing, the yields on domestic debt and, in turn, the performance of the rand,” Groepe said in a speech posted on the bank’s website.
He said economic prospects would remain difficult, at least in the short term, and cited Britons’ vote to leave the European Union last week that triggered global market chaos.
“Just last week, we saw how, in response to Brexit, many emerging-market currencies, including the rand, suffered a burst of volatility, which could add a risk premium in South African and other emerging-market asset markets,” he said.
“However, several – and more fundamental – patterns do suggest that the country should be relatively well placed to take advantage of a gradually improving global economic environment, notwithstanding the possible negative implications of the Brexit.”
Groepe said there were tentative signs that export-orientated and import-competing sectors may be starting to benefit from the exchange rate depreciation.
“Some may ask: ‘isn’t there a risk that the consecutive interest rate increases implemented by the South African Reserve Bank over the past year may nip this recovery in the bud?’ As I’ve mentioned earlier, we must appreciate that ‘policy space’ in South Africa has narrowed.”
The deputy governor said when expressed relative to both actual and expected inflation, the real policy rate was still relatively low by long-term historical standards.