South African central bank keeps rates on hold, warns on political instability

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South African President Jacob Zuma’s battles with his finance minister threaten a long-sought decline in the country’s inflation rate, the governor of the country’s central bank warned as the bank announced it would keep its interest rates on hold.

The central bank has now kept its benchmark interest rate at 7 per cent for an entire year, though it has previously said it could consider a further rate hike should inflation rise further.

The recent strength of the rand has helped the country’s inflation rate fall back toward the top end of the bank’s target range, though the currency’s rapid depreciation this week has highlighted the fragility of the move.

Lesetja Kganyago, SARB governor, said:

The recent heightened domestic political uncertainty has reversed some of these exchange rate gains, and the risk of further rand weakening overshadows the inflation outlook.

The rand plunged earlier this week after Jacob Zuma, South Africa’s president, ordered his finance minister Pravin Gordhan to immediately return from an investor trip to the UK, prompting fears that Mr Gordhan would be sacked.

It has recovered slightly since yesterday afternoon, however, after signs of support for Mr Gordhan from within the African National Congress raised hopes that he will hold on to his position.

Mr Kganyago stressed the difficulties the uncertainty has caused for the central bank, noting that “one of the skills that is very short within the central bank is political analysis …we employ economists, we can’t analyse which direction politics is going …we have got people whose job it is to beat numbers until they confess”.

The governor refused to be drawn on what effect this week’s events would have on the government’s chances of maintaining its investment-grade credit ratings. Mr Kganyago said “I would be very worried if the ratings agencies make any decisions based [only] on something that happened today or yesterday”, but acknowledged that “it is always useful that they have got certainty about what the political trajectory of the country is, what the economic trajectory is”.

The central bank has been struggling with a combination of rising inflation and slowing growth in recent months. Mr Kganyago said today that the economy has passed the worst point of the cycle, and the bank revised its growth forecasts for the next two years upwards. However, he stressed that “the domestic growth outlook remains weak”.

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