SA economy ‘faces turbulence’

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Newly appointed SA Reserve Bank governor (SARB) Lesetja Kganyago gestures during a media briefing in Pretoria, October 6, 2014.   REUTERS/Siphiwe Sibeko

Newly appointed SA Reserve Bank governor (SARB) Lesetja Kganyago gestures during a media briefing in Pretoria, October 6, 2014. REUTERS/Siphiwe Sibeko

JOHANNESBURG – South Africa’s economy faces a turbulent time as the prospect of rising US interest rates and a slowing Chinese economy complicate policy-making, the country’s Reserve Bank Governor Lesetja Kganyago said on Tuesday.

Speaking at the Reuters Economist of the Year event, Mr Kganyago said China’s devaluation of its currency to stem an economic slide would affect the competitiveness of South Africa’s manufacturing exports to the world’s second largest economy.

South Africa’s commodity exports are also at risk from the slowdown in China’s economy.

The South African Reserve Bank raised domestic rates for the first time in a year in July despite lacklustre growth, citing inflationary pressure partly stemming from a weaker rand.

The rand has weakened nearly 10 percent against the dollar this year as investors have sold off emerging market assets, anticipating that the US Federal Reserve will soon start tightening policy.

“The global economy is entering into new unchartered waters with the prospect of normalisation in the US and a slowdown in China, impacting on commodity prices,” Mr Kganyago said.

“The reality is that South Africa, along with other emerging market economies, is likely to face an increasingly turbulent time ahead.”

He reiterated that the rand exchange rate was one of the main upside risks to the inflation outlook, but added that the central bank did not target a level for the currency.

The central bank’s concern about the impact of US policy normalisation did not however mean it would simply follow global interest rates in conducting domestic policy.

“Our decisions on short-term interest-rate changes are focused primarily on the domestic inflation outlook,” Mr Kganyago said.

The Reserve Bank raised its repo rate in July by 25 basis points after a hike of the same size a year ago, a departure from previous cycles when policy makers adjusted rates in 50 basis point instalments.

“Our baseline is that even in the current tightening cycle that we have identified it is going to be a very moderate one,” Mr Kganyago said.

“Even in the US we expect that the lift-off will actually be a fairly moderate one.” – Reuters

 

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