Low inflation key to recovery, maintaining foreign flows – Lesetja Kganyago

South Africa’s lending rate remains accommodative and sufficient to support an economic recovery, central bank governor Lesetja Kganyago said on Thursday, adding that the bank would keep targeting inflation to keep foreign investors happy.

“The interest rate differential that matters for capital flows isn’t the differential of the policy rate. What matters is the differential of the bond yields, and South African bond yields are still significantly higher than those is in the US and in real terms,” Kganyago said during a live webinar.

“That is an attraction for investors,” Kganyago said.

“Those portfolio investors when they come in, they would like to know, is the central bank serious about containing inflation, because in those bond yields investors would like to be compensated not just for today’s inflation, but for what they think will be tomorrow’s inflation.”

The Reserve Bank has kept benchmark lending rates unchanged at record lows at its last four policy meetings, despite fast-rising US Treasury yields and rate increases in response by other emerging markets like Turkey, Russia and Brazil.

Non-resident portfolio flows into South Africa’s bonds have turned negative in recent weeks following a brief recovery earlier in 2021. The country is partly reliant on foreign investments in its debt to fund a gaping budget deficit.

Data from the Johannesburg Stock Exchange (JSE) this week showed foreign investors have sold nearly R30 billion ($2.10 billion) of government bonds year-to-date.

The huge global selloff in risk assets at the height of the Covid-19 pandemic in March last year saw South African assets sell off heavily, pushing portfolio outflows in 2020 to R159.3 billion.

The selloff pushed yields on the benchmark 10-year government bond above 13%, but it has since eased, currently trading at a yield of above 9%, still higher than most other emerging markets. Local inflation sits at 3.2%.

“If we’re to bring down the long-term interest rate in South Africa, the biggest borrower (government) in this economy must borrow less… That will bring down the cost of capital in the overall economy,” said Kganyago.