South Africa will avoid a ‘knee-jerk’ reaction to currency weakness, central bank deputy says

Emerging markets have been under pressure as a result of a strengthening dollar and trade war fears, and central banks in turn are facing tough decisions on monetary policy.

South Africa’s central bank has plenty on its plate, especially within the context of a new president and unenviable credit ratings following years of corruption and economic mismanagement.

But despite trade fears and a severely weakened currency, the bank is not rushing to raise interest rates, its deputy governor told CNBC’s Annette Weisbach in Sintra, Portugal, on Tuesday.

“We are concerned — we are a small open economy, and conditions in our economy depend on the global economy, on trade conditions, on a strong demand for our goods. If there is to be a trade war, a slowdown in the global economy, that will affect us,” Kuben Naidoo said during the global summit for central bankers.

But despite the South African rand hitting a six-and-a-half-month low against the dollar, the bank is still taking a ‘wait-and-see’ approach. The rand on Tuesday was at 13.8550 to the greenback at 2:09 p.m. local time.

“So we don’t really act in a knee-jerk reaction to a currency weakness,” Naidoo said. He described what he saw as sound fundamentals in South Africa compared to other emerging markets that have had to hike rates, like Argentina and Turkey, adding that inflation is currently within range and the budget deficit, while high, is projected to decline.

Still, escalating trade tariffs between the world’s two largest economies and declining low confidence within the country will keep pressure on the bank’s policy makers, leaving the door open for future rate rises in response to the ongoing rand selloff.

“If there is persistence in that currency weakness and it feeds into other prices, we would have to act. It’s not an immediate response, we will wait — because the economy is weak we can afford to wait and see,” he said. “That may be a few months, maybe a few quarters.”

South Africa in March cut interest rates to their lowest in two years, down 25 basis points to 6.5 percent after judging that inflation would remain low and within the bank’s target of between 3 and 6 percent. Inflation in April jumped to 4.5 percent from March’s seven-year low of 3.8 percent.

The election by the ruling African National Congress (ANC) of pro-business President Cyril Ramaphosa in December saw business and consumer confidence improve, as well as a boost in the rand, following several years of damaged trust between investors and the government.

But the “Ramaphoria effect,” as many have called it, has faded alongside global trade worries and a depreciation in both the currency and domestic confidence, which has dipped to a seven-month low.

South Africa’s fairly new leadership faces a plethora of challenges, not least crippling unemployment at more than 26 percent, debt-ridden state-owned enterprises, high crime and poverty, and one of the highest inequality levels in the world.

The country’s government in late May passed a bill to establish a minimum wage, meaning that millions of people will now earn 20 rand ($1.58) per hour, equivalent to 3,500 rand ($277) per month. South Africa’s main opposition party and several unions have opposed the bill, demanding a higher figure, and protests surrounding the issue are set to continue.