By Ntando Thukwana and Jennifer Zabasajja.
South Africa’s central bank chief Lesetja Kganyago said that officially locking in a lower inflation goal could underpin another drop in bond yields, which have already fallen sharply since he announced the bank was aiming at the bottom of its 3% to 6% target range.
“Once you have a formal announcement of what the new target would be, we potentially could see a further decline in the bond yields,” Kganyago told Jennifer Zabasajja in an interview on Bloomberg Television on Thursday. “This would be consistent with the work that the staff of the bank has done.”
Yields on South Africa’s 10-year bond have fallen to around 9.1% from more than 11% in April, as price pressures eased below 3% and the decline accelerated after Kganyago’s unexpected July 31 announcement on the inflation target. It previously aimed for the midpoint of the range.
While Finance Minister Enoch Godongwana has not formally ratified the new anchor, Kganyago said the two men have “found each other” and are aligned on a lower goal, pointing to a joint statement between the National Treasury and the Reserve Bank last month that was “the real driver” of investor optimism of South African assets.
The joint statement said that the finance minister will make an announcement as soon as is practical to anchor expectations. Kganyago would not be drawn on when that might be. Godongwana may offer clarity when he delivers his medium-term budget update on November 12.
The current inflation framework has been unchanged since it was introduced in 2000 and the central bank and Treasury have been working on a review for nearly two years.
South Africa’s monetary policy committee used the new goal to guide its interest-rate decision at its meeting last month, when the six-member panel kept borrowing costs unchanged at 7% even as inflation remained benign.
Annual inflation has hovered near the floor of the central bank’s target band since March and unexpectedly eased to 3.3% in August.
“You should not claim easy victories,” Kganyago said, acknowledging that bond yields have also been driven lower by cooler-than-expected price pressures.
The MPC meets again next month and will announce its decision on November 20. Forward rate agreements — used to speculate on borrowing costs — are almost fully pricing in another quarter percentage point rate cut by the time of the central bank’s January meeting.
Inflation expectations two years ahead, the MPC’s preferred gauge, fell to 4.2% in the third quarter — their lowest level since 2005.