An expected rate hike by South Africa’s central bank on Thursday would be a trade off between short-term growth for longer-term macroeconomic stability, Fitch rating agency said.
Veronica Kalema, associate director for sovereigns at Fitch, told a seminar that initially she had concerns over the central bank’s policy of raising interest rates sharply this year.
The bank has twice raised its key repo rate by 100 basis points this year in a bid to stem the inflationary impact of the rand’s 37% slide in 2001 and a third is seen as almost inevitable when the bank’s monetary policy meeting ends today.
This is because at 8,8%, its targeted inflation measure is well outside its three to six percent range.
”Since the inflation target is new, I think the government feels that it has to be really established and that this probably outweighs the impact on growth,” Kalema said.
”(Otherwise) I think that we could end up in an inflation-wage spiral in the medium term,” she said.
Kalema, one of the analysts who rates South Africa, said she believed that although inflation was rising now it would remain in single digits and fall in the medium term.
But she said one of the main constraints on South Africa’s credit rating was relatively slow growth in gross domestic product. It was 2,2% in 2001.
”Although it’s picking up it’s still below the triple BBB mean,” she said. Fitch’s foreign currency rating for South Africa is BBB-.
Other structural problems for South Africa’s credit rating were income disparities, a skills shortage, high unemployment and sensitivity to external shocks, she said.
Fitch is due to reassess its South Africa rating within three months. – Reuters