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South Africa’s cenbank governor says shocks to inflation, growth causing uncertainty

RECENT shocks to growth and inflation had created a great deal of uncertainty, the central bank governor said on Wednesday, adding that he could not predict the outcome of a rating review due on Friday.

The economy of Africa’s most industrialised country has been hit by a ravaging drought, and its economic prospects do not look promising, Governor Lesetja Kganyago said at a conference, days before Standard and Poor’s releases its decision on Friday.

S&P’s has already warned that dismal growth and policy upheavals are a concern for the ratings agency, while analysts fear the economy could be downgraded to “junk” as major sectors of the economy slipped into sharp decline.

A severe drought has helped trigger higher inflation while battering consumer and business confidence, which hovers around quarter-century lows, forcing the central bank to raise interest rates despite the lack of growth.

“The South African Reserve Bank is certain that an environment of consistently low and stable inflation is the best contribution it can make to a balanced and sustainable growth (outlook),” Kganyago said at an agricultural business meeting in Somerset West, near Cape Town.

Recent shocks to growth and inflation had created “a great deal of uncertainty”, he said, adding that “in this context, at least, you can be certain that the South African Reserve Bank is committed to containing inflation.”

Kganyago said the current monetary policy tightening cycle was one of the most gradual on record.

The South African Reserve Bank has gradually raised interest rates by a cumulative 200 basis points since January 2014 to fight price pressures while at the same time protecting the ailing economy it expects to grow by 0,6% this year.

The bank left the benchmark repo rate unchanged at 7% this month. Inflation stood at 6,2% in April.

Inflation is expected to persist above the top end of a 3-6% target band until late next year, Kganyago said.

South Africa holds local government elections in August, in what analysts say will be a tough test for the ruling African National Congress party blamed for weak growth and unemployment, which rose to its highest ever in the first quarter.

The country was on track to consolidate its budget and maintain its monetary policy framework, but the governor said it was not clear whether this would be enough to avoid a credit rating downgrade from S&P.

“We told them the South African credit story. We basically told them the South African credit metrics had improved since the last time they had issued their statement,” he told Reuters when asked about his discussions with S&P ahead of the review.-Reuters

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