South African central bank deputy governor Fundi Tshazibana said on Friday there was a good case for domestic interest rates staying “higher for longer” as financial conditions had tightened and the government's borrowing needs had risen.
Inflation is close to the upper end of the South African Reserve Bank's preferred target range of between 3% and 6% — it rose to 5.9% in October, the latest month for which data is available. In November at its final monetary policy meeting of 2023, the central bank kept its main lending rate unchanged at 8.25%, its third pause in a row following 10 consecutive hikes starting in November 2021.
“There still seems to be a good case for keeping rates higher for longer domestically,” Tshazibana told a Bank of America conference in Johannesburg. Tshazibana said that was because the government needed to borrow more at a time when global interest rates were higher and the country was seen as riskier.
The Treasury outlined increased borrowing plans in its midterm budget statement in November, citing higher-than-budgeted-for public wage increases and rising pressure to bail out struggling state-owned entities among the reasons.
Tshazibana made clear on Friday that higher rates were not the central bank's preference given economic stresses, calling them a second-best outcome.
“The underlying drivers of interest rates are going up. To maintain the value of the currency — that is, to stabilise inflation — actual rates must rise too,” she said.
For lower rates, the deputy governor said there needed to be different macroeconomic settings. She cited reforms to bring down the country's risk premium and a lower inflation target among potential ways to achieve that.
“Higher for longer is not inevitable. We have to control inflation, but if we have different macro arrangements, that could be done more cheaply,” she said.
However, in its financial stability review, the central bank said at the start of the hiking cycle banks benefit, but as rates remain elevated for an extended period, consumers feel the pinch and there is an increase in non-performing loans, which hurts the bank’s balance sheets.
“As rates increase, the financial stress on bank customers also increases, which could lead to increased non-performing loans. The credit quality of the banking sector’s balance sheets has started to deteriorate, with non-performing loans accumulating across both corporate and retail portfolios,” the review said.
The review, which measures the health of the financial sector, said this risk was elevated for loans originated during periods of lower interest rates, and that a higher-for-longer interest rate environment was likely to dampen economic growth and employment levels and reduce the opportunity to extend credit prudently.
Prof Raymond Parsons of the North West University Business School said the Bank was cautioning that higher-for-longer interest rates could create new risks when banks’ longer-term liabilities begin to reprice and the credit quality of the banking sector’s balance sheets begins to deteriorate.
Higher for longer is not inevitable. We have to control inflation, but if we have different macro arrangements, that could be done more cheaply
“With interest rates in South Africa at their highest in 14 years these additional risks are now becoming relevant considerations for the Bank.
“These concerns help to explain why the Bank has frequently argued there are limits to what monetary policy can do to reduce inflation, failing implementation of other key cost-reducing measures lying outside its mandate — and partly why the MPC [monetary policy committee] has kept interest rates unchanged since May.”
Bank governor Lesetja Kganyago said the risks to South Africa’s financial stability included unreliable electricity supply, continued capital outflows, tight financial conditions, debt, and the country remaining on the Financial Action Task Force greylist for longer than expected.
“Systemic risk has remained elevated since the release of the May 2023 financial stability review, albeit some of the underlying contributing factors have changed. Similar to other emerging markets, rising fiscal risk has been flagged as a financial stability concern in South Africa, given government’s increasing debt levels and associated higher debt service costs,” he said.
