PRETORIA – South Africa will keep paying a high rate of interest on the loans it needs to plug a widening budget deficit until its fiscal problems are addressed, the reserve bank said on Tuesday.
The South African Reserve Bank (SARB) has resisted political pressure to implement a drastic lowering of the repurchase, or repo rate, to boost growth that is expected to remain at 0.6% this year, pointing to fiscal rather than monetary policy as the root of the problem.
In its biannual Monetary Policy Review publication after holding lending rates steady at 6.5% on Sept. 19, the bank hinted that it might be willing to lower rates to support growth but the impact would not last.
The bank said its analysis showed the gap between short-term and long-term bonds was widening and that this reflected investor demand for a higher risk premium. The bank described South Africa’s yield curve as “unusually high”.
“Much of the steepening over the past year has come from lower short-term rates, reflecting lower inflation and weaker growth. Meanwhile, the longer end of the curve has stayed high due to fiscal risks,” the reserve bank said.
“Investors expect the repurchase rate to stay somewhat lower in the future, but they also now require more compensation for locking money down in long-term loans,” the bank said.
South Africa’s debt to GDP ratio is fast approaching the 60% seen as a red line by rating agencies, while interest payments on outstanding debt regularly outpace key spendings such as infrastructure and health.