South Africa questions need for central bank to fight inflation

Like many emerging markets, South Africa is struggling to find an equilibrium between taming inflation and bolstering growth. After the latest inflation numbers came in at 6.3%, higher than the central bank’s target range, pundits have started to question the appropriateness of the Reserve Bank’s price stability mandate with some calling for a constitutional amendment to scrap said mandate.

The ruling African National Congress Party’s base has voiced concern over central bank policy. Labor unions have previously criticized the price stability mandate as ignoring the effect that higher interest rates have on unemployment.

However, Enoch Godongwana, a member of the ANC’s National Executive Committee, stated that no such amendments are being considered, “precisely because the Minister of Finance Pravin Gordhan and the Reserve Bank have dealt with that issue to the satisfaction of everyone else.”

While inflation does remain high, the numbers were actually lower than the expectation of 6.7%.

Alastair Sellick, who runs the fixed interest department at PSG Asset Management, posits that the Reserve Bank may have more flexibility than it would seem: “If anything, it gives it more ammunition to cut rates in the future.”

Traders looking for exposure to the South African Rand can look to the WisdomTree Dreyfus South African Rand fund (SZR, quote). 

For the South African economy as a whole, investors can use the iShares MSCI South Africa Index (EZA, quote).

Although SZR has performed well this year, it is down on the day.