Discussion Document 15

South Africa’s sovereign yield curve is one of the steepest among large emerging markets. Our estimates suggest that this can be explained by an increase in the term premium embedded in long rates. We argue that a higher term premium reflects a deterioration in market perceptions of South African credit risk and South Africa’s relatively high macroeconomic volatility. A higher term premium implies that interest rates in South Africa have been less reactive to domestic monetary policy than they might have been if South Africa had a stronger fiscal position, a lower inflation target or lower macroeconomic volatility overall.