A note on the (continued) ability of the yield curve to forecast economic downturns in South Africa

Ferdinand Botha, Gavin Keeton

Economic Research Southern Africa | Published : 2014


In 2002/03 the yield spread falsely signalled a downswing that never materialised. This paper provides two reasons for this false signal. Firstly, while the Reserve Bank never actually officially declared the start of a downswing, by other important measures a downswing did actually occur. It is to this slowing in economic activity at that time that the yield curve pointed. Secondly, short-term interest rates in 2003 were higher than they should have been because of a mistake made in measuring consumer price inflation. Because South Africa had recently introduced an inflation targeting regime, policy interest rates were as a result of this error kept too high for too long. This policy mistak..

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