3. UK Economic Policy Uncertainty Shock and the South African Economy: Inferences from the Exchange Rate, Exports and Inflation Channels

This chapter assesses whether the South African price stability mandate is impacted by UK economic policy uncertainty shock and whether the shock effects differ when inflation is above and below six percent threshold. Inflation rises whether inflation is below or above six percent but the peak inflation increases are large when inflation is above the six percent threshold. The effects are even larger when UK policy uncertainty persists compared to when it is transitory. Evidence shows that the enforcement of the price stability mandate benefits much from a reduction in UK economic policy uncertainty, which lowers South African consumer price inflation. UK economic policy uncertainty shock has positive spillover to South African, US and European economic policy uncertainties. Furthermore, as long the UK policy uncertainty shock induces an unexpected trade decline in South Africa, the negative trade shock will induce heightened domestic economic policy uncertainty, exchange rate deprecation and these exert inflationary pressures. The South African economic policy uncertainty amplifies the responses of domestic inflation and the exchange rate to UK economic policy uncertainty shocks and this is a risk to price stability.