central bank governor@ (Adds details)
LONDON, Sept 28 (Reuters) - South Africa must sort out its political problems in order to kickstart structural reform and unlock economic growth, central bank governor Lesetja Kganyago told Reuters on Thursday.
Speaking on the sidelines of a conference organized in London by the Bank of England, Kganyago also said financial market inflation expectations seemed to be out of kilter with reality.
He added that he was happy with the South African Reserve Bank's independence following a flurry of criticism earlier this year.
South Africa has fallen into recession in a year that has also seen corruption rows, infighting between potential successors to scandal-plagued President Jacob Zuma and the row over central bank independence.
Kganyago said that politics remained the key to economic improvement, especially as noise intensifies in the run-up to the ruling African National Congress (ANC) party's leadership contest in December.
The ANC is riven by fighting between factions backing Deputy President Cyril Ramaphosa and former African Union head Nkosazana Dlamini-Zuma as leadership candidates.
"Politics is at the heart...you can't do structural reforms unless there is political certainty," Kganyago said, adding this had impacted on consumer and business confidence, the latter being at its lowest since 2014.
"There needs to not only be clear communication of what policy is going to be, but also implementation that demonstrates where policy is going, that will take the uncertainty away."
South Africa is also struggling with high unemployment, weak infrastructure and inefficient state-run firms. Its credit rating was cut to junk earlier this year by two of the top three ratings agencies.
And while the world economy is steadily recovering, South African growth remains anemic - the central bank predicts the economy to expand just 0.6 percent this year
In contrast, the global economy could grow 3.5 percent in 2017, the International Monetary Fund forecast.
"We need to raise that potential growth rate through structural reforms, which unfortunately are not in control of the central bank," said Kganyago, noting that potential growth was now seen at 1.5 percent compared to 4 percent a few years ago.
"If you implement structural reforms I can guarantee growth will take off. We all know what the reforms are...they just need to be implemented."
Investors in South Africa were spooked earlier this year by a proposal to switch the central bank's mandate to pro-growth from inflation and currency stability. The central bank is widely respected for its independence and institutional integrity.
The proposal, made by the head of the country's anti-graft watchdog in June, was quashed by a court but credit agencies warned that pressure on the central bank was a key risk for the country's sovereign rating.
Central bank independence was enshrined in the constitution and debates on the subject were normal in a democracy, Kganyago said, but added:
"Unfortunately in South Africa these debates are based on rhetoric, and not just rhetoric but on populist slogans which are not useful for the discussion."
"We are happy with the safeguards, they are holding up. It's been tested in court and it stood in court. Should there be another attack coming we will not hesitate to approach the courts and say 'this can't be'."
Speaking on the outlook for interest rates after the central bank last week kept its main rate unchanged at 6.75 percent, Kganyago said he was concerned about how little market expectations had adapted to falling inflation.
"The most recent inflation reading is 4.6 percent ... but inflation expectations seem anchored just under the 6 percent level and businesses expect it to be above 6 percent," he said.
The bank had been expected to deliver a cut based on easing inflation pressures, after reducing interest rates for the first in five years in July.
"I don't know why the market was running ahead of itself thinking we would move at this meeting," he said (Reporting by Sujata Rao and Karin Strohecker Editing by Jeremy Gaunt)