South Africa’s central bank has kept its main interest rate at a historic low of 3.5 per cent, breaking with emerging-market peers that have increased rates following this year’s surge in US Treasury yields.

The South African Reserve Bank said on Thursday it would maintain its benchmark repo rate for now, in contrast to the central banks of Russia, Turkey and Brazil that increased rates last week. Emerging markets are competing for investor interest with rising US Treasury yields.

South Africa’s central bank is struggling in the aftermath of the biggest ever downturn in the country’s economy, which contracted 7 per cent in the global pandemic last year. A planned vaccine rollout is off to a slow start and frequent rolling power blackouts have returned to hobble activity.

Growth this year is expected to be about 3.8 per cent and “getting back to pre-pandemic output will take time”, the Reserve Bank said, explaining its reasons for keeping rates on hold. Inflation is also expected to stay at the low end of a 3 to 6 per cent target in 2021, it added.

The risk for emerging markets is that, as rising interest rates feed into rising borrowing costs for governments, thet will exacerbate fiscal problems. After heavy public spending during the pandemic, Brazil’s government debts were equal to 102 per cent of GDP at the end of last year, up from 89 per cent a year earlier, according to the Institute of International Finance. South Africa’s rose from 64 per cent of GDP to 82 per cent during the year, raising fears of fiscal instability.

South Africa spent 18.6 per cent of public revenues on servicing its debt last year, up from 14.2 per cent in 2019 according to recent estimates by Fitch Ratings. That compares with an emerging markets average of 9.9 per cent, up from 8 per cent.

Investors have sold off US Treasuries in greater numbers this year as they bet that vaccinations and President Joe Biden’s stimulus plan will boost the economy and inflation — eroding the value of long-term bond income. The benchmark 10-year US yield has risen almost a percentage point this year to as high as 1.73 per cent, offering investors an attractive alternative to riskier emerging-market debt.

Brazil, Turkey and Russia all tightened monetary policy last week by more than analysts had expected. An increase of two percentage points by Turkey’s central bank was double the market forecast — and President Recep Tayyip Erdogan, who favours low rates, promptly removed the bank’s governor. Inflationary pressures have also been rising in the three countries that raised rates, although mostly in food and fuel prices that tend to fluctuate more than core inflation.

Lesetja Kganyago, the South African Reserve Bank’s governor, played down concern about the impact of higher US yields on South Africa’s economy, and said South African bond yields were rising in tandem with Treasury yields.

Most analysts surveyed by Bloomberg expect no move at all from the South African Reserve Bank this year, with fewer than a quarter of them predicting a rise of a quarter of a percentage point at the central bank’s meeting in November.

But Charles Robertson, chief economist at Renaissance Capital, expects the bank to be forced into action more quickly by the surge in US bond yields. “Unless there is some big surprise in the US, South Africa is going to have to participate in the rate hiking cycle this year,” he said.