Interest rates: Reserve Bank acted early enough to keep inflation in check, says Kganyago

June 23, 2022

The rising interest rates in SA will not choke economic recovery in the country because the central bank acted early enough to keep inflation in check, says South African Reserve Bank (SARB) Governor Lesetja Kganyago.

Speaking at the SA Tomorrow 2022 conference, where government was trying to convince local and international investors that SA is on a path to creating a more conducive environment for businesses to grow, Kganyago said SA could continue to take steps to control inflation without hurting the economy.

The Reserve Bank has already raised interest rates four times since November 2021, adding 125 basis points to the repo rate over a six-month period. As a result, SA's inflation has remained more benign compared to many developed and other emerging economies.

Slowly does it  

Kganyago said while some critics say central banks are acting hastily, the SARB's view was that the country needed to switch the taps off its stimulus as early as July last year. This way, the SARB would be able to control the inflation rate gradually, without slamming harsh brakes on the economy as other central banks are doing now.

In the US, the Fed announced a 75 basis points increase last week, the biggest interest rate hike since 1994. The European Central Bank has also signalled a 25 basis points hike at its July monetary policy meeting, the first increase for the European Union in three years. Kganyago said the SARB on the other hand has "taken the foot off the accelerator".

But he said the bank won't be complacent. It is watching the extent to which harsh hikes in these major economies will drive prices locally. It will also be forced to act if the rand depreciates further because if accompanied by rising import prices, SA could also face runaway inflation.

"As the global economy reopens and we see inflation rising, it's important that central banks do not become complacent but become alive to the issue of inflation," said Kganyago.

He said the bank was doing this, particularly for the working class because those are the people who suffer the most when their incomes are eroded by the rising inflation.

The Reserve Bank's inflation-targeting approach has earned it lifetime critics from organised labour, particularly Cosatu, who feel that its "one-dimensional and narrow pursuit" of keeping inflation under control doesn't support economic growth and job creation.  

On the other hand, the market is expecting the bank to adopt a more hawkish stance. Standard Bank expects another 75 basis-point interest rate hike this year, taking the total for the year to 175 basis points. Many other economists expect SA's repo rate to rise from the current 4.75% to around 6% or 6.5%.

SARB's Quarterly Projection Model (QPM) only forecast three 25 basis points interest hikes for 2022. But the Reserve Bank has already deviated from that, implementing a 100 basis points hike within the first five months of the year. So, some economists have been watching that reaction while others feel that the SARB will have no other choice but to institute more increases when the US and the UK hike their rates.

Kganyago said the QPM was only one of the inputs the Monetary Policy Committee uses in its policy deliberations. In every meeting, it assesses the situation as it unfolds.

"The fact that we started acting as early as July last year meant that we are able to take steps with inflation without necessarily choking off the nascent recovery that we have," said Kganyago.

He said the SARB didn't want to wait until inflation was out of hand to take corrective action. He promised that the SARB's policy measures won't be costly to the economy.

The governor said SA's economic growth is hampered by other "significant policy mistakes", not monetary policy.

He said the government has failed to act with urgency on obvious constraints. For instance, when the economy started opening up after the lockdown, load shedding dampened that potential growth.

"As it stands now, we are experiencing this commodities boom, but we can't take that bulk commodities to the market with the speed at which we are supposed to in order to take advantage of the pricing," said Kganyago.-fin24

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Last modified on Thursday, 23 June 2022 16:26