Johannesburg - Monetary policy cannot eliminate structural constraints to growth, but can keep inflation in check, says South African Reserve Bank deputy governor Daniel Mminele.
In a speech given at the University of KwaZulu-Natal’s Business Management Conference, posted on the bank’s website, he said there were still too many environmental risks that could push inflation higher and, as a consequence, it’s too early to call an end to the rate hike cycle.
Mminele said SA’s economic growth had been deteriorating since 2011, registering a mere 1.3 per cent in 2015 following a similarly disappointing growth rate of 1.6 per cent in 2014.
“This is a far cry from the growth rates of almost 6 per cent that we celebrated prior to the global financial crisis.
“A number of domestic and external factors have been responsible, including electricity supply constraints and one of the most severe droughts to affect the agricultural sector, the slowdown in China and lower commodity prices (adversely affecting mining and manufacturing production), as well as weak demand in both advanced and emerging market countries, including those in sub-Saharan Africa.”
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Mminele adds the economy is not expected to grow at all this year, and only reach 1.1 percent next year and 1.5 percent in 2018. By contrast, he says, the bank’s forecasts show inflation remaining above the target range in 2016, averaging 6.6 percent this year before declining to 6 percent next year and 5.5 percent in 2018.
The deputy governor said there had been questions as to why the bank isn’t doing more to boost growth, and had been asked what its long-term monetary policy is to support growth.
Slow increase
Mminele noted the bank has, since January 2014, been increased the interest rate by 2 percentage points, to the point where the repo rate is 7 percent and prime is 10.5 percent.
“While it may seem counterintuitive to increase interest rates when growth is weakening, the bank has been facing a policy dilemma in the face of this weaker growth being accompanied by rising inflation risks over this period, mainly in the form of rising food prices and currency depreciation.”
Mminele notes monetary policy cannot influence growth outcomes in the long run – and there is broad consensus that South Africa needs structural reforms to increase output. He adds, however, that the monetary policy committee has been cautious in hiking rates.
“As a small open economy, South Africa is highly exposed to exogenous shocks that can affect inflation,” often pushing it up, Mminele says.
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Mminele adds that, although the bank has lowered its inflation targets recently, inflation is still anticipated to remain above the target range until the middle of 2017, peaking in the fourth quarter of this year at 7.1 percent. Although the committee has said recent developments - the stronger rand and cheaper oil - give it room to pause, monetary policy is not tight.
Mminele notes SA’s real interest rate is not high when compared to other emerging markets, household credit growth is weak, but this is linked to a high level of debt, and corporate credit extension has accelerated.”
“Such indications add to other evidence that interest rate hikes have not been the primary constraint to growth outcomes over the period. Unusually severe shocks – including the strikes in 2014, electricity shortages in 2015, and the drought in the past two years – have hit the domestic economy.”
Mminele adds SA’s cyclical recovery has been hampered by disappointingly low global trade and world economic growth. In addition, domestic growth is also weak for structural reasons.
Because of the risks in the environment, it is not possible to say the rate hike cycle is over - despite an improvement to the inflation rate, says Mminele.
As a result, he says, the bank remains focused on containing medium-term inflation. “The best contribution that central banking can make to growth outcomes is to play a facilitative role aimed at implementing policies that provide a stable macroeconomic and financial markets environment.”
IOL