Newly reappointed governor of the South African Reserve Bank (Sarb) Lesetja Kganyago yesterday called on a broader discussion on measures to stimulate growth beyond the fixation on monetary policy.
In a lecture delivered at the University of South Africa, Kganyago defended the bank’s Monetary Policy Committee (MPC), charging that it was not responsible for creating growth.
He said growth could not be created by setting interest rates alone.
“There is a healthy debate about where exactly we need to go with the repo rate. But we see no monetary policy stance that would single-handedly transform South Africa’s prospects,” Kganyago said.
“And as our economic circumstances get more difficult, I worry that more people will choose to avoid making hard choices and pretend they do not need to be made, as if the Sarb could just cut rates enough and all will be well.”
Kganyago further insisted that by maintaining a “credible monetary policy and a short-term interest rate” that compensates investors for risk, the central bank helped to maintain capital flows into South Africa.
The MPC last week cut the benchmark repo rate for the first time since March 2018 in a move to somewhat boost sluggish demand in the economy.
Yesterday, Statistics South Africa (StatsSA) said the country’s annual inflation remained unchanged in June at 4.5 percent, sparking hopes for a new rates relief.
The print marked the seventh consecutive month that year-on-year inflation was at or below the midpoint of the bank’s target band.
John Ashbourne, senior emerging markets economist at Capital Economics, said: “South African inflation remained at the 4.5 percent midpoint of the target range in June, which strengthens our view that policymakers will follow up this month’s 25 basis points rate cut with another one in September.”
Sarb has been at pains to stress that the country’s economic growth bottlenecks were structural in nature and that monetary policy was not the panacea to grow an economy that has not grown above 2 percent since 2013.
Kganyago said that despite the interest rates cut, the economy was expected to grow below 0.8 percent this year.
Fears of further downgrades heightened this week after the National Treasury said it will give embattled power utility Eskom R59 billion over the next two years, on top of the R69bn over three years it pledged in the February budget, as the utility battles to keep its going concern status.
NKC African Economics economist Elize Kruger said the inflation data confirmed that consumer prices were well contained in South Africa.
“Given the moderate inflation outlook and dismal economic growth prospects for 2019, a further 25-basis points cut in the second half of 2019 could be fully justified, but not a firm call, as the Sarb signalled that any further monetary policy loosening will be data dependent,” Kruger said.
Kganyago said the government’s ballooning debt presented a significant challenge to sustainable growth.
“Government’s debt-to-GDP ratio is moving steadily higher, and with bailouts for state-owned enterprises, there are real risks we will soon have one of the highest debt levels among our emerging market peers,” he said.