South African Reserve Bank (SARB) Governor Lesetja Kganyago has outlined the challenge facing the central bank in fighting inflation with a “very constrained policy toolkit” on the back of rising prices globally, a weaker rand and slow domestic economic growth.
Kganyago was delivering a lecture on “Challenges facing the global economy: a South African perspective” at the University of Johannesburg.
This comes as SARB is expected to raise its benchmark lending rate by another 25 basis points this month, in a bid to tame persistently elevated consumer inflation.
SARB’s hiking cycle has had a crippling effect on the purchasing power of South African households, with more disposable income going to servicing the rising cost of borrowing.
Kganyago yesterday said SARB’s Monetary Policy Committee had had to act decisively to prevent inflation expectations from de-anchoring more permanently, with headline inflation remaining above the targeted midpoint of 3% to 6% for an extended period.
Over the past 18 months, the repo rate had been raised by a cumulative 425 basis points, and now sits at 7.75% per annum, with the prime lending rate at 11.25% per annum.
Kganyago said central banks were not capacitated to influence the long-run growth trajectory of the economy, as the decisions needed require governments to make policy trade-offs that entail winners and losers.
“Fighting inflation is much harder when the economy is already under-performing, as tighter financial conditions have the effect of cooling economic activity more broadly,” Kganyago said.
“Yet, if allowed to persist, high inflation will either fatally undermine the economy’s growth potential or raise the nearer-term costs of eventually bringing inflation back to target.
“As we have often said, the prevailing conditions more than ever before have brought the monetary policy conundrum to the fore,” he lamented.
Bank of America’s sub-Saharan Africa economist Tatonga Rusike said a hike by SARB could potentially conclude the hiking cycle with a terminal rate of 8% – that is 450 basis points (bp) worth of hikes since November, 2021.
Rusike said this would be just shy of the last aggressive hiking cycle in 2006/2008, with 500bp of hikes to deal with double-digit inflation.
“Over the medium term, monetary policy does not need to be restrictive as there is no demand-side problem to fix,” Rusike said.
“To stop the rates’ hiking, SARB needs to see inflation on a sustainable downwards trajectory, which we believe is more likely in the second half of 2023.”
Domestic headline inflation remains above 7% and is projected to remain elevated, returning to the target range in the third quarter of this year and averaging 6.0% for the year.
Meanwhile, Kganyago said SARB had to deal with the task of maintaining price stability to protect the value of the rand in the interests of balanced and sustainable growth.
The rand has been one of the worst-performing emerging market currencies this year and over the past 12 months, due to “idiosyncratic factors” such as persistent load shedding and the recent greylisting of the country by the Financial Action Task Force.
“The challenging part now is that we must do this in a context where many of the drivers of both inflation and growth are outside of our control,” Kganyago said.
“Central banks have a very constrained policy toolkit to steer growth and can only effectively smooth business-cycle fluctuations,” he said.
In spite of these challenges, Kganyago said they were constantly monitoring price developments and standing ready to act as necessary to fulfil the bank’s mandate.