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

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Governor of SA Reserve Bank, Lesetja Kganyago.

Governor of SA Reserve Bank, Lesetja Kganyago.

Image: Deon Raath/Netwerk24

  • Lesetja Kganyago said the interest rate hike would not dampen SA’s economic recovery.
  • The SA Reserve Bank governor told investors at a SA conference Tomorrow that rate hikes protect the working class.
  • Runaway inflation will damage purchasing power even more, he added.

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

Speaking at the SA conference Tomorrow 2022, where the government is trying to convince local and international investors that SA is on track to create a more conducive environment for thriving businesses, Kganyago said SA can continue to take steps to control inflation without damaging the economy. .

The Reserve Bank has raised interest rates for the fourth time since November 2021, adding 125 basis points to the repo rate in six months. As a result, SA inflation remains milder compared to many other developed countries and emerging economies.

Slowly do it

Kganyago said that while some critics said the central banks acted quickly, the SARB found that the country should shift stimulus in early July last year. In this way, the SARB will be able to control the inflation rate gradually, without putting a rough brake on the economy as other central banks are doing now.

In the U.S., the Fed announced a 75 basis point hike last week, the largest interest rate hike since 1994. The European Central Bank also marked a 25 basis point hike at its July monetary policy meeting, the EU’s first hike in three years. Kganyago said the SARB on the other hand had “taken a foot off the accelerator”.

But he said the bank would not be satisfied. It is watching the extent to which harsh rises in these major economies will drive local prices. It will also be forced to act if the rand goes down because if coupled with an increase in the price of imports, SA may also face unsustainable inflation.

“When the global economy reopens and we see inflation rising, it is important that central banks not become complacent but live up to the problem of inflation,” Kganyago said.

He said that the bank did this, especially for the working class because these people were the ones who suffered the most when their incomes were declining due to rising inflation.

BACA | SA’s biggest monetary error can still be fixed, Kganyago said

The Reserve Bank’s inflation-targeting approach has drawn lifelong critics from the organized workforce, particularly Cosatu, who feel the “one-dimensional and narrow pursuit” to control inflation does not support economic growth and create jobs.

On the other hand, the market expects banks to adopt a more hawkish stance. Standard Bank expects another 75 basis point interest rate hike this year, bringing this year’s total to 175 basis points. Many other economists expect the SA repo rate to rise from the current 4.75% to 6% or 6.5%.

The SARB’s Quarterly Projection Model (QPM) only predicts a 25 basis point increase in interest rates for 2022. But the Reserve Bank has deviated from that, projecting a 100 basis point increase in the first five months of the year. So, some economists have watched the reaction, while others feel that the SARB has no choice but to increase its hike while the US and UK raise rates.

Kganyago said the QPM was just one of the inputs used by the Monetary Policy Committee in policy deliberations. At each meeting, he evaluates the situation as it unfolds.

“The fact that we started acting in early July last year means we can take steps with inflation without having to speed up the existing recovery,” Kganyago said.

He said the SARB did not want to wait until inflation was unavoidable to take corrective action. He promised that the SARB policy measures would not be costly for the economy.

The governor said SA’s economic growth was hampered by “significant policy mistakes”, not monetary policy.

He said the government failed to act quickly on the obvious obstacles. For example, when the economy starts to open up after a lock, reducing the burden reduces the growth potential.

“As of now, we are experiencing a boom in this commodity, but we are not able to bring this large commodity to market at the speed that we need to do in order to benefit from that price,” Kganyago said.

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