South African Reserve Bank governor Lesetja Kganyago has doubled down on the widely criticised decision by the Bank to base future rate decisions on a lower inflation anchor, saying South Africa’s price stability has remained intact despite inflation shocks.
Last week, at the announcement of a 25 basis-point cut to the repo rate, Kganyago told journalists that the monetary policy committee (MPC) would base future decisions on the lower inflation target band of 3%. This led to an outcry that the Bank was overstepping its powers and setting monetary policy.
It also invoked a public spat with finance minister Enoch Godongwana, who issued a statement the next day emphasising that he, the cabinet and President Cyril Ramaphosa were responsible for setting monetary policy.
Speaking at the 105th annual ordinary general meeting of the Bank's shareholders on Friday, Kganyago defended the stance.
“The only reason it was [taken] was because inflation is already at 3%. Economists complicate these things. They call it opportunistic disinflation. But the bottom line is that it is there. The target range is still 3%-6%, and all that we said is we will aim closer to the lower end of the inflation targeting range. Nothing more, nothing less.”
He said South Africa had managed global inflationary pressures well because of the MPC’s approach to inflation.
“We have had space to ease rates because inflation has been well contained, with prices up 3% over the past 12 months. There have been notable risks to prices this year, such as the spike in oil prices after the bombing of Iran in June and the sharp depreciation of the rand back in April. But these risks have been resolved rapidly, and inflation has remained moderate.”
In a statement last week, Godongwana said: “Policymaking responsibility in this area resides with the minister of finance — working with the president and cabinet — who sets the inflation target in consultation with the South African Reserve Bank.”
Delivering the closing remarks to the ANC national executive committee (NEC) meeting on Monday, Ramaphosa chastised the bank for overstepping its boundaries.
“We began a discussion on the issue of monetary policy, and specifically the role and value of inflation targeting. Everyone understands that it is the minister of finance, together with cabinet, who sets the inflation target in consultation with the Reserve Bank. The Reserve Bank then operates independently in pursuit of the inflation target that would have been agreed upon,” he told NEC members.
We are a long way from having the strongest reserve position among emerging markets, but we are no longer the laggard we once were. The South African economy no doubt has its vulnerabilities, but it also has strengths, and I am proud to say the SA Reserve Bank is one of those strengths
— Lesetja Kganyago, Reserve Bank governor
A technical committee tasked with investigating the economic effect of lowering the target has concluded its work, but its findings are yet to be made public. Godongwana poured cold water on speculation that he would make this announcement when he delivers the medium-term budget policy statement later this year.
On Friday Kganyago outlined what he called the benefits of the central bank’s inflation target, saying tighter policy would aid price stability in the long term.
He said that to the extent that inflation settles at 3% — and expectations continue to move lower — the bank’s forecasting model showed the possibility of lower interest rates if inflation remained contained at current levels.
“Given that this is the year of uncertainty, I do not want that projection to be mistaken for a promise,” he said. “Events may not unfold exactly in line with our forecasts.
“We are a long way from having the strongest reserve position among emerging markets, but we are no longer the laggard we once were. The South African economy no doubt has its vulnerabilities, but it also has strengths, and I am proud to say the SA Reserve Bank is one of those strengths.”
He said the Bank had started a new strategy cycle, streamlining to three strategic focus areas — price stability, financial stability and payments.
Prof Raymond Parsons of North-West University Business School said finality was needed on the likelihood of a lower inflation target of 3%, in which case the Bank has indicated it will need to keep borrowing costs higher for longer.
“The dialogue with the National Treasury still appears ongoing. It is also not yet clear whether the necessary political support and ‘buy-in’ have been secured for the inflation target change,” Parsons said.
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