SA Reserve Bank governor Lesetja Kganyago has warned that it is not the time for policymakers to loosen their grip on inflation.
Kganyago, who was speaking at the Wits School of Governance on Tuesday morning, said consumption based on rising debt levels cannot be a sustainable growth and development strategy.
“Having faced the unique threat of the Covid-19 crisis, we confronted that challenge with relatively low stable inflation. We were able to soften the damage of the crisis with the policy rate while still protecting the value of the rand, and in so doing, were able to play our part in maintaining macro-economic stability,” said Kganyago.
“Now that the global economy is recovering and inflation in many countries, including our own, is rising, we have learned from experience that we must not be tempted to loosen our grip on inflation, or to fall behind our peers as rates are normalised – the consequences would be too costly.”
The central bank has been increasing interest rates aggressively since the beginning of the year, responding to a surge in the price of goods and services. At its meeting recently, the central bank raised its benchmark repo rate by 75 basis points to 6.25%.
It was the sixth consecutive hike since policy normalisation started in November 2021 to anchor inflation expectations more firmly around the mid-point of the target band and achieve the inflation target in 2024.
South Africa’s annual inflation rate eased to 7.6% in August from an over 13-year high of 7.8% in July.
Kganyago also said employment and growth are both limited by factors beyond the reach of the central bank’s toolset.
He said: “The best chance we have with monetary policy to get faster, more job-rich growth is to maintain our focus on price stability with flexible inflation targeting, a proven framework.
“This enables the South African Reserve Bank to help maintain a stable environment that is conducive to economic growth, and because credibility is high, for it to create the necessary flexibility to ignore short-term inflation shock.”
The central bank has had to fend off numerous challenges to its independence, mainly from suspended public protector Busisiwe Mkhwebane, who called for a change in the bank’s mandate from price stability to one of “ensuring that the socio-economic wellbeing of the citizens is protected”.
At its policy conference in July, the ANC doubled down on a proposal that the central bank’s mandate be changed, while the ruling party also wants the nationalisation of the Reserve Bank to be accelerated.
The ANC also wants the central bank’s mandate to expand beyond inflation targeting to include tackling unemployment.
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