Less than two months before ANC delegates meet to elect new leaders, Reserve Bank governor Lesetja Kganyago has rejected calls — including from a section of the ANC — for the bank to expand its mandate to include job creation and growth.
“Employment and growth are both limited by factors that are beyond the reach of the central bank’s tool set. 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,” Kganyago said at a public lecture at the University of the Witwatersrand on Tuesday.
While ANC delegates at its July policy conference had initially wanted the party to revisit the debate on the mandate and ownership of the central bank, they settled on a compromise in their final resolutions.
SA’s official unemployment rate fell to 33.9% in the second quarter from 34.5% in the first quarter, however youth unemployment rate (those aged 15–24 and actively searching for work) remained stubbornly high at 61.4%.
On broadening its mandate beyond inflation targeting, ANC delegates conceded that the Bank’s current mandate of “protecting the value of the currency in the interests of balanced and sustainable growth” was constitutionally enshrined and would not be easy to amend.
On the issue of nationalisation of the Bank, a resolution dating back to the 2017 conference, delegates noted that this would have to be done in a manner and at a pace that takes into account the likely cost implications to the fiscus.
Asked at a lunch with editors if he was worried by this renewed political focus on the bank, Kganyago said these were policy issues beyond the bank’s purview.
The head of the ANC’s economic transformation committee, Mmamoloko Kubayi, told Business Times they had thought Kganyago would engage with them first before making his view public on matters that will be raised at the Nasrec conference in December.
“I’m disappointed that he’s decided to go public without engaging. Should he have concerns in any form he must raise them with us. Speaking in public will not help,” she said.
Meanwhile, another interest rate hike could be on the agenda when the monetary policy committee (MPC) meets in two weeks. The Bank has been on a hiking cycle since November and on Tuesday Kganyago said it had not reached the end of its policy rate space as inflation continues to rise.
“If a snake enters your house you don’t ask the snake are you from the demand side of the forest or are you from the supply side of the forest? You have got to manage the fact that the snake is now here, and that is what we face,” he said.
South Africans are paying more in credit card repayments, vehicle finance and home and personal loans since the Bank began the hiking cycle in November last year. The repo rate was raised to 6.25% when inflation moderated slightly to 7.6% in August from a more than 13-year high of 7.8% in July.
South Africa is not the only country increasing rates to bring down inflation. The US Federal Reserve on Wednesday delivered the fourth straight 75 basis point rate hike, and the Bank of England on Thursday hiked interest rates by 75 basis points to 3%, marking the highest increase since 1989.
I’m disappointed that he’s decided to go public without engaging. Should he have concerns in any form he must raise them with us. Speaking in public will not help
— Head of the ANC’s economic transformation committee, Mmamoloko Kubayi
Kganyago said South Africa had trailed behind the Brazilians, who began raising rates in March last year. He said other Latin American countries were smiling because they also started their hiking cycle earlier.
“You cannot wait to see the whites of inflation’s eyes before you act. By that time it will be too late. Many central banks you can see are playing catch-up.”
He said the central bank had heard the cries of consumers complaining about the rising cost of living.
“We hear your cries when you say inflation is eroding your incomes, whether it is in the form of a salary or the R350 that you are getting from the government, or some other grant. Erosion of that income by inflation is what the central bank should deal with. We hear those cries, but in dealing with those cries there is going to be short-term pain. That short-term pain, unfortunately, comes in the form of interest rates.”
It will not be easy because there are no easy answers to curbing inflation, Kganyago added.
“We do not derive joy from people losing their houses and cars, but we understand that we have to do this thing. It will be painful, but we have got to deal with a medium-term problem called inflation that is eroding the income of South Africans. If we don’t, we might end up in a different era,” he said.
Zwelinzima Vavi, general secretary of the SA Federation of Trade Unions (Saftu), hit back at Kganyago’s assertion that raising interest rates was a cure for high inflation.
“To stop inflation using policy rates comes at a high social and economic cost. In addition to increasing the cost of living for the working-class majority, it is leading to defaults, bankruptcy, low wages, retrenchments and — contrary to Kganyago’s intention — even inflation in the intermediate period,” he said.
Daniel Meyer, a professor at the University of Johannesburg’s College of Business and Economics, disagreed with the Bank’s view that interest rate hikes are the best tool to curb inflation.
He said inflation was high due to cost-push factors such as oil and energy costs, not overspending.
“The increases in interest rates will not lead to lower inflation or lower fuel prices; what it is doing is killing the economy and jobs. Also, it contributes to lower levels of investment,” Meyer said.
He advised the Bank to change its inflation midpoint target to 6%, as 4.5% does not allow economic growth with job creation.
“The rising repo rate destroys growth, jobs and investment. Where is the minister of economic development? Where is our economic growth and development strategy? We have stagflation with relatively higher levels of inflation and low to negative growth.”
Izak Odendaal, investment strategist at Old Mutual Multi Managers, expects the monetary policy committee to continue hiking rates due to peaks in headline inflation because of rising petrol and food prices, although core inflation is rising gradually.
“The global environment remains risky, with other central banks still hiking rates, most notably the US Federal Reserve. In the MPC’s worldview, failure to keep up with other central banks could lead to a disorderly depreciation of the rand and rising inflation,” he said.
— Additional Reporting by Caiphus Kgosana
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