Monetary Policy changes ‘risky’, warns Kganyago

Despite South Africa’s well-documented low economic growth and high unemployment rates, South African Reserve Bank (SARB) Governor Lesetja Kganyago has warned the country against considering risky monetary policy changes.

The Governor sounded the alarm during a virtual keynote address, titled the shadow of COVID: lessons from 20 years of inflation targeting at the University of Pretoria on Wednesday.

“We have a well-established inflation-targeting framework, which is delivering low interest rates and low inflation,” he said.

The address came after the pandemic saw the SARB reduce the repo rate by 250 basis points in an effort to soften the economic impact of the virus on consumers.

Kganyago emphasised that getting monetary policy right isn’t going to be enough. “South Africa’s debt situation is critical. And our rebound from lockdown is looking weak compared with other countries,” he said.

As a country, said the Governor, South Africa needs to find a path back to fiscal sustainability and growth.

He said: “We can borrow from new creditors; we can shift our debt towards short-term borrowing; we can move things around different balance sheets – but this is not a recovery strategy; it is just a way to buy time.

“If public sector borrowing were the way to achieve sustained growth, the last 10 years of debt accumulation should have been enough.”

Kganyago said the real task now is restoring the country’s fiscal credibility and implementing structural reforms so the economy has a way to become more efficient and grow.

“In many ways, as a country, we seem to be depressed, unable to get out of bed. Yes, it is winter, and it’s cold. But we can’t live like this. Spring is coming, and inflation and interest rates are low. We need to focus on the opportunities, get up, and get to work,” he added.

Right now, South Africa does not have the high inflation and high interest rates of the past.

“But we also don’t have the zero rates and close-to-zero inflation of the rich countries. The inflation-targeting paradigm is working pretty well,” he said.

“Given all the challenges facing South Africa, we should recognise that monetary policy is the last place where we should consider risky changes. We have a well-established inflation-targeting framework, which is delivering low interest rates and low inflation.”

This, he said, is the most functional part of the macroeconomic framework.