More policy flexibility is needed to protect economies against external shocks as the global economy faces the real danger of a major slowdown, South African Reserve Bank Governor Tito Mboweni said.
”The danger of a major and protracted slowdown in world growth, with inflationary pressures only likely to react with some time lag, is indeed, very real,” he said in the prepared text of a speech, posted on the Reserve Bank website on Thursday.
World markets tumbled on Wednesday, and the rand suffered its biggest ever one-day fall after weak United States data sparked massive risk aversion on fears that efforts to save banks will not stave off recession.
Mboweni said policy action was needed to improve the global economic infrastructure and to shelter the poor from the adverse effects of the crisis.
”While remaining committed to prudent policies, greater flexibility will be required to soften the impact of exogenous shocks, even as we consolidate the gains of better macro-economic frameworks,” he said.
Major central banks cut interest rates last week to try loosen tight credit markets and have injected funds into money markets to boost liquidity, while governments moved to rescue struggling US and European banks.
South Africa’s central bank chose to leave its repo rate at 12%, though, with its banks not suffering the same problems as international institutions.
Local banks steered clear of the instruments that set off massive losses in the United States, partly due to exchange controls that limited outward investment and fairly conservative lending policies.
Inflation remains a serious concern in South Africa despite a collective five percentage points in rate increases between June 2006 and June 2008, and a weak rand will add to pressure on imported prices.
Mboweni said the global economy was witnessing a severe financial crisis that many people viewed as the worst since the Great Depression.
Growth in advanced economies had weakened to well below potential and activity in developing countries appeared to be slowing at a faster pace than had been expected.
Collective global action was needed to overcome the crisis, he said, before criticising the role of the International Monetary Fund.
”Given the changing landscape of the world economy and the failure of today’s multilateral institutions to provide us with a collective response to the crisis, an ambitious rethink of the global financial system is required.” — Reuters