/ 6 June 2023

Kganyago: ‘We don’t take pleasure in people losing houses or cars’

Kganyago said that the current debate is characterised by people conflating the bank’s mandate with other issues.
South African Reserve Bank Governor Lesetja Kganyago (Siphiwe Sibeko/Reuters)

South African Reserve Bank governor Lesetja Kganyago has again defended interest rate hikes in the wake of criticism that they will do little to bring down inflation.

Kganyago was presenting the biannual financial stability review in parliament, when he was asked by Democratic Alliance MP Dion George about the view that inflation has been driven by factors impervious to the Reserve Bank’s policy tools. 

Last month, the central bank raised the repo rate at which it lends to commercial banks  by another 50 basis points amid still-ticky inflation and the rand’s recently dismal performance. The cost of borrowing is now at its highest level since 2009. The repo rate is now at 8.25% and the prime lending rate is at 11.75%.

Inflation, Kganyago told MPs, has become more broad-based — spreading beyond food and fuel prices, which have been vulnerable to supply shocks. “Once it starts to spread to core inflation, it starts to affect the manner in which price-setters think about prices,” he said.

“And so, as a result of that, you have got to act, because if you do not act, people will adjust their inflation expectations to a higher level.”

Inflation expectations reflect the rate at which unions, employers and analysts believe prices to rise in the future. According to the Bureau for Economic Research, in the first quarter of 2023 average inflation expectations for this year and next increased by 0.2 percentage points compared with the fourth quarter of 2022. They forecast inflation to average 6.3% in 2023 and 5.8% in 2024.

Importantly, inflation expectations tend to affect wage demands from unions. When workers ask for higher pay and prices are set higher and higher, a wage price spiral takes grip. This is what the central bank risks happening when it fails to act decisively against inflation, Kganyago said.

“And with respect to my fellow economists, who hold a different view from the central bank, I am sorry, inflation has spread beyond the headline … Second-round effects are kicking in and we are having to respond. And if we fail to do that, the incomes of South Africans will continue to be eroded.”

The Reserve Bank takes “no pleasure in people losing houses or losing cars”, Kganyago added on Tuesday. “But the truth of the matter is inflation is eroding the incomes of South Africans and something must be done,” he said.

“And when people say the interest rate is a blunt instrument, yes it is a blunt instrument. But that is what we have.”

Responding to the repo rate hike in May, trade union federation Cosatu accused the Reserve Bank of being indifferent to the plight of workers “who are currently reeling under the pressure of high indebtedness”. 

“The effect of the government outsourcing the management of the economy to the [Reserve Bank] and its one tool kit is a cumulative 475 basis points over the past 18 months. This will suffocate the economy and collapse any prospects of it growing, especially because about 60% of the country’s GDP comes from consumer spending.”

Cosatu called on the treasury to take full responsibility for the country’s economic crisis.

Chairperson of parliament’s standing committee on finance Joe Maswanganyi closed Tuesday’s meeting with a suggestion that the treasury be called to give its take on the crisis and to explain its policy response.