Reserve Bank governor Lesetja Kganyago
With inflation still elevated, now is not the time for central bankers in advanced economies to relax their 2% target, South African Reserve Bank governor Lesetja Kganyago said on Thursday.
At an event hosted by financial services group PSG, Kganyago said doing so would destroy the bankers’ inflation fighting credentials. Inflation in the US is still somewhat higher than the Federal Reserve’s target, at 3.7% year-on-year. The UK has endured more stubborn inflation, which currently stands at 6.7%.
“The time to take the target higher is not when inflation is higher,” Kganyago said.
“Because when you do that, the price-setters will expect that you are going to do it again. So, if advanced economies want to revise their inflation targets higher, this is not the time to do it.”
Earlier this week, the Geneva-based United Nations Conference on Trade and Development (Unctad) said central bankers in advanced economies should relax their 2% inflation target in the interest of global stability.
Monetary policymakers in the developed world have united under the “higher for longer” mantra in an effort to tame inflation, bringing it sustainably within target. However, tighter financial conditions have detrimental outcomes for economies, particularly those in the developing world.
Speaking at the report’s launch, Unctad secretary general Rebeca Grynspan said the UN’s economic arm was calling for the 2% target to be revised, in a bid to avoid “collateral damage” in developing countries.
The report notes that interest rate hikes by central banks in developed countries “may have limited effects domestically but they wreak havoc in developing countries”.
“Especially for countries with weaker currencies, higher interest rates in advanced economies can easily cause significant capital outflows, which puts more pressure on the currency, drives up inflation and can easily cripple the productive system,” the report continues.
“This, in turn, exacerbates inequality and compromises livelihoods. Developing countries are then under strong pressure to raise their own interest rates, sacrificing their financial stability to defend their monetary stability — an impossible choice in the best of times.”
It further notes that in countries with muted fiscal policy, increased cost of credit leads to reduced investment, stagnant wages, limited employment growth and liquidity stress. The hardest hit are the unemployed and low-to-medium earners.
In South Africa, interest rates are higher than they have been in over a decade and the tight financial conditions have played a part in the recent anxiety over the country’s fiscal position — which has seen the prospect of austerity rear its head once more.
This week, the Institute for Economic Justice (IEJ) released a policy brief which found that, contrary to what has been reported, South Africa is not on the precipice of a budget crisis.
However, the brief notes, South Africa’s debt trajectory is of concern, particularly in the absence of a credible growth strategy. The critical issue facing the country’s borrowing is the cost of debt, that is, relatively high interest rates, the IEJ added.
As a small open economy, the IEJ explained, South Africa’s interest and exchange rates are strongly influenced by international developments, including monetary policy in developed countries.
This results in costly policy responses, such as monetary tightening. Debt service costs in the 2022-2023 fiscal year were R5.4 billion more than expected. This was mainly due to the Reserve Bank increasing the policy rate, according to the IEJ.