Reserve Bank governor Lesetja Kganyago gave MPs a spirited defence of his policy to continue hiking rates amid criticism that this is not taming inflation.
On Tuesday, Kganyago addressed Parliament’s Standing Committee on Finance on the bank’s financial stability report.
The bank hiked rates by another 50 basis points in May, bringing the increase to 4,75 percentage points since November 2021. He has been criticised by economists who argue that higher rates are not bringing down inflation, which is due to rand depreciation, and are killing growth.
Said Kganyago:
We take no pleasure in people losing houses, but the fact of the matter is that inflation is eroding people’s incomes, and something must be done. And when people say interest rates are a blunt instrument, they are, but that is what we have. The instrument we use is the interest rate. If we want lower rates, we have got to beat the monster of inflation.
Kganyago said that while initially central bankers around the world had assumed that the reappearance of inflation was temporary, because it was caused by supply-side shocks – or shortages of particular goods due to Covid-19 disruptions – this had fed into other prices.
In the case of SA, the bank considers prices of inputs such as fuel, food, and electricity to be “exogenous” and not a result of the business cycle. However, when other price setters in the economy raise prices in response to higher input costs, “second round effects” kick in, and inflation of items excluding exogenous factors start to rise.
“Once this happens, if you do not act, people will adjust their inflation expectations to a higher level, causing a wage-price spiral … That wage-price spiral sets in when the central bank fails to act decisively when there is an indication that inflation is starting to be broad-based.
“With respect to my fellow economists who hold a different view to the central bank: I am sorry – inflation has spread beyond the headline, we have seen core inflation rising and second-round effects kicking in, we are seeing inflation and… [have] to deal with that. Failure to do that will mean that the incomes of SA will continue to be eroded.”
This is the first time that MPs have called the Reserve Bank to Parliament to discuss the financial stability report, which highlighted how new threats – such as secondary sanctions in response to SA’s relationship with Russia, load shedding and greylisting – had raised SA’s risk profile and threatened financial stability.
The outflow of capital from the bond market by foreign investors since the start of the year, which came in response to heightened global and domestic risk, has raised the cost of government borrowing. It has also, for the first time since the 1990s, reduced the depth and liquidity of domestic capital markets, raising fears of the financial sector’s stability.
Source : News24
