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Kempton Park – Growth is determined by “real factors” in the economy and requires structural reforms. The burden of output growth should not fall on monetary policy.
This is according to South African Reserve Bank (Sarb) governor, Lesetja Kganyago. He was speaking at the South African Chamber of Commerce and Industry (Sacci) convention in Kempton Park on Thursday.
“Monetary policy cannot be an engine for sustained growth,” he said. Creating expectations for monetary policy to achieve growth objectives undermines its credibility and institutional strength.
Instead output growth is related to infrastructure, education, labour and product market efficiency, productivity growth, and institutional strength.
Inflation targeting
Kganyago explained that the inflation target is a primary goal of the monetary policy, which is set by government. The bank has operational independence to implement policies to achieve an inflation rate between the target range of 3% and 6%.
“Government cannot dictate interest rate policy to the bank, and the requirement to consult regularly with the minister of finance does not undermine our independence,” he said. The independence of the central bank, does not mean decisions should be made independently of the needs of the economy or goals of government policy.
“The Sarb must perform its functions independently and without fear, favour or prejudice,” said Kganyago. But this must go along with consultation between the reserve bank and the finance minister.
READ: Team SA must guard the strength of institutions - Kganyago
The Sarb’s role includes protecting the currency value, which means the purchasing power of the rand must be maintained, by containing inflation. This involves influencing inflation expectations of businesses and consumers, he said.
Inflation targeting reduces uncertainty for businesses and households. Increasing certainty will translate into long-term investment and economic growth. Achieving price stability also protects the poor, as they are most vulnerable to inflation, he said.
The challenging economic environment has seen interest rates rise by 200 basis points since 2014. Inflation has been driven by the exchange rate and food prices. But the inflation outlook has improved. The forecast for 2016 is at 6.4%. For 2017 the forecast is at 5.8% and in 2018 5.5%. This is due to expectations of the exchange rate outlook improving and food price growth to slow down.
“The MPC is of the view that should the forecasts materialise, the hiking cycle may be nearing its end,” he said. However this does not mean interest rate cuts are on the cards, the bank wants the inflation rate to remain “firmly” within the target range over a “sustainable basis”.
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