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Cape Town - The South African Reserve Bank (SARB) can provide support for the economy even as it remains focused on inflation, Governor Lesetja Kganyago says.
While inflation risks remain tilted to the upside, the central bank has to consider South Africa’s challenging economic environment in setting policy, Kganyago said in a printed copy of a speech delivered to investors in New York on Thursday.
There is scope for “counter-cyclical stimulus”, he said.
“We have to take cognisance of the growth outlook and provide whatever support we can,” Kganyago said. “We therefore aim for a policy stance that balances short-term growth support with long-term disinflation, and all its accompanying benefits.”
The rand extended a decline after Kganyago’s comments, weakening as much as 1.2% against the dollar. The currency was little changed at R14.25 to the US dollar by 08:32 in Johannesburg on Friday.
The Reserve Bank's Monetary Policy Committee unexpectedly cut its key interest rate in July after the economy fell into a recession.
In September, the MPC held the rate even though inflation was within the target band of 3- to 6%. The rand’s depreciation since then vindicated the decision as this showed risks hadn’t been fully priced in by asset markets, Kganyago said.
Heightened uncertainty
“At times of heightened uncertainty, monetary policy becomes highly data-dependent and also more sensitive to our assessment of the risks to the forecast,” Kganyago said. “It should have been reasonably clear to observers that monetary policy was not on a predetermined course.”
The rand’s exchange rate remains the single-biggest risk to the inflation outlook while supply-side pressures, such as a probable advance in power prices, are also concerning, Kganyago said. The Reserve Bank would not automatically react to first-round effects of a tariff increase, but would assess second-round effects, he said.
“The SARB will continue to focus on its constitutional mandate to pursue price stability,” Kganyago said. “This is the best contribution we can make to the economy because it creates the conditions for long-term investment decisions that generate jobs.
"However, this will be done within a flexible inflation-targeting framework, always mindful of the trade-offs and the impact we may have on growth in the short run.
"This balancing is important.”
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