Sarb defends resolve to hold interest rate

The SA Reserve Bank (Sarb) should stick to targeting inflation rather than trying to stimulate the economy, because an abrupt change in policy would damage its credibility and push up prices, a policymaker at the bank said this week.

The speech by Sarb deputy governor Francois Groepe came after the ANC released and then retracted a statement last week saying that “monetary policy was critical in driving growth, creation of jobs, and reduction of the capital costs in the economy”, apparently calling for rates to be lowered.

Last week, the central bank’s monetary policy committee left rates unchanged at 6.5% for a third straight meeting, citing risks to inflation posed by a weakening currency.

The temptation to reduce rates was understandable, Groepe said in his speech, but the effect on growth would be small and temporary and eventually cause consumer prices to rise.

“The unexpected monetary policy shock would dent the credibility of the central bank, as economic agents would be forced to reassess the central bank’s reaction function,” he said.

“This, in turn, would result in higher inflation expectations, while the medium-term growth prospects would, at best, be no better than they were before.”

The central bank targets an inflation rate of 3% to 6%. The rate unexpectedly fell to 4.9% in August from 5.1% in July.

It has cut rates only once in the past 12 months, attracting some criticism from political quarters as well as trade union federation Cosatu.

South Africa’s economy slumped into recession in the second quarter, weakening a rand already battered by an emerging-market selloff.

Business confidence, which rose after Cyril Ramaphosa was elected president in February, also took a hit.

Last week, Ramaphosa announced a multibillion-rand stimulus programme, earmarking funds for job creation and infrastructure development in a bid to revive the economy.

The effect on growth would be small and temporary and eventually cause consumer prices to rise. Francois Groepe Sarb deputy governor