Reserve Bank defends interest rates policy

The SA Reserve Bank 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.

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

Last week, the Reserve Bank 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, but the effect on growth would be small and temporary and eventually cause consumer prices to rise.

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

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

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. –