Prices the key trigger for action, says Bank governor

Policymakers will only respond to changes in the exchange rate if they could cause inflation to rise, says Reserve Bank governor Lesetja Kganyago.

“Our approach in SA has been and continues to be that we do not react to the firstround effect of depreciation or appreciation of the currency,” Kganyago said in a forum discussion in Washington.

“We will only act to the extent that we think the depreciation of the currency would lead to a rise in inflation,” he said.

Kganyago was speaking ahead of meetings of the International Monetary Fund and World Bank, at which finance ministers and policymakers have gathered to discuss potential threats to global economic expansion.

THE BANK HAS ‘BREATHING SPACE’ SHOULD RISKS TO ITS INFLATION OUTLOOK COME TO FRUITION

He noted that rising interest rates in developed nations could prompt capital to flee emerging markets and cause their currencies to weaken. Currency depreciation can fuel inflation by raising the price of imports.

SA’s economy had reduced some of its key vulnerabilities such as the size of its current account deficit as a share of the economy, he said. As a result, the Reserve Bank had “breathing space” should risks to its inflation outlook — such as currency movements or a spike in oil prices — come to fruition.

Inflation in SA fell to a sevenyear low in March with prices gaining an annual 3.8%, well within the Reserve Bank’s target range of 3% to 6%.

The rand has appreciated around 4% so far in 2018.