Kganyago suggests rates will not increase in 2021

Reserve Bank governor Lesetja Kganyago has suggested SA’s interest rates will stay at a record low throughout 2021, even as some economists debate the possibility of them rising due to faster inflation and higher bond yields in developed markets.

The Bank’s monetary policy committee (MPC), which next decides on rates on May 20, decided in March to keep its repo rate unchanged at 3.5%, the lowest since it was introduced in 1998, despite its in-house projection model suggesting hikes of 25 basis points in the second and fourth quarters of 2021.

In a Business Day webinar on Thursday, Kganyago signalled that this was unlikely to change as inflation remains under control and the Bank nurses an economy that shrank 7% in 2020.

“Our own forecast of interest rates based on our projection model [signalled] there could be two interest rate hikes of 25 basis points each during the course of this year. When the MPC met, our assessment was that, yes, this is what the projection says, but we do not think this is something we should do as this economy can still do with some support because inflation is contained,” Kganyago said.

He described“the Bank’s policy stance as very accommodative”, as shown by interest rates being lower than they are “supposed to be”.

Rising bond yields in developed economies, as investors start to worry that monetary and fiscal loosening will boost inflation, had some local economists debating whether SA’s central bank should be thinking of tightening policy.

Higher yields in developed markets reduce the appeal of holding local assets, which could put pressure on the rand and drive up the cost of imports. Instead, the rand has been among the best performers against the dollar, rising 3.25% so far in 2021. While US yields have risen, the US 10-year rate of 1.58% is still about 7.5 percentage points lower than SA’s.

The Bank targets an inflation rate of 3%-6% and sees little danger of it moving outside that range, necessitating a reversal of the easing that saw it cut the repo rate by a cumulative 2.75 percentage points since Covid-19 entered SA in March 2020.

“As things stand, we see inflation remaining where it is, which is around the midpoint of the inflation target range,” Kganyago said. “It is still closer to 3% than it is to 4.5%, but a transition might actually take place.” The Bank has said it wants the rate anchored near the midpoint of the target range.

At the height of the pandemic crisis in 2020, Kganyago came under attack from critics who argued that the Bank had been too timid and should have resorted to a more unconventional policy, such as quantitative easing the creation of new money by the Bank to boost liquidity in the economy.

He said the inflation-targeting approach, introduced 21 years ago, has served SA well and allowed the Bank to aggressively cut rates when needed.

“Since the introduction of inflation targeting, growth in SA has become less volatile, inflation has become less volatile and lower. Today we can say with pride that the framework has served SA well. If you want lower interest rates you have got to have lower inflation.”

Kganyago also addressed allegations by ANC veteran and former Gauteng premierturned-businessperson Tokyo Sexwale that a “heritage fund” with money meant to help SA’s poor existed, and the money was stolen from the Bank.

“First, you cannot make something that doesn’t exist

2 the number of interest rate increases in 2021 signalled by the Bank’s projection model

21 how many years SA’s policy of inflation targeting has been in place

disappear,” the governor said. “The amounts being talked about at some stage were going into trillions of dollars. If the Reserve Bank was keeping trillions of dollars then our reserves would not be $50bn — our reserves would be trillions of dollars. But they are not.”

Kganyago also rejected accusations that the Bank could simply use “magic money” to solve all the country’s problems, either by printing new cash or using some of its foreign exchange reserves. He said its reserves are needed for SA to pay for goods acquired from other countries and to meet liquidity requirements, and are not for domestic expenditure.