Kganyago defends stance on repo rate

Reserve Bank governor Lesetja Kganyago says that the Bank responds appropriately to changing prices and the factors driving them.

The Bank raised the repo rate by altogether 75 basis points since October last year with the inflation rate rising thanks to higher fuel and food prices and core inflation adding to pressures, though from a low base.

In response to questions at a media briefing on the latest monetary policy review (MPR) statement on Tuesday, Kganyago said that the initial view was that these rises in inflation could be temporary.

“But what we are now seeing is that policymakers are coming to the realisation that these rises in inflation could become of a permanent nature. As a result, interest rates are normalising faster than was initially expected,” he said.

Kganyago said that inflation expectations are also starting to rise, although they are still within the Bank’s target range

“It is important to note that, even as we have responded in the manner that we have responded over the past number of MPC [monetary policy committee] meetings, monetary policy in South Africa remains accommodative,” said Kganyago.

After averaging 4.5% in 2021, up from 3.3% in 2020, headline consumer price index inflation is projected at 5.8% in 2022, up from 4.2% in the previous MPR.

GDP growth was revised slightly higher to 2.0% in 2022, up from 1.7% in the October 2021 MPR, as the resurgence in commodity export prices is expected to raise growth through higher exports, terms of trade gains, and the income and wealth effects of higher prices, countering the adverse effects of higher fuel prices and inflation.

The governor said domestic economic recovery progressed well, but Covid-19 hit some sectors severely. As the more affected sectors are more labour intensive, lower output levels help explain why overall employment has not recovered.

Output of the labour-intensive construction, transport and trade sectors remain well below 2019 levels, he said.

The MPR shows that at the aggregate sector level, the primary sector expanded beyond its 2019 size, benefiting from favourable weather and elevated global commodity prices. It states that the secondary sector, at 90% of its 2019 output level, remains furthest behind.

The tertiary sector surpassed its 2019 output level despite persistent weakness in transport and trade activity.

Kganyago said that these two subsectors are expected to rebound as the pandemic fades and will help to boost employment. However, inadequate electricity supply remains a serious drag on growth and impedes the contribution of demand to the economy, he said.

The MPR shows that by the fourth quarter of 2021, the economy had recovered to above 98% of the 2019 GDP level.

The governor said that despite medium-term growth remaining disappointingly low, the economy is expanding, resulting in the output gap closing a little faster and disinflationary pressures moderating further, as seen in the trajectory of core inflation.

The Bank has said that rising rates will in the long-term limit the risk of inflation from exceeding its inflation target for a lengthy period.

“In this, monetary policy authorities must keep inflation in check to ensure price stability so that inflation does not run away from us,” said Kganyago.

He said that keeping inflation in check will be important for domestic growth prospects.

“Along the path, policy is currently expected to remain accommodative and supportive of the economic recovery.”