‘Adding jobs to Bank’s mandate will not fix the problem’
Reserve Bank criticised after ongoing interest rate hikes
SA has an unemployment problem that needs more credible solutions than changing the Reserve Bank mandate into a dual one, governor Lesetja Kganyago said yesterday.
The governor was responding to critics who have been vocal in their criticism of the Bank’s inflation targeting, recommending it target both employment and inflation.
Kganyago said even though some have argued that monetary policy should be pushed much further and harder to get the expected growth or jobs, “we have seen now that having two targets certainly does not mean double the benefit”.
“Instead, it means that there are times and certain conditions when one policy tool helps to achieve both.”
The Bank has come under a lot of criticism after its acceleration of interest rate hikes since November 2021, raising the repurchase rate by a cumulative 275 basis points over the past 10 months and bringing borrowing costs to 6.25%.
The continuous increases come against the backdrop of an extremely high unemployment rate of 33.9% in the second quarter as recorded by Stats SA. Its quarterly employment survey showed total employment in the formal nonagricultural sector dropped by 119,000 by end-June.
The drop was a result of falls in the community services, manufacturing and trade sectors, which fell by 92,000, 13,000 and 2,000 respectively, wiping out the gains of 42,000 jobs in the previous quarter, and bringing total employment to 9.9-million.
Kganyago said that when inefficiencies and constraints exist in employment creation, “pushing harder on monetary policy is like pushing the accelerator to the floor on a curvy, icy road over a mountain pass”.
He said the approaches that have a permanent effect on employment levels have nothing to do with monetary policy.
“Just adding ‘jobs targets’ will not get us there, and part of our inflation problem stems from efforts to achieve such targets at a global level,” he said. “Assuming that most of our unemployment problem is structural, are we at least sure that the residual cyclical unemployment is being reduced by monetary policy? ”
He said employment and growth are both limited by factors that are beyond the reach of the central bank’s toolset.
When policy becomes overloaded with too many and contradictory objectives, then negative outcomes are more likely, he said. “We need to recognise for the sake of solving our low employment problem and to keep monetary policy focused on the right things…”
Kganyago said as inflation rises and growth slows, a central bank that fails to respond to rising prices will face the prospect of compounding inflationary shocks, currency depreciation and a fall in investment. – BusinessLIVE