Now is not the time to experiment with monetary policy, says Lesetja Kganyago

SA Reserve Bank governor Lesetja Kganyago. Picture: PUXLEY MAKGATHO
SA Reserve Bank governor Lesetja Kganyago. Picture: PUXLEY MAKGATHO

Reserve Bank governor Lesetja Kganyago has dismissed calls for it to shake-up monetary policy to deal with the economic fallout from the Covid-19 pandemic.

Policymakers are ready to support SA’s economy as required but this is not the time to “venture into policies or instruments that have proved a failure in economic history”, he said at the Bank’s AGM on Friday.

“There are tough choices for us to make as a society. However, as we have indicated in the past, improving the potential growth rate of the economy cannot be left to the central bank alone.”

SA’s recessionary economy and the unprecedented effect of Covid-19 has led to calls for, among other things, the Bank to ditch its policy of inflation targeting, and to effectively print money through quantitative easing. The Bank has argued that its adherence to its mandate and success in keeping inflation inside the 3% to 6% range has given it the policy to cut the repo rate by 275 basis points since March.

While the central bank, in addition to the rate cuts, has bought R30bn of government bonds in the secondary market, it has said this was done to aid liquidity in the market rather than influence the state’s cost of borrowing.

“Coupled with prudent macro-economic policies and structural reforms, a lower cost of capital can support growth in long-term investment,” Kganyago said. “The recovery of the SA economy requires a multi-pronged policy approach.”

Central banks around the world have cut interest rates due to Covid-19 in 2020, with the Bank’s latest cut in July bringing the  benchmark rate to 3.5%, the lowest rate implemented by the Bank in almost 47 years.

“As we navigate through this Covid-19 storm, the Reserve Bank will continue to deploy its tools, as appropriate, in accordance with its mandate, to provide support to the SA economy,” Kganyago said. 

The cuts so far are unlikely to cause significant rand weakness, according to Nedbank corporate and investment banking analyst Walter de Wet. “Our estimates suggest that the Bank is not running a policy rate that is low enough to induce currency weakness on its own.” 

On the other hand, inflation looks set to accelerate steadily into December, and get closer to 3%, said De Wet. At that point, monetary policy may become less supportive of the rand unless the medium-term budget policy statement in October surprises us and provides a clear and credible path to fiscal consolidation.”


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