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Interest rate increases needed to fight inflation – Lesetja Kganyago

Lesetja Kganyago

It is incumbent on South Africa’s central bank to increase borrowing costs to tame sticky inflation, even if its actions gave rise to financial distress, Governor Lesetja Kganyago said.

Complaints about surging living costs predated those about higher interest rates, and the South African Reserve Bank, first and foremost, had to protect the local buying power of the rand, Kganyago said in an interview broadcast by Johannesburg-based broadcaster eNCA on Wednesday.

“We, unfortunately, have to administer particular medicine in order to tame inflation,” he said. “Failure to administer that medication might result in the patient having to undergo surgery or end up in intensive care.”

The central bank’s monetary policy committee has raised the benchmark rate at its 10 past meetings with the aim of bringing inflation back to the 4.5% midpoint of its target range, where it prefers to anchor expectations. The key repurchase rate stands at 8.25%, the highest level in 14 years.

Inflation slowed more than projected to a 13-month-low of 6.3% in May, easing pressure on the bank to continue raising borrowing costs.

“When inflation rises or stays elevated, it is appropriate that monetary policy adjusts and that adjustments take place through interest rates to bring inflation down,” Kganyago said.

He conceded that the South African economy, battered by rolling power cuts and logistics constraints, was in trouble, although “crisis is not the word I would use.”

Without the energy shortages and logistics issues, gross domestic product would have expanded about 2.3% this year instead of barely growing, he said.

“There are things that are working in this economy in spite of our troubles,” the governor said.

“One of the things we are picking up is, what is almost driving investment now, is businesses are investing in renewable energy and backup power. That comes from the resilience of the economy.”

Other highlights:

  • There is a 24-month horizon for the country to be removed from the Financial Action Task Force’s so-called grey list denoting nations with shortcomings in tackling illicit financial flows.
  • The Reserve Bank is working with the National Treasury and other government agencies to make sure that shortcomings identified by the FATF are addressed.
  • Kganyago says he’s got “no doubt that government’s engagement with the US” means South Africa will retain its duty-free access to American markets through the African Growth and Opportunity Act.

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