South African Reserve Bank does not follow Federal Reserve interest-rate hikes

Lesetja Kganyago

South Africa’s central bank has the freedom to adjust monetary policy without having to follow the Federal Reserve’s interest-rate hikes because the effects of the US institution’s moves feed into the exchange rate and domestic inflation, which the Reserve Bank targets, its chief said.

“The Fed affects us because their actions tighten global financial conditions, and that in the main leads to a realignment of exchange rates, including the South African rand,” Governor Lesetja Kganyago said Wednesday.

“Depending on what has happened to the movement in the rand — which feeds through into inflation — that is our reaction function. We do not try and follow what the Fed is doing with respect to interest rates.” 

Kganyago spoke in an interview with Bloomberg Television from Washington, where he’s attending International Monetary Fund and World Bank meetings.

The South African Reserve Bank surprised financial markets in March when it raised the benchmark repurchase rate by a bigger-than-expected 50 basis points.

That was an attempt to entrench price-growth expectations close to the 4.5% midpoint of its inflation-target range.

Average inflation expectations for the year — as measured by a survey of analysts, business people, labor unions and households — rose to 6.3% in the first quarter.

That’s as persistent power outages, logistic-network constraints and currency weakness stoke price growth in Africa’s most industrialized economy.

The currency has weakened 7.5% against the dollar this year, the worst performer in a basket of 16 major currencies tracked by Bloomberg.   

The panel under Kganyago has frontloaded its fight against inflation: At 7.75%, the key rate is already higher than the peak suggested by its quarterly projection model, which the monetary policy committee uses as a guide.

Its strategy has meant South Africa hasn’t seen the scale of inflation-target misses experienced by some of its developed and emerging-market peers. 

Hawkish Stance

The central bank’s increasingly hawkish stance in March suggests Kganyago is reluctant to pivot away from tightening even as the country’s economic growth prospects deteriorate.

The Reserve Bank sees the economy expanding just 0.2% this year, with persistent power outages seen shaving 2 percentage points off output growth.

Forward-rate agreements used to speculate on borrowing costs show traders are pricing in at least a quarter-point rate increase in May.

On Tuesday, Kganyago renewed his call for a lower inflation target and suggested that a single-point goal of 3% would be optimal.

That’s likely to draw criticism from detractors of the central bank, including some politicians and labour groups, who have said it should do more to support South Africans and the domestic economy.

While the bank’s target range for inflation is 3% to 6%, “there is nothing that stops us from aiming for the lower part of that,” Kganyago said Wednesday.

“We have done this before: when we decided to aim for the midpoint, which was the 4.5%, we saw what it did for the South African economy. It anchored inflation expectations and, getting into Covid pandemic, we were able to provide the necessary support because inflation was low.”

In January, the governing African National Congress’s chairman, Gwede Mantashe, said the party agreed to change the central bank’s mandate to include job creation, a prospect that rattled investors worried that modifications would weaken the Reserve Bank’s independence and commitment to its inflation target.

President Cyril Ramaphosa later downplayed suggestions that the change was imminent, while Finance Minister Enoch Godongwana said an explicit mention of jobs in the central bank’s remit won’t affect its operations.

The inflation target, first announced in 2000, is set by the finance minister in consultation with the central bank. Lowering it before next year’s election, which opinion polls show the ANC risks losing its national majority, is likely to be politically unpopular.  


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