Reserve Bank governor positive about inflation – but interest rates will remain high

South African Reserve Bank (SARB) governor Lesetja Kganyago said he expects average inflation in 2023 to be within the SARB’s target range, but the country’s interest rates will remain high.

Kganyago told 702’s Clement Manyathela that the Reserve Bank expects June’s inflation reading to come in at below 6% and 2023’s inflation to average 6% or just below.

While this falls within the SARB’s target inflation range of 3% to 6%, he said the Reserve Bank only expects inflation to reach the midpoint of this range – 4.5% – in 2025.

The country’s inflation rate has been stubbornly high for months, reaching 7.8% in July 2022.

To combat this sticky inflation, the SARB has been in a hiking cycle since November 2021. It implemented ten consecutive rate hikes and a cumulative 475 basis points. The repo rate currently stands at a decade-high of 8.25%.

The effects of these hikes on inflation only seemed to show in April 2023, when inflation dipped below 6.9% for the first time in 11 months. Inflation continued to fall in May 2023 when it dipped to a 13-month low of 6.3%. 

Despite this downward trend and the SARB’s positive outlook for June, Kganyago said, “We do not make policy for yesterday’s inflation. We make policy for future inflation.”

He expects South Africa’s interest rate will remain high for longer, depending on whether there are “factors that could threaten the inflation outlook and make inflation to be higher than we had initially expected”.

Interest rates are a blunt tool

The governor acknowledged that interest rates are a blunt tool used to control inflation but said it is the Reserve Bank’s best tool. “[Interest rates are] a blunt instrument – but is there a sharper one I can use?”

While Kganyago admitted that interest rates are a blunt tool, he rejected criticism that they are ineffective.

“Therein lies the point: That’s the instrument that the South African Reserve Bank has. People say that it would not work – so what made inflation come all the way down from 7.8% in July last year to 6.2% now?”

However, Kganyago said he does not take pleasure in people feeling pain due to the policies the SARB embarks on.

“We do not take pleasure in people losing their houses. We don’t take pleasure in people losing their cars. But the genesis of the pain was not the rise in interest rates,” he said.

“The genesis of the pain was the rise in prices, the rise in inflation, and that’s the rise in the cost of living. That is the genesis of the pain.”

“And it is that rise in inflation – that rise in prices – that began to eat into the incomes of working people that necessitated the Reserve Bank to take a step to cap that rise in prices.”

“And unfortunately, as we take these steps to cap the rise in prices, the cost of your mortgage and the cost of your car goes up, but this will come to an end at some point.”