The government needs to help the Reserve Bank fight against inflation by rebuilding its fiscal buffers and reducing expenditure, as interest rates are expected to remain higher for longer.
This is feedback from South African Reserve Bank (SARB) Governor Lesetja Kganyago, who spoke to Reuters on the sidelines of the IMF and World Bank Annual Meetings in Marrakech.
Kganyago said governments worldwide need to help central banks unwind the fiscal stimulus they implemented during the Covid-19 pandemic.
The Governor said the current spike in inflation was caused by the unusually large supply-demand imbalances caused by sudden restrictions and relaxations on economic activity.
“Fiscal authorities have got to be rebuilding their fiscal buffers so that the process of disinflation is assisted.”
“Failure to disinflate economies would result in higher financing costs for the fiscal authorities and, by extension, all of us. This also applies to South Africa.”
Kganyago said he was unsure whether more interest rate hikes were on the horizon but was clear that “the disinflation job is not yet done”.
Risks to the Reserve Bank’s outlook included high oil prices, global financial conditions, the strong dollar, and food prices reversing their downward trend.
Earlier this year, Kganyago said the government is making it harder for the SARB to fight inflation due to the effects of ongoing load-shedding on the economy and economic underperformance.
Swift relaxation of Covid restrictions “fuelled what would eventually be the highest rates of global inflation in a generation”. The Russian invasion of Ukraine exacerbated the situation.
However, “idiosyncratic factors such as load-shedding and the country’s greylisting” keep inflation elevated in South Africa while it is declining globally.
In particular, the ongoing energy supply challenges are fuelling inflation by raising operating costs for businesses, which are passed on to consumers.
The Reserve Bank estimates that load-shedding adds 0.5% to inflation in 2023, and this is something it can do nothing about.
Food inflation provides a good example of the idiosyncratic nature of South African inflation. It is increasing in South Africa while agricultural commodity prices are decreasing globally.
Such factors also keep investors wary of investing in South Africa, limiting economic growth.
The Reserve Bank has to fight inflation “in a context where many of the drivers of both inflation and growth are outside of its control”, according to Kganyago.
Furthermore, “fighting inflation is much harder when the economy is already underperforming” due to structural constraints that must be solved at the government level.
The Reserve Bank is not capacitated to solve these structural issues nor influence long-term growth – this requires sound economic policy from the government.