South Africa

Advanced economies can learn from emerging-market central banks – SARB governor

South Africa’s central bank governor urged monetary authorities in advanced economies to take a cue from the resolve shown by their emerging-market counterparts as they face political pressure for increasing interest rates to tackle the fastest inflation in a generation. 

“As the economic conversation in advanced economies changes to address higher inflation, emerging markets have something to offer,” Lesetja Kganyago said in an opinion piece published on the International Monetary Fund’s website.

“Emerging-market central banks have ample experience dealing with these conditions, including the political pressure that often follows policy tightening.”

South Africa’s central bank has stood firm on its constitutional remit to protect price stability, even as the ANC has proposed amending its purview to job creation.

It’s a prospect that’s rattled investors worried that modifications would weaken its independence and commitment to its inflation target.

“It isn’t helpful to question and criticize the role of the central bank,” Kganyago said. “Because of balance-sheet concerns, it is even more critical that central bank mandates remain simple and direct.”

The South African Reserve Bank has more than doubled its benchmark since November 2021 to 7.25%. Its stance has meant the country hasn’t experienced target misses on inflation of the scale seen in some of its African and emerging-market peers, and rate hikes haven’t been as large as in other developing nations. 

“As advanced economies face inflation dynamics that more closely resemble patterns in emerging markets, this distinction – between the things that require conviction and those that need debate – could be helpful,” Kganyago said.

“In advanced economies, particularly in recent years, group-think has perhaps been a major policy problem.”

The governor also called on developed economies to manage supply shocks as inflation today is more likely to echo into the future. 

‘Policy flexibility’

“Many emerging market economies have introduced robust inflation-targeting frameworks to better shape inflation expectations, and these have generally worked well, creating policy flexibility,” he said.

There also has to be a realization that fiscal and monetary policy overlap, he said. 

Research from the Federal Reserve has shown that fiscal support enacted in many countries to support households during the Covid-19 pandemic helped to boost spending without increasing production, widening the mismatch between supply and demand and worsening inflation in some countries including the US.

“To achieve good outcomes, countries need a broader macroeconomic strategy that delivers other key outcomes, especially fiscal sustainability,” Kganyago said. “Without such a strategy, central banks cannot, by themselves, ensure a growth-friendly environment.”


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