‘Deal with the snake’ – Reserve Bank governor on SA being bitten by imported inflation

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Calls for the South African Reserve Bank (Sarb) to expand its mandate to include developmental objectives are “a red herring”.

This is according to the bank’s governor, Lesetja Kganyago, who addressed shareholders at its 102nd annual general meeting on Friday. “The Sarb’s contribution to development is in maintaining price stability, which is in the interest of balanced and sustainable growth in the republic,” Kganyago said in response to one shareholder’s question.

For years, the Reserve Bank has fielded criticism for its strict adherence to inflation targeting, which aims to maintain price stability by keeping the rise in consumer prices between 3% and 6%. To keep inflation in check, the bank adjusts the repo rate, which affects the cost of borrowing. Hiking the repo rate risks cooling consumer demand, hurting economic growth.

“Our mandate, which emanates from the Constitution, is consistent with the mandates of other central banks around the globe,” Kganyago said on Friday.

“When people talk of expanding the Sarb mandate to include developmental objectives, it is pointing to a failure elsewhere in our society … And we then, as South African citizens, look at the South African Reserve Bank and say: ‘Here is an institution that is functioning, that is successful in the implementation of monetary policy. If we give it more, it will continue to deliver on that mandate.’ No, you will set a central bank up to fail.”

The Reserve Bank’s inflation targeting regime has come under fire recently, as consumers reel from the effects of the rising prices of imported goods. Russia’s war in Ukraine, and the food and oil supply shocks that have followed, is at the centre of the recent surge in inflation.

In response to elevated consumer price inflation — which pierced the upper limit of the Reserve Bank’s target range, accelerating to 7.4% in June — the bank implemented the steepest repo rate hike in almost two decades.

In the wake of the 75 basis point increase, some pointed out that raising the repo rate would do little to temper imported inflation and would hurt an economy already at the mercy of external shocks.

On Friday, Kganyago noted that factory gate inflation has been subdued for several years, cushioning consumers from significant pass-through costs. However, this trend has now taken a turn. In the first half of this year, producer price inflation soared to its highest level on record.

“Alongside stronger economic growth than expected, these developments raise the prospect that higher import prices feed through more directly to consumer prices,” the central bank governor added. 

“Wage settlements during the first half of this year have come in above inflation, further squeezing margins of firms and raising the prospect of more entrenched wage inflation.”

When asked whether hiking the repo rate was the appropriate tool for curbing imported inflation, Kganyago said: “You take a hike in the African bush and, somewhere on your hike in the African bush, you decide you are going to set up your tent and sleep there. And once you are sleeping there, something comes crawling into your tent and it turns out to be a snake.

“You don’t ask the snake where it has come from. You deal with the situation. You manage the snake at that particular point in time.”