SA interest rate hikes needed to tame inflation, Kganyago says

The central bank’s monetary policy committee has raised the benchmark rate at its 10 past meetings with the aim of bringing inflation back to the 4,5 percent midpoint.

It is incumbent on South Africa’s central bank to increase borrowing costs to tame sticky inflation, even if its actions gave rise to financial distress, governor Lesetja Kganyago (pictured right) said.

Complaints about surging living costs predated those about higher interest rates and the South African Reserve Bank first and foremost had to protect the local buying power of the rand, Kganyago said in an interview broadcast by Johannesburg-based broadcaster eNCA on Wednesday.

“We unfortunately have to administer particular medicine in order to tame inflation,” he said.

“Failure to administer that medication might result in the patient having to undergo surgery or end up in intensive care.”

The central bank’s monetary policy committee has raised the benchmark rate at its 10 past meetings with the aim of bringing inflation back to the 4,5 percent midpoint of its target range, where it prefers to anchor expectations. The key repurchase rate stands at 8,25 percent, the highest level in 14 years.

Inflation slowed more than projected to a 13 month-low of 6,3 percent in May, easing pressure on the bank to continue raising borrowing costs.

“When inflation rises or stays elevated, it is appropriate that monetary policy adjusts and that adjustments take place through interest rates in order to bring inflation down,” Kganyago said.

He conceded that the South African economy, battered by rolling power cuts and logistics constraints, was in trouble, although “crisis is not the word I would use.”

Without the energy shortages and logistics issues, gross domestic product would have expanded about 2,3 percent this year, instead of barely growing, he said.

“There are things that are working in this economy, in spite of the troubles that we have,” the governor said.

“One of the thing we are picking up is, what is almost driving investment now, is businesses are investing in renewable energy and back up power.

“That comes from the resilience of the economy.” — Moneyweb