NEWS

The SARB Didn't Miss This Opportunity To Slam Mkhwebane's Recommendations On Inflation Targeting

Reserve Bank governor Lesetja Kganyago adds to the debate on monetary policy.

03/07/2017 12:41 SAST | Updated 03/07/2017 12:42 SAST
Simon Dawson/Bloomberg via Getty Images
South African Reserve Bank governor Lesetja Kganyago.

In the most recent to-and-fro between the South African Reserve Bank and public protector, SARB governor Lesetja Kganyago emphasised the need for lower inflation rates in discussing monetary policy.

This flies in the face of Public Protector Busisiwe Mkhwebane, who recommended Parliament amend the Constitution to change the mandate of the Reserve Bank, which would effectively put an end to inflation targeting.

The amendment essentially ends the Reserve Bank's mandate of using interest rates to contain inflation.

In a statement on Monday, Kganyago said national discussions on money should informed by facts.

"All too often, public debate is framed by those who claim to speak for 'the person in the street' while their arguments suggest otherwise," he said.

Kganyago said his experience showed economies grew stronger and more consistently at lower inflation rates, and this applied irrespective of the policy framework, be it inflation targeting, money-supply targeting or fixing the exchange rate.

"Rising inflation also generates its own self-fulfilling outcome because it causes currencies to depreciate and drives up import prices, in turn creating more inflation and pushing up interest rates... high inflation penalises the poor, not the wealthy, and deepens inequality," he said.

"The solution is to keep inflation low, keeping critical prices [like the cost of borrowing] low to support investment and grow the economy, stimulating job creation and raising wages for millions of South Africans. Effective competition policy also plays an important role in this regard."

Quoting the prime rates and Consumer Price Index since the 1990s, Kganyago determined that as inflation fell, average gross domestic product (GDP) growth strengthened.

He said the introduction of inflation targeting reinforced that trend.

"Since the most recent global recession, South Africa has had the second-highest average inflation rate but the fourth-weakest growth rate. Countries that have succeeded in getting rid of high inflation have improved their growth performance," Kganyago said.

"My appeal, to all South Africans, is to discuss policy options based on evidence and analysis. For our part, in addition to our monetary policy forums across the country, we will come up with more and better ways to foster that dialogue."

The SARB has previously torn into Mkhwebane, calling her attempt to rewrite the Constitution "ill-informed and reckless", and a threat to the poor.

The institution will be approaching the courts to have Mkhwebane's recommendations revoked.