Kganyago defends inflation targeting

Reserve Bank governor Lesetja Kganyago
Reserve Bank governor Lesetja Kganyago

Johannesburg - In the event of any adjustment to the South African Reserve Bank’s inflation target range, we should see the target narrowed rather than widened, said bank governor Lesetja Kganyago on Friday.

“The discourse has to be able to bring inflation down. Higher inflation results in higher costs in terms of output and employment,” he said.

“Are you going to do it [change the inflation targeting range] in the middle of a recession? You are going to do it at an appropriate time.

“Many times there isn’t a best time to do it. The Brazilians seem to feel that they can do it now, despite indications that they might fall back into recession,” Kganyago said.

“Is it a thing you must do now? I don’t think so,” he added.

Currently, the central bank sets its target to keep annual inflation within a range between 3% and 6%.

Earlier this week, Deputy Finance Minister Sfiso Buthelezi spoke at an event hosted by the Gordon Institute of Business Science in Johannesburg, saying there should be a debate about whether inflation targeting was still appropriate.

“We set this 3% to 6% target then, under different economic conditions,” Buthelezi said.

“Is it a policy for all seasons?”

Buthelezi declined to indicate what inflation range he would suggest when City Press approached him after the event.

Brazil has just reduced its inflation target from 4.5% to 4.2%, and will further reduce this figure to 4% by 2020, Kganyago told City Press during an interview at the Reserve Bank’s headquarters in Pretoria.

South Africa’s inflation target range is already among the widest in the developing world.

Kganyago pointed out that since the implementation of inflation targeting, inflation had declined as interest rates had tracked inflation lower. This, in turn, caused higher investment, which led to higher economic growth.

“It is a no-brainer,” he added.

“No amount of screaming at the Reserve Bank is going to get the potential growth rate higher. But monetary policy does effect the growth in the cycles.

“What of poverty and unemployment? The poor do not own assets that can protect them from inflation [unlike the rich, who own assets such as shares, property and offshore assets]. Neither do they have the ability to shift their income,” said Kganyago.

“Do not underestimate the intelligence of the poor. They can see that inflation erodes their buying power.”

Letting inflation get out of control would ultimately inflict a “massive impact” on output and employment, he added, citing Zimbabwe and Venezuela as examples.

“We believe that [inflation targeting] is sound. We do not believe it is good for all seasons,” he said.

There were times when shocks to the economy caused inflation to rise, which had a costly effect on economic production, he added.

“That doesn’t mean we don’t do anything to bring inflation down. But we have to do it over a longer period of time, so the cost of lost output is not as massive.”

This is why the Reserve Bank’s inflation targeting framework has an escape clause that allows for “flexible inflation targeting”.

Buthelezi’s remarks come hot on the heels of Public Protector Busisiwe Mkhwebane’s recommendation in a report on Absa’s 1992 acquisition of bailed-out bank Bankorp that the country’s Constitution be changed to alter the role of the central bank.

ANC supporters cite Absa’s acquisition of Bankorp as an example of state capture under apartheid. This they compare to the current accusations around state capture involving the Guptas, who have been consistently associated with allegations of excessive and undue government influence, racketeering, bribery and corruption.

Mkhwebane recommended that Absa pay back R1.25 billion related to the Bankorp transaction.

On Friday, Absa filed court papers challenging Mkhwebane’s recommendation.

Section 224 of the Constitution lays down the Reserve Bank’s primary objective as being “to protect the value of the currency in the interest of balanced and sustainable economic growth”.

“You need price stability for balanced and sustainable economic growth,” said Kganyago.

However, Mkhwebane recommended that the Reserve Bank’s primary mandate be changed to the following: “To promote balanced and sustainable economic growth ... while ensuring that the socioeconomic wellbeing of the citizens is protected.”

This week, the central bank filed court papers requesting that Mkhwebane’s ruling be set aside.

Kganyago said: “The Public Protector’s report hasn’t taken away the independence of the Reserve Bank. As we say in our court papers, we do not believe she has the power to order Parliament to change the Constitution.

“What have we learnt from the drafters of our Constitution is that they knew that when things are difficult and difficult political decisions must be taken, decision makers look for someone else to take some other decision and take away from the difficult decision.

“So, we have difficult decisions to make in terms of structural reforms and increasing the potential growth rate of the economy. Out of nowhere somebody thinks, ‘Let us change the mandate of the central bank so that we can do all of these other things.’

“The Reserve Bank has been tasked with price stability. The courts have been tasked with the administration of justice and interpretation of the laws. The army has been tasked with protecting the borders of this country.

“Should we say that we should change the constitutional mandate of the army and make the army responsible for the socioeconomic wellbeing of all South Africans?

“The bank’s vision is to lead in serving the economic wellbeing of all South Africans, and we will do this by protecting the buying power that they have. That means protecting the value of the currency.

“You cannot play around with the Constitution. It is a covenant that South Africans have entered into ... As far as we are concerned, this covenant can only be changed by all South Africans and their democratically elected representatives, which is Parliament.

“The authors of our Constitution decided that we must be independent and act without fear, favour or prejudice ... We look beyond political cycles.”

Kganyago cited as an example that often, the Auditor-General’s reports were “not politically palatable”.

“Those are exactly the checks and balances that the authors of our Constitution provided, and they must be created. There will always be contestation about policy in society. What’s important about this contestation is that we move from a common basis of facts and evidence.”

Kganyago said there were three key alternative monetary policy frameworks to inflation targeting.

The US Federal Reserve has an inflation target of less than 2%, as well as a measure of targeted unemployment that it tracks.

The second form of monetary policy is aimed at “intermediate targets” or monetary aggregates, as used by the Bank of England and the German Bundesbank, such as credit growth and money supply.

The third type of monetary policy framework is used by Asian countries, including China, whereby a country targets a level for its currency exchange rate, Kganyago said.

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