Kganyago: We will act with resolve on inflation

Sarb deputy governor Lesetja Kganyago. (Lisa Hnatowicz)
Sarb deputy governor Lesetja Kganyago. (Lisa Hnatowicz)

Johannesburg - The South African Reserve Bank will “act with resolve” if price pressures stemming from a weaker rand spread more broadly in the economy, Reserve Bank Governor Lesetja Kganyago said.

If “there is a de-anchoring of inflation expectations, to maintain the integrity of the inflation targeting framework, we will have to adjust the monetary policy stance,” Kganyago said in an interview with Bloomberg TV at the World Economic Forum in Davos on Wednesday.

After falling 25% against the dollar in 2015, the rand weakened a further 8.3% since the start of this year, the worst performer of 16 major currencies tracked by Bloomberg. That’s adding to pressure on inflation, which accelerated to 5.2% in December as the worst drought in more than a century pushed up food prices.

Economists are split on whether policy makers will stick to raising the benchmark rate in moves of 25 basis points at a time, or take more aggressive action. Seven of the 12 economists in a Bloomberg survey said the Reserve Bank will increase the repurchase rate by 50 basis points on January 28, with one analyst predicting it will stay unchanged at 6.25% and the rest expecting a quarter-point increase.

“The tightening steps that we have taken have been very measured unlike the previous cycle that we have seen,” Kganyago said. “Given where the policy rates are, a 25 basis point hike is not a small hike necessarily.”

The rand weakened after Kganyago’s interview as some market analysts interpreted his comments to suggest the bank won’t raise interest rates by more than a quarter percentage point. The currency fell 0.4% to R16.8468/$ as of 18:50 in Johannesburg.

“People are taking this as pretty dovish,” Peter Attard Montalto, an economist at Nomura in London, said in an email. “I don’t think so necessarily. Everything else he has just said is unchanged and shows concern on expectations and currency impact.”

The rand fell as much as 9.9% against the dollar to a record low of R17.9169 in early-morning trading in Asia on January 11 during low liquidity. The so-called flash crash of the currency “is something that we are concerned about,” Kganyago said.

“There is nothing that a central bank can do to stop a currency to adjust to where fundamentals should be,” he said. “Exchange rates do overshoot and to the extent that this one has overshot, it will come back and adjust to the fundamentals.”

Weakening growth in South Africa is heightening the policy challenge for Kganyago. The International Monetary Fund on Tuesday cut its 2016 economic growth forecast for South Africa by almost half to 0.7% amid a slump in commodity prices and a slowdown in the nation’s biggest export market, China. Barclays Africa Group this week cut its GDP growth forecast for South Africa to 0.9% from 1.4%.

“South Africa is facing a policy dilemma, you are having slower growth and you are having rising inflation,” Kganyago said.

Finance Minister Pravin Gordhan, speaking on a panel at the World Economic Forum in Davos, said the IMF’s forecasts show “dismal” growth for the South African economy. The government’s revised growth estimates, due to be published in the budget next month, are more optimistic than the IMF, he said.

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