EDITORIAL | Reserve Bank has got it right on inflation and rates

The South African Reserve Bank can be forgiven for patting itself on the back for a cool-headed monetary policy stance that might just keep inflation from going completely off the rails in the face of the global oil price spiral wrought by the Middle East war.

At the bank’s most recent policy meeting, governor Lesetja Kganyago recounted how it has repeatedly warned about elevated risks and, therefore, is proceeding cautiously in its rate-setting, adding: “Now a crisis has hit, thisprudent approach is proving appropriate.”

It’s no secret that for years the central bank, under the leadership of Tito Mboweni, Gill Marcus and now Kganyago, has faced relentless criticism over what its detractors, including labour and political parties, have seen as its obsession with keeping inflation low through higher borrowing costs at the expense of economic growth.

In the face of accusations of “punishing the poor” through prohibitive interest rates while serving the interests of “white monopoly capital”, Kganyago and team have, regardless, been dogged in their quest to keep price pressure contained.

Thanks to that stance, inflation now sits at just 3.1% after peaking at nearly 8% during the Covid-19 pandemic and — provided the Middle East conflict is not protracted — is likely only to reach 4% this year even as fuel prices push production and consumer costs higher.

Credit must also go to finance minister Enoch Godongwana who, despite being a politician and as susceptible to populism as the best of them, has publicly defended the independence of the Reserve Bank, though he might privately have wanted to see more interest rate cuts himself.
 

A far cry from the leader of the world’s biggest economy who has repeatedly and publicly thrown his toys out of his cot whenever outgoing Federal Reserve chair Jerome Powell has refused to bow to his pressure to reduce borrowing costs in the US.
 

Yes, there were clearly tensions last year when the Bank signalled its desire to shift the inflation target to 3% from a 3%-6% band, a move Godongwana perceived as trying to force his hand on the issue. But these were more about process, timing and institutional authority than outright policy disagreement.
Godongwana was arguably within his rights to be annoyed that the central bank had more or less announced the new target on its own, stressing that the target is set by the finance minister and cabinet.
 

But other than that, the Treasury and central bank have been in lockstep insteadily steering South Africa’s financial ship recently ― pushing hard to stabilise debt and reduce borrowing costs, and pursuing a credible monetary policy that has helped anchor inflation expectations in their present lows.
 

We are not out of the woods yet. In the worst-case scenario, the Reserve Bankwarns that inflation could spiral to nearly 4.6% this year and peak at 5.5% in 2027, which could force the central bank to hike interest rates more than once.
 

But in a highly volatile and uncertain climate such as this one, when no-one knows when the
Strait of Hormuz will become fully operational and oil can start flowing smoothly once again, it helps to have a credible central bank that remains vigilant on inflation without prematurely pulling the trigger on interest rates.