Lesetja Kganyago. Picture: TREVOR SAMSON
Lesetja Kganyago. Picture: TREVOR SAMSON

Reserve Bank governor Lesetja Kganyago mounted a strong defence of the institution’s independence, saying the only way it can help lower the cost of capital to support economic growth is by controlling inflation as stated in its constitutionally protected mandate.

"Monetary policy brings down the cost of capital by reducing inflation, even for the government," he said in an interview with Business Day on Friday, the day after the central bank decided to keep its repo rate unchanged at 6.5%. "As long as inflation is high, government will pay more for its borrowing activities. High inflation leads to a high cost of capital."

The Bank’s decision prompted a farce from Luthuli House when ANC spokesperson Phelisa Nkomo, who has since been banned from speaking on the economy, issued a statement imploring the monetary policy committee (MPC) to "prioritise the plight of poor South Africans". Those comments were later disowned by the ANC’s economic policy head, Enoch Godongwana, who affirmed the party’s respect for the Bank’s independence.

With less than a year before the next general election, when the ANC will face voters burdened by a weak economy and an unemployment rate of more than 27%, calls on the Bank to loosen monetary policy and support the economy will probably intensify, even as inflation edges towards the upper limit of its 3%-6% target.

Policymakers argue there is no trade-off between controlling inflation and boosting growth, saying by defending the buying power of the rand, they protect the most vulnerable in society and that lower inflation also keeps a lid on government bond yields, so that it can dedicate more resources to funding its social welfare and economic growth priorities, instead of diverting cash to pay interest.

The Bank went to court in 2017 to defend its independence after public protector Busisiwe Mkhwebane recommended that its mandate be tampered with so that it focused less on currency and price stability and more on economic growth.

The ANC resolved at its December 2017 conference to nationalise the Bank, although private shareholders have no say in the formulation of monetary policy. The president already appoints the governor, who then heads up the MPC, which oversees the implementation of the mandate.

Kganyago denied that he had called the ANC headquarters to complain about Nkomo’s statement, but confirmed that he had discussed it with finance minister Nhlanhla Nene.

The MPC voted 4-3 last week to keep rates unchanged even after cutting its economic growth forecast for 2018 to just 0.7%. Three members voted for a 0.25% hike, prompting economists to suggest that the next move in rates will be higher. The MPC expects headline inflation to peak at 5.9% in the second quarter of 2019 and average 5.7% for the year as a whole.

Kganyago rejected the notion that the Bank taking its eye off the inflation mandate would support the economy, saying countries that have the lowest rates of inflation are also the ones with the cheapest borrowing. "If you want low interest rates, you must have low inflation," he said. "Have you asked yourself why is it that interest rates in Japan are 0.1%? Why is it that the policy rate in the US is 1.75%." The euro area has a benchmark rate of zero.

"It’s because there is virtually no inflation. Alternatively, we can look at Turkey. It’s so logical." Turkey’s central bank raised its key rate to 24% earlier in September, as it sought to deal with runaway inflation and prevent a currency crisis.