Reserve Bank governor Lesetja Kganyago. Picture: SUPPLIED
Reserve Bank governor Lesetja Kganyago. Picture: SUPPLIED

SA Reserve Bank governor Lesetja Kganyago has stood by the monetary policy committee’s (MPC’s) contested decision to hike interest rates in November 2018, calling the move “appropriate” at the time.

The Bank, which has been at the centre of a heated debate over its ownership and mandate to protect the value of the rand, faced intense backlash to the hike given the weak economy and strain on consumers. The ANC and its alliance partners have long argued that the Bank should also include economic growth and employment levels as policy goals, as targeting inflation tends to lead to higher interest rates.

“Faced with rising longer-term upside risks to the inflation outlook, the Reserve Bank felt that it was appropriate to act against such risks, especially in light of policy normalisation in advanced economies — which would most likely imply a higher neutral real interest rate for a small and open economy like SA’s,” Kganaygo told the Bank’s shareholders at its AGM.​

Since then, there have been favourable developments on the inflation front, he said, citing data showing prices are rising “at a more benign pace” than predicted a year ago, despite higher oil prices, significant rand depreciation, and the one percentage point hike in the VAT rate.

Last week, the MPC cut interest rates by 25 basis points, effectively reversing November’s hike. The Bank cited lower growth and lower inflation expectations for last week’s cut.

By early 2019, inflation had eased more than anticipated and the risks to the inflation outlook had eased sufficiently enough, Kganyago said.

“It is important to acknowledge the progress made in reducing inflation volatility in SA, including in response to exchange rate shifts, and how this has also allowed for better inflation expectations, and, in turn, how this has also limited the need for sharp monetary adjustments,” he said.

Kganaygo said the MPC would continue to exercise vigilance but that a stable interest rate path will “enhance the environment for sustained economic growth”. “In all our decisions, we must consider the trade-offs between short-term and long-term gains.”