Any analysts who are banking on the Reserve Bank to reverse its stance and cut interest rates anytime soon could be mistaken.
Delivering a public lecture at Stellenbosch University on Wednesday evening, Reserve Bank governor Lesetja Kganyago said: “Inflation has not really been sufficiently low to get our high long-term interest rates lower, and this creates an economic cost that weighs more heavily on job creation as time goes on.”
Inflation has eased in recent months on lower oil prices and a firmer rand. The Bank’s monetary policy committee kept the repo rate unchanged at 6.75% in February after raising it 25 basis points for the first time in two years in November.
The committee will make its next decision on March 28, with analysts expecting an unchanged stance in response to the improved inflation outlook. Some analysts have pencilled in rate cuts towards the end of 2019.
“We have indicated that a consistently lower rate in the near term, at the midpoint of our target band, would lower long-term interest rates and be more supportive of balance in the economy,” he said.
With just two months until the national elections, Kganyago also reaffirmed the Bank’s independence amid heated political debates.
“At the end of the day, central bank independence allows the Reserve Bank to hear what different interest groups have to say, but gives it the policy space to make decisions about inflation that on balance benefit all,” he said.
Earlier in 2019, the ANC, which voted in favour of nationalising the Bank at its 2017 elective conference, stated in its election manifesto that the central bank must consider the effect of monetary policy on economic growth when it decides on interest rates.
“Independence is the flip side of accountability. A central bank cannot be easily held to account if private or political actors have the ability to sway its decisions,” Kganyago said.
According to the constitution, the Bank’s mandate is to protect the value of the currency in the interest of balanced and sustainable growth.
“Central bank independence is really just about giving the Reserve Bank the institutional freedom to get on with those two things,” Kganyago said.
To achieve this, the Bank uses inflation targeting to anchor inflation to the midpoint of the 3%-6% target band through monetary policy and interest-rate decisions.
“This independence means that the Reserve Bank can make the case for how best to achieve that goal, in consultation with government and with full transparency to the general public,” he said, adding that the Bank’s inflation-targeting framework is the best way of achieving the mandate.
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