Kganyago: Rate hike tackles supply shocks, anchors expectations
South African Reserve Bank Governor Lesetja Kganyago announced a rate hike from 6.75 percent to 7 percent. Speaking at the BER Annual Conference, he explained the decision was necessary to manage persistent supply shocks and anchor inflation expectations.
Hopes fade, rates rise
SARB Governor Lesetja Kganyago detailed the Monetary Policy Committee's (MPC) decision to raise rates from 6.75 percent to 7 percent, a shift from the unchanged stance in March.
He noted that initial hopes for a quick resolution to global conflicts and supply chain disruptions have faded.
The Strait of Hormuz remains largely closed, causing sustained high prices for Gulf products like oil.
Furthermore, the outlook for food prices has deteriorated due to fertiliser shortages and high diesel costs in supply chains.
Kganyago highlighted farmers' concerns about planting next season and the additional risk of an El Niño-induced drought, solidifying the need for the recent rate adjustment.
The playbook for persistent inflation
Kganyago addressed critics who argue monetary policy cannot influence droughts or oil prices, asserting that such simple claims misrepresent its actual workings, especially in small, open economies.
He recalled the 'Team Transitory' experience of 2022, where some advanced economies initially dismissed supply shocks, only to tighten policy later.
Emerging markets, by contrast, responded timeously.
The Governor emphasized that while interest rates cannot prevent initial shocks, they are crucial for preventing persistently higher inflation if public expectations become unanchored, making the central bank's role vital in managing second-round effects.
Credibility above all
Kganyago's address highlights the challenge of distinguishing first- and second-round supply shock effects, demanding timely, judgement-based policy despite uncertainty.
It reiterates the SARB's commitment to low and stable inflation, even when requiring unpopular rate hikes in a weak economy.
This decisive stance safeguards central bank credibility and anchors inflation expectations against recurring global disruptions.