Kganyago outlines SARB playbook for supply shocks
South African Reserve Bank Governor Lesetja Kganyago discussed the central bank's approach to supply-side shocks and the 3% inflation target at Rhodes University. He emphasized the importance of managing second-round effects to prevent persistent inflation.
SARB's cautious starting point
Governor Kganyago noted that South Africa entered the current global price shock with inflation already at its new 3% target.
The policy stance was reasonably well calibrated, allowing the SARB to avoid urgent changes.
This position was achieved after two years of positive economic trajectory, marked by reform momentum, lower borrowing costs, a stronger rand, and an improved credit rating.
Despite a supportive global context for many emerging markets, the SARB moved cautiously, avoiding large 50 basis point cuts and refraining from cutting rates at every meeting, such as in January 2026.
This prudent approach meant the policy stance was not immediately rendered obsolete when new geopolitical conflicts emerged, providing a relatively stable foundation to confront severe shocks with inflation precisely at target.
Managing second-round effects
The established playbook for supply-side shocks focuses on looking through initial, fast-acting first-round effects, which monetary policy cannot immediately address.
Instead, the SARB prioritizes managing second-round effects, which occur when price shocks broaden out into the wider economy, impacting inflation expectations and wages.
These effects can transform a one-off shock into persistently higher inflation.
Kganyago highlighted pitfalls of a pure 'look-through' strategy, including the risk of multiple, overlapping shocks eroding trust in low inflation, and the loss of policy optionality.
He stressed that central banks must take responsibility for inflation in general, rather than ignoring supply-side pressures, a lesson reinforced by the post-COVID global inflation surge where emerging markets responded more proactively than rich countries.
A delicate balance ahead
The SARB faces a complex environment where its new 3% target is not yet firmly anchored, making the current fuel price shock particularly challenging.
While the rand has shown resilience, rising food prices and unanchored expectations could quickly broaden inflation pressures.
This necessitates careful data monitoring and a proactive stance to prevent second-round effects from derailing hard-won credibility.