Ina Opperman

By Ina Opperman

Business Journalist


‘What evil are we trying to cure?’ – Reserve Bank governor on inflation, interest rates and the failed state

He unpacked the inflation problem this week at a PSG Think Big series webinar.


Reserve Bank Governor Letsetja Kganyago says inflation disproportionately affects the poor, diminishing their disposable income.

Kganyago said inflation had proven to be more persistent than initially anticipated in advanced economies. He was speaking at a PSG Think Big series webinar.

“Even after we adjusted rates, inflation kept on climbing and it only peaked in July last year before it started to decline although the declines were very minuscule t first.”

He said price stability adversely impacts the poor because they suffer more from inflation than any other income group. It’s not high interest rates but inflation that reduced people’s disposable income.

“People are now paying more for the same goods and services that they were consuming the year before. Inflation is reducing the disposable income of people and then the Central Bank has to step in to cap inflation and unfortunately, capping inflation involves us having to increase interest rates and as we do that, people feel pain.

“The medicine is not nice. It is a bitter medicine, but if the patient does not take this medicine now, the patient might end up in the ICU and we do not know whether they will come out of the ICU.”

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‘No, the Sarb is not fighting state failure’

Asked if the Sarb was not trying to fight state failure where higher interest rates was the price of state failure on so many fronts as it fed into cost and the inflationary scenario, Kganyago was quite firm.

“The concept of state failure should not be used loosely. The South African Reserve Bank is part of the state and we have not failed. When you talk about state failure, you must tell us where, which part of the state is the cause of failure.

“No, the causes are not a failure, so there might be parts of the state that are not functioning, but the term or concept of state failure should not be used loosely.”

Asked about the influence of the exchange rate, Kganyago said it was not one of the variables the central bank controls.

“Even as inflation has come down, we have made it clear that there are risks to the inflation outlook and among the risks we identified has been the oil price, food prices and the possibility of an El Nino effect.”

He said the exchange rate was also mentioned and the Sarb worried about the currency to the extent that it ends up feeding into inflation.

Kganyago also pointed out that global financial conditions had tightened.

“Interest rates increased globally and the indications are that interest rates are going to remain high for longer globally. This means there will be a realignment of exchange rates.

“We saw this week that the pound is at its weakest against the dollar since whenever. The Rand is so weak as it was in 2020. The euro is this weak against the dollar and there is a realignment of exchange rates and the Rand is no exception to that realignment.

“We have seen worse. We have seen interest rates at 26% before. I don’t think we will ever go there at least while you have the central bank that has been given this responsibility. What you should be watching is what happens to inflation, because the only thing that makes central banks increase interest rates is because inflation has gone up.”

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Inflation is much higher in other countries – Kganyago

He said just across the Atlantic, in the southern part of the Americas, there is a country with inflation of about 100%.

“Their interest rates are definitely not 8.25%. And north of here, just across the Limpopo, is another country with inflation in the nineties. Their interest rates are no way close to 8.25%. The countries with low interest rates at the moment are countries with low inflation.

Asked about economic growth, Kganyago said there was no country that grew sustainably because it had high inflation.

“I can’t find one. There are countries that are not growing and also have low inflation, but I can’t find one which is growing sustainably. Ask the Zimbabweans, ask the Turkish, ask the Argentinians, ask the Ghanaians, ask the Angolans, ask the Mozambicans what high inflation bought? It didn’t buy them growth.”

On what it would take to have a Brics currency or if it is just a political project, Kganyago said the Euro was also a political project, as is the proposal of an African currency.

“Let the people who take those decisions make those decisions.”

He said to establish a Brics currency there will have to be an issuer for starters.

“There must be a Brics central bank. I do not want to get into the politics of it, but a decision will have to be made. Where will this central bank be located?”

Kganyago also warned there would have to be one fiscal policy instead of five.

“You can’t have one currency and five fiscal policies. There will have to be a common fiscal policy, otherwise you do not have a single currency. Lessons from Europe also show there will have to be a banking union and a common regulation of banks in the Brics countries. The question that should be asked is what evil are we trying to cure.”

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