SARB ‘powerless’ in low-growth trap – ‘Unable to assist recovery’

Caught between a rock and a hard place may be the right situation for South African Reserve Bank governor Lesetja Kganyago. Speaking at the Group of 20 meetings over the weekend in China, he said the economy is caught in a low growth environment, and the central bank is unable to assist in a recovery. And while inflation moderated to a respectable level according to the Reserve Bank, which saw interest rates kept on hold, the zero growth rate expectation raised alarm bells. He said the country’s problems are structural while his division deals with technical factors. But some may argue against Kganyago’s ineffectiveness on this front as the last thing the country needs is ‘stagflation’ to join the likes of recession and junk. It’s an interesting conundrum, growth versus inflation, and it may be time to revisit the textbooks.The country needs all stakeholders to fight the same cause. – Stuart Lowman

by Tom Mackenzie

(Bloomberg) — South Africa’s economy is in a low-growth trap and the central bank is unable to assist its recovery, according to Governor Lesetja Kganyago.

“We are concerned about what has been happening with the growth outlook,” Kganyago said in a interview with Bloomberg TV at the Group of 20 meetings in Chengdu, China, on Saturday. “The slowdown in the economy has nothing to do with technical factors that have to be dealt with by monetary policy. The slowdown in growth has to do with structural impediments.”

SARB Governor Lesetja Kganyago
SARB Governor Lesetja Kganyago

The Reserve Bank’s Monetary Policy Committee left the benchmark repurchase rate unchanged at 7 percent on July 21 as it slashed its 2016 growth forecast for Africa’s most-industrialized economy to zero percent. The nation’s economic outlook has deteriorated due to weak export demand, the worst drought in more than a century, low commodity prices, and most recently, the U.K.’s vote to quit the EU. The MPC raised the key rate by 125 basis points since last July to steer inflation back toward its 3 percent to 6 percent target band.

The rand has strengthened 8 percent against the dollar this year after losing 26 percent of its value in 2015.

Inflation below forecasts gave the central bank room to pause its interest-rate increase cycle, Kganyago said. While price growth could surprise to the downside if the rand sustains its recent strength, the central bank stands ready to act on interest rates if necessary, he said.

Inflation quickened to 6.3 percent in June and will probably return to the target band in the third quarter of next year, according to central bank forecasts.

If a high inflation rate becomes the norm, observers may think the central bank is happy to tolerate price growth outside the target range, Kganyago said.