Reserve Bank Governor Lesetja Kganyago says lowering the inflation target point could benefit the country’s economy by keeping interest rates low. Kganyago says, however, lowering rates is not the answer to the country’s unemployment problem.
He says implementing structural reforms is the only way to reduce unemployment. Kganyago was delivering a virtual public lecture hosted by Stellenbosch University.
He says a clear target of 3% would be more useful than the current inflation target range of 3 to 6 %. He says lowering the county’s inflation target range was always part of the plan until policymakers lost their nerve when the rand depreciated during the Argentine crisis in 2001.
“Naturally, a step like this would involve some work. Part of this would be coordination with the government. The task of locking in a lower target will be fundamentally easier and cheaper if we get buy-in from administered price setters. Stats SA reports a measure of inflation excluding administered prices, and this is already in the region of 3%, it has averaged 3.5% so far this year.”
Kganyago says the easiest way to destroy price stability in South Africa would be to insist on lowering interest rates because of unemployment. He says a move like that would result in higher inflation as well as higher unemployment.
“I am even more painfully aware of a South African disease. We are scared of reform; we make every excuse to avoid it; we emphasise any short-term pain and discount any long-term benefits, and then we sit around wondering why our economy is stagnating, why our young people can’t find jobs, and why we are getting steadily poorer relative to the rest of the world.”
Kganyago says despite the country’s challenges, prices for export commodities have improved this year, while the pace of economic recovery from the COVID-19 shock is promising.
