The job of a central bank is to worry, as a Fed official once said. And among the world’s central bankers, Lesetja Kganyago must be the greatest worrier of our time.
Because while his peers are focused on delivering so-called soft landings (hiking interest rates by just enough to tame inflation, but avoid a recession), Kganyago’s plane is already on fire, with the engine stolen mid-flight as it crashes towards a pot-holed runway.
The South African economy – which has been in a bad state for years – is being devastated by record load shedding, and Kganyago’s monetary policy committee has added immense pain by hiking the repo rate from 3.5% to 8.25% in less than three years. This is to fight red-hot inflation, with food prices at 14-year highs.
Rate hikes should dampen demand, which is supposed to cool prices and inflation. But critics point out that much of SA’s inflation is not fuelled by demand, but by other costs, like load shedding.
Key to South Africa’s inflation situation, however, is the rand. We import almost all our fuel, and many other key imports are also priced in dollar. In the current environment, high interest rates are crucial to keep the rand and local assets, like bonds, attractive to foreign buyers.
Until recently, local rates were juicy compared to rates of around zero in rich countries like the US and Europe. But this has changed as other central banks aggressively hike rates to fight inflation. South Africa’s interest rates now look much less appealing – at a time when the risk of investing here has also spiralled. And that is thanks to a government that delivered a massive electricity crisis, grey-listing and now also a diplomatic disaster that crashed the rand, which will trigger even more inflation.
Respected as a leading central banker in the world, whose MPC started hiking rates long before the West was supposed to, these completely avoidable crises have made Kganyago’s tough trade-offs now look impossible.
Helena Wasserman – Business24 editor.
