Policymakers can also hit the brakes if needed to bring inflation to target.
(Repeats story first published on June 29)
South African Reserve Bank Deputy Governor Kuben Naidoo said Wednesday that policymakers can tighten monetary policy more aggressively if needed to reach their dominant goal of returning inflation to target.
“We are in the phase of taking our foot off the accelerator and we will continue to do that," he said in an interview after an online talk at the Toronto Centre, which trains financial supervisors. "We may have to do that faster depending on the data. If that doesn’t work we will have to start applying the brakes, so we will have to take interest rates above what we would consider to be a neutral level.”
The central bank’s model estimates neutral at 7%-7.25%, he said, though some individuals put it as low as 6%-6.5% or as high as 7.5%, he said. The SARB hiked its benchmark rate by 50bps to 4.75% May, the biggest such increase in six years, and has another decision in July.
Asked if hiking 50bps or perhaps more is consistent with the brake or the accelerator, Naidoo said: “At the moment we are taking our foot off the accelerator, and we could take it off at a faster pace.”
While returning inflation to target is the first priority Naidoo also said there's little evidence of broad-based surges or "second-round" price effects. Core inflation remains below the SARB's 4.5% target with the vast majority of price gains tied to food and fuel, he noted.
South Africa's 125 basis points of tightening has also been less aggressive than some other emerging markets, which Naidoo said makes sense given local inflation has also been slower than in places such as Brazil.
“One hundred twenty-five basis points in that context is not a little,” he said. “I don’t fully accept the criticism that we’ve been slow.”
“You could say that when the May CPI number came out at 6.5, you could say in hindsight we were too slow, that may be a fair criticism,” he said. “We started hiking in November last year, probably a couple of months after some emerging market central bankers started hiking, but certainly before most central banks hiked."
“In the short to medium term our job is to get on top of inflation,” he said.
ACTIVIST CENTRAL BANKER
Naidoo's official biography calls him an "activist and a public servant committed to achieving a socially just society," but he expressed caution when asked about the Fed's recent mandate shift to pursue a more inclusive job market.
“Central banks have a role to play but I do not believe that central banks can play that role fully, I think we would be overstating our role if we attempt it and we told the public that we can play that role,” he said.
Naidoo campaigned against apartheid and joined the public service soon after the transition in 1994, saying it's important to continue with activism within the conservative world of central banking. “I still see that as my job. I’m a public servant, I want to build a more socially just world, and at the moment the role that I play is in the central bank. Where is the contradiction?” he said.
“We have a history in emerging markets of inflation eroding the purchasing power of low-income people,” he Naidoo said. “Price stability and financial stability are important elements of a broader growth strategy. It’s not a sufficient condition, but I do think it’s a necessary condition.”