Kganyago on global economy, monetary policy & inflation outlook

South Africa's economic outlook for 2024 was a key focus at the World Economic Forum where Lesetja Kganyago, the Governor of the South African Reserve Bank, shared insights on the vulnerabilities in the financial system and the impact of inflation on monetary policy globally. In a conversation with CNBC Africa's Fifi Peters, Kganyago delved into the challenges central banks face in responding to inflationary pressures, tightening financial regulations, and the potential risks associated with non-bank financial institutions. One of the key risks identified by Kganyago was the inflationary pressures leading central banks in developed countries to act more aggressively than emerging markets in adjusting rates. While developed economies began rate adjustments in 2022, many emerging markets had already started in 2021, resulting in a significant catch-up for the former. This adjustment, while initially benefiting banks with higher interest rates, eventually led to stress for borrowers and an increase in non-performing loans. Furthermore, the shift of leverage from traditional banks to non-bank financial institutions raised concerns about the oversight of these institutions and the potential risks they pose to financial stability. Kganyago highlighted that the stance of monetary policy, particularly in developed markets, indicates a trend towards higher policy rates for a longer period, as central banks are unlikely to meet their inflation targets before 2025. In terms of South Africa's monetary policy stance, Kganyago emphasized that the decision is anchored in the economic outlook, including growth and inflation metrics. Despite calls for interest rate cuts, Kganyago highlighted the importance of sustainable inflation decline towards the midpoint of the inflation target range before revisiting the monetary policy stance. He stressed that monthly fluctuations in inflation should not dictate policy decisions, but rather the long-term inflation outlook over the next 12 to 24 months. Regarding the potential impact of geopolitical tensions on inflation and supply routes, Kganyago expressed concerns about disruptions in global supply chains, particularly related to the Red Sea route. He noted that such tensions could lead to increased freight costs, which may be passed on to consumers. However, Kganyago also highlighted the opportunity for South Africa to offer alternative trade routes if domestic paths are optimized. Reflecting on past monetary policy decisions, Kganyago outlined the positive impacts of rate increases on reining in inflation and maintaining economic stability. He compared South Africa's response to previous crises, noting that the central bank's credibility in containing inflation has allowed for lower peak rates over time, despite recent rate adjustments. Kganyago underscored the importance of building a policy buffer to support the economy during times of crisis. In response to questions about the departure of former Deputy Governor Kubernaidu, Kganyago explained the governance protocols in place to manage transitions within the institution. He noted that individuals leaving key positions are placed on a cooling-off period to protect the bank's integrity and avoid conflicts of interest. While not speculating on potential replacements, Kganyago emphasized the diverse responsibilities held by central bank officials beyond monetary policy discussions, highlighting the broad scope of their roles. As South Africa prepares for the first Monetary Policy Committee (MPC) meeting of the year, Kganyago's insights provide a comprehensive view of the factors shaping the country's economic trajectory. With a focus on inflation, financial vulnerabilities, and global economic trends, the South African Reserve Bank remains vigilant in navigating a complex and dynamic economic landscape.