Rashad Cassim: Seeing like a central bank - the SARB, supply shocks, and the logic of higher interest rates in a world of low economic growth

Keynote address by Mr Rashad Cassim, Deputy Governor of the South African Reserve Bank, at the ACI Financial Markets Association South Africa, Johannesburg, 6 September 2022. 

Central bank speech  | 
06 October 2022

Introduction

Good evening, ladies and gentlemen.

The South African Reserve Bank (SARB) has increased the repurchase (repo) rate at each Monetary Policy Committee (MPC) meeting since November of last year; our most recent move was 75 basis points, to 5.5%. We are raising rates in the context of higher inflation, with headline inflation currently at 7.8% − well above the 6% upper bound of our target range. I hear many questions about why we are raising rates, seeing that inflation is driven primarily by supply shocks in the form of higher global food and oil prices, while demand pressures in the economy are limited. I hope to explain today how central bankers think about what tools they have at their disposal in these circumstances. In so doing, I would like to make two points.

First, we are aware of the role of supply shocks in driving inflation, and we understand that monetary policy cannot cancel out something like a sudden food price shock. The task we set ourselves on the MPC is different. Our objective is to look past the immediate supply shock, focus on the period after it has subsided, and ensure inflation stabilises at that point. I will discuss what factors we consider in pursuit of that goal.