Rashad Cassim: The state of the South African economy and the role of monetary policy

Speech by Mr Rashad Cassim, Deputy Governor of the South African Reserve Bank, at the Central Banking Conference, Cape Town, 14 March 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

These are some of the most remarkable years in the history of the South African economy. Unfortunately, they are remarkable for the wrong reasons. Domestically, we are experiencing the lowest growth episode in modern South African history, marked most recently by the widespread failure of basic infrastructure, especially electricity. Externally, we have been buffeted by a series of extraordinary shocks: the COVID-19 pandemic, the war in Ukraine, and a global inflation surge. These circumstances have profoundly affected the lives of all South Africans. They have also confronted policymakers with difficult choices. Today, I want to outline how monetary policy has responded, and share with you the main uncertainties and debates we are grappling with today.

I will start with the changing external environment. In 2020, the COVID-19 shock prompted an unprecedented drop in economic activity worldwide. We saw a broad decline in inflation which led to a huge wave of stimulus from fiscal and monetary authorities. In South Africa, this included lowering the repurchase (repo) rate to 3.5% - its lowest level ever. 

Fortunately, global pandemics are rare events, but this meant no one had much experience on which to base forecasts. While policymakers emphasised this uncertainty clearly, we can still say actual outcomes surprised most of us. For example, in 2020 it did not seem like the major advanced economies would soon be confronting the highest inflation rates in a generation.1 Part of the challenge was that the pandemic produced an unusual mix of supply and demand effects, which included supply chain disruptions and abrupt shifts in the composition of demand. On top of this came the Ukraine war, a further shock in none of our forecasts, which pushed up food and energy costs around the globe.