lesetja kganyago : how the new global environment is influencing the state of south africa's economy address by mr lesetja kganyago, governor of the south african reserve bank, at the lebanese chamber of commerce, pretoria, 7 march 2023. * * * introduction ladies and gentlemen, it is my pleasure to address you today at this event hosted by the southern african lebanese chamber of commerce. i commend the efforts of the chamber to deepen economic ties between lebanon and southern africa, especially the long - established and thriving lebanese community in south africa. last year, trade between south africa and lebanon amounted to over r170 million. as we look into the future, i believe there is room to strengthen ties even more. the topic chosen for my address – how the global environment is influencing the state of south africa's economy – could not be more topical. since the spread of the covid19 pandemic across the globe three years ago, the world economy has faced numerous shocks, which have compounded the domestic challenges faced by south africa and complicated the task of central bankers, both here and in the rest of the world. covid - 19 and other macroeconomic shocks the major disruptions since the onset of the pandemic in early 2020 challenged the belief of many that the world had entered a long phase of low and stable inflation. we now know that the'closing and reopening'of economies due to the pandemic would not occur without major supply and demand mismatches in most markets. supply chains, stretched by the staggered reopening of economies, only proved as resilient as their weakest link, resulting in major delivery lags and higher costs in key industries. labour supply did not adjust automatically when firms began to hire again, resulting in tight labour markets and, in some jurisdictions such as the united states or the united kingdom, an unusually high level of unfilled vacancies relative to unemployment. there was no precedent in recent history that we could learn from relating to the policy responses required to manage the pandemic shock. even after economies had reopened, fears of long - term scarring, including bankruptcies and permanent job losses, prompted coordinated responses from governments and central banks to uphold highly stimulative policies. in retrospect, we now know that such stimulus provided excess support to demand at a time when supply was struggling to adjust, which compounded inflation. the war in ukraine, which

decided to keep the policy rate unchanged at its september meeting. this does not prejudge any future moves. rather, because of the elevated level of uncertainty we are currently facing, the mpc feels a particularly strong need to reassess the balance of risks at every meeting. consequently, monetary policy decisions, now more than ever, have to be data - dependent. the most recent decision of the mpc appeared to surprise domestic money markets somewhat, as they had come to discount a 25 basis points rate cut in the wake of the july move. we prefer not to surprise markets. in fact, we see policy transparency and consistency as crucial in ensuring an effective transmission of rate decisions to the economy. yet in a fluid environment, where even small changes in the balance of risks can tip the policy scales one way or another, it is not possible to systematically come up with fully predictable policy decisions – just as it is not possible, in such an environment, for the mpc to give the kind of forward guidance that some call for. if anything, domestic financial market indicators seem to broadly echo the sarb [UNK] s view that the uncertain environment is forcing a cautious approach to policy. thus, forward rate agreements only discount a short and shallow easing cycle while the yield curve is positively sloped – a sign that investors are cognisant of the upside risks to inflation, and therefore to policy rates, in the medium to long term. conclusion – the continued relevance of the inflation target range the challenges that south africa has had to face over the past few years – in particular the combination of slow growth and relatively high inflation – may have led some observers to question whether the current inflation target range remains page 7 of 8 relevant for the country at this stage. in my view, raising or even contemplating abandoning the inflation target band would be a misguided approach. both economic theory and historical experience show that whenever the price and wage formation process is rigid and price expectations are adaptive rather than well anchored, the cost of negative shocks tends to be higher and longer - lasting in real economic terms. south africa [UNK] s own experience of the most recent global financial crisis, which saw the country suffer a relatively high number of job losses, illustrates the merit of such a strong and credible price anchor. in fact, many emerging economies, including those at a similar level of development as south africa, have enjoyed both stronger economic growth as well as lower and more stable inflation since introducing inflation targets. this observation has continued to apply since the