lesetja kganyago : monetary policy and south africa ’ s economic objectives keynote address by mr lesetja kganyago, governor of the south african reserve bank, at the fedusa collective bargaining conference 2015, muldersdrift, 17 february 2015. * * * good morning ladies and gentlemen. thank you for inviting me to address you today as you prepare to participate in collective bargaining across a range of industries. in particular, i would like to thank mr. koos bezhuidenhout, the president of fedusa and mr. dennis george, general secretary of fedusa. the south african reserve bank has enjoyed a healthy and productive relationship with your federation for many years, a relationship i wish to continue. you have asked me to address the pertinent question of whether monetary policy is still supportive and accommodative of south africa ’ s economic objectives. my emphatic answer to the question is yes, monetary policy is still accommodative and supportive of south africa ’ s economic objectives. in elaborating on this short answer, i will discuss three broad issues. firstly, what is the mandate of the bank in achieving south africa ’ s economic objectives? secondly, i will explain in an historical context why monetary policy at the present moment is highly accommodative ; and thirdly, i will discuss some of the longer term policy challenges confronting workers and the south african economy in general. this third part of the answer will provide some context, both in answering your question and points for you to ponder as you prepare for the next round of collective bargaining. the constitution mandates the bank to protect the value of the currency in the interests of balanced and sustainable growth. the value of the currency in your pocket is its buying power. our aim is to maintain the buying power of each rand you earn or have saved. we do this by aiming to keep inflation low. hence our primary mandate is price stability. the bank also plays a key role in regulating the financial sector with the aim of maintaining financial stability. we do this to protect workers and the economy from shocks that may arise in the financial system. why do we pursue price stability and how does this objective fit into south africa ’ s overall economic objectives? indeed, you may legitimately ask, what does balanced and sustainable growth mean and is low inflation a prerequisite for balanced and sustainable growth? these are critical questions in understanding south africa ’ s economic policy architecture. there are very

the markets, the rand could strengthen or weaken by over a percentage point in a day. in addition to these global factors, domestic growth has been weak because of our own owngoals. lengthy and sometimes violent strikes, electricity supply constraints, perceived or real concerns about economic policies and a slow breakdown in trust between major social partners have deducted from growth and investment. in 2012, the marikana strike and its consequences knocked exports as well as confidence ; confidence in our ability to manage our social stresses. in 2013, the motor industry strike and related strikes in the automotive component sectors and transport sectors knocked over 0. 5 percent off our growth. in 2014, the five - month - long platinum strike and the four week manufacturing sector strike knocked over one percentage point off our gdp growth. while electricity constraints have become more binding in recent months, the lack of supply capacity has cost us foregone investment for much of the past five years. national treasury estimates these costs to be about 0. 3 to 0. 4 percentage points of gdp a year, and this was before load - shedding resumed in december 2014. lower electricity capacity for the next three to four years is a major reason behind the bank ’ s downward revision to gdp growth for 2015 from 2. 5 percent to 2. 2 percent. we hope that business, labour and government can join together to manage the electricity constraint in a manner that does least damage to the economy. bis central bankers ’ speeches strike activity and a slow breakdown in trust between major social partners have impacted on business confidence and hence on investment. add to this weak consumer demand, and it appears as though the economy is in a rut : weak demand leads to low investment, weak investment means no growth in employment and household incomes. how does one break out of such a rut? there is little space for macroeconomic policy in this context. fiscal policy, having been used successfully to offset weak demand for six years has reached its limits. a failure to consolidate the fiscal position would leave the country vulnerable in the face of another global shock, and if the country ’ s credit rating is further downgraded, would raise borrowing costs for the entire economy. fortunately, in the 2014 mtbps, the minister of finance outlined a clear path towards fiscal consolidation in south africa. monetary policy is constrained by the fact that inflation has either been close to or above the target band for a significant period over the past two years. in the absence of macroeconomic policy space, which