lesetja kganyago, governor of reserve bank of south africa, sat down for an interview thursday, oct. 6, 2016, with the wall street journal<u+2019>s kate kavidson, in washington d.c. <u+00a0>the central banker was in town for the international monetary fund<u+2019>s and world bank<u+2019>s fall meetings. he discussed monetary policy, rising protectionism, the fall in commodity prices, the prospect of a federal reserve interest rate increase and central bank independence, among other topics. here is a transcript of the conversation, lightly edited for length and clarity. ms. davidson:<u+00a0> why don<u+2019>t we start with some the themes that you<u+2019>re discussing while you<u+2019>re here <u+2013> global growth challenges. i guess i wanted to ask first if you<u+2019>re concerned at all about protectionist voices that we<u+2019>re hearing kind of around the world, and either in your economy or globally.<u+00a0> one example, you know, we<u+2019>re hearing a lot here in the u.s. is [republican presidential candidate] donald trump. i don<u+2019>t know if you<u+2019>re <u+2013> do you have thoughts or concerns about the election that<u+2019>s happening here right now, or global risks <u+2013> political risks more broadly? mr. kganyago:<u+00a0> i think the global economy is not in a good space at the moment.<u+00a0> growth has been revised down once again, not by <u+2013> not by much. but different regions have been affected in different ways.<u+00a0> you could say that you are seeing recovery in the u.s.<u+00a0> china continues to grow.<u+00a0> the euro area is struggling.<u+00a0> the u.k. was growing.<u+00a0> so the global economy is <u+2013> it<u+2019>s still growing, but it is not the kind of growth that we had actually hoped to see. which then begs the question, what<u+2019>s to be done?<u+00a0> and both the imf and the [organization for economic co-operation and development] have done work that suggested that, should countries with fiscal space utilize that space to give a boost to growth, that everyone else will also benefit from that.<u+00a0> but not everyone has fiscal space. and i guess that was a way of saying we think that monetary policies have done what they possibly could under the <u+2013> under the circumstances.<u+00a0> and that the thing that is constantly coming through these meetings now, which had also come through during the spring meetings, is that it is now time to embark on structural reforms.<u+00a0> because both fiscal and monetary policy, which have an impact on cyclical growth, but what actually would lift the potential growth is those structural reforms that are actually required.<u+00a0> so that is what <u+2013> one they wanted to see. now, the way in which countries respond, it<u+2019>s also important.<u+00a0> and the bigger economies<u+2019> responses have got spillovers to everyone else.<u+00a0> and as you correctly pointed out <u+2013> asked, am i concerned about the rise of protectionism?<u+00a0> the [world trade organization] earlier in the year reported that they are concerned.<u+00a0> and they had compiled a number of <u+2013> they said that there was a rise in protectionist measures among countries.<u+00a0> and they specifically identified countries in the g-20, because those are the big <u+2013> the big economies. and i actually think that rising protectionism will actually undermine the nascent economic recovery that we are having in the global <u+2013> in the global economy.<u+00a0> and in a way, protectionism itself seems not very logical.<u+00a0> you want access to other countries<u+2019> markets, but you don<u+2019>t want them to have access to yours? ms. davidson:<u+00a0> right.<u+00a0> so, we<u+2019>re now two years after commodity prices began plummeting.<u+00a0> what has been the aftermath, you know, in your economy, in your region, and globally? mr. kganyago:<u+00a0> globally is a difficult one, but i can talk about the region and for our economy in particular. when you (have) a decline in commodity prices which took place early last year sometime, you had the oil price decline, and it declined faster than the other commodities that south africa exports.<u+00a0> so we had a temporarily terms of trade benefit, ok?<u+00a0> so what you then had was that you could export, because the prices are better, the commodity producers in our country, the miners are profitable.<u+00a0> we benefitted from a decline in the <u+2013> in the oil price, which meant that we were able to keep inflation in check. when you start looking at the continent, you have to distinguish then between oil producers and other commodity producers, and see what has actually happened.<u+00a0> and oil exporters on the continent took a significant <u+2013> a significant knock.<u+00a0> for many of them, they ended up with deteriorating current account balances, deteriorating budget deficits.<u+00a0> and for many of those oil exporters, they ended up having to go out and borrow and plug the gap in the hope that there will be a recovery in oil prices. that recovery hadn<u+2019>t taken place until recently.<u+00a0> <u+00a0>but even still, it<u+2019>s nowhere close to what these countries previously experienced.<u+00a0> and more importantly is that, even with the recovery in commodity prices now, of late, any hope that the commodity prices will recover to their previous highs, i think, that that one we must take off the table.<u+00a0> i do not see that happening in the current economic environment that we are actually <u+2013> actually have. ms. davidson:<u+00a0> so would you say that south africa is prepared for a [u.s. federal reserve interest] rate increase, perhaps by the end of the year?<u+00a0> and do you think that the fed should hold off, or should it be thinking about moving more quickly raising rates in the u.s.? mr. kganyago:<u+00a0> the fed should do what is good for the u.s. economy.<u+00a0> and even if the fed is hiking rates because they believe that the u.s. economy is recovering and is strong, a recovering and strong u.s. economy is good for the world economy.<u+00a0> and the spillovers then from a recovering global economy will benefit all of us.<u+00a0> so that is one set of issues. the second set of issues is that when the u.s., the fed, embarked on unconventional monetary policies, you experienced a surge of capital flows to emerging market countries, including south africa.<u+00a0> and when the fed then said that they are starting to unwind these unconventional monetary policies, when they first indicated it in 2013, you saw a reversal of flows from emerging market countries.<u+00a0> and actually, i think figures showed that last year was another year where there was a net outflow of capital from emerging market countries. yet, today, there have been a resurgence of flows to emerging market countries, some say because the fed seems to have <u+2013> the figures seem to suggest that the fed (inaudible).<u+00a0> i think that the fed had communicated well last year in the run-up to the december rate hike.<u+00a0> and i actually think that when you look at how the fed has communicated what it is seeing and what it think(s) it would do this year, for me it has been clear.<u+00a0> why the markets are not believing what the fed is saying is another matter.<u+00a0> but i actually think the main reason the fed has communicated, they have almost tried to take as much uncertainty as they could out of the markets. that does not mean that everything is certain.<u+00a0> there are so many moving parts, they are <u+2013> there is a lot of data that could give conflicting signals.<u+00a0> if the fed hikes, what would that mean for south africa?<u+00a0> what does it mean for emerging markets?<u+00a0> if the fed hikes, our baseline scenario is that there will be a reversal of flows from emerging markets into the <u+2013> back into the u.s.<u+00a0> and if that happens, there will be a repricing of emerging market financial assets, and that there will also be a global realignment of exchange rates as these flows also affect exchange rates. so i can<u+2019>t say to the fed:<u+00a0> this is what you must do, this is what you must not do.<u+00a0> all that i can say is that if they eventually increase interest rates, the two channels that we will expect it should be affected through will be the real economic effect and a portfolio balance effect. ms. davidson:<u+00a0> so how are you seeing the slowdown in china filtering through your economy <u+2013> the economy in your country and the region? mr. kganyago:<u+00a0> part of the decline in commodity prices had to do with a slowdown of the chinese economy.<u+00a0> and so, when you have china slowing down, you will see an impact on commodity prices.<u+00a0> but this time around, it is actually going to be more significant than previously, partly because the chinese authorities have indicated <u+2013> or have indicated that they are now going to rebalance their economy away from the investment-led growth, towards a consumption-driven economy.<u+00a0> and what that would mean is that if they then rotate growth from investment to consumption, many of the industrial commodities which are inputs into infrastructure investment in china would then be affected.<u+00a0> and that would mean that commodity prices<u+2019> recent recovery would be constrained by reduced demand, which is why i said that even with the recovery in commodity prices you don<u+2019>t expect that they would be back to where we had previously seen then. ms. davidson:<u+00a0> ok.<u+00a0> so i understand at last press conference you said that the bank may be close to the end of your tightening cycle.<u+00a0> what events could press you to raise rates nevertheless?<u+00a0> and what would need to happen in the economy for the bank to cut rates? mr. kganyago:<u+00a0> you know, at our recent meeting we stated that the risks to the inflation outlook are more or less balanced, which meant that the effects of that had been (inaudible) inflationary pressures are beginning to behave, we believe; and, more importantly, that those factors that could lead to a decline in the interest <u+2013> in the inflationary are also behaving.<u+00a0> and what we were actually saying is that the combination of inflation-driving sectors and inflation-slowing sectors is balanced, which then led to a situation where we said that we might be coming close to the end of our hiking cycle.<u+00a0> we didn<u+2019>t say we are done hiking; we said we might be coming close to the end of our <u+2013> of our hiking cycle. and we also then took it further and said that the bar for future rate cuts has actually been set very high.<u+00a0> and you say, which factors?<u+00a0> well, we look at the following.<u+00a0> do we look at our inflation forecast of the bank?<u+00a0> when you look at the inflation forecast of the bank, it will get back into target in the second quarter of the next year.<u+00a0> and by 2018, we will be at 5.5 (percent).<u+00a0> it<u+2019>s within the target we set.<u+00a0> we would like to see it firmly within the target.<u+00a0> five-point-five is not quite firmly within the target.<u+00a0> you round this thing up, it still looks like a six rather than a five.<u+00a0> and the fact that inflation remains close to the upper end of our target range suggests to us that there is still persistence in the inflation <u+2013> in the inflation rate. second, inflation expectations are bubbling at the upper end of our inflation target range.<u+00a0> and those expectations, whether you measure the expectations of analysts or whether you measure the expectations of price that has been business and labor, they are uncomfortably bubbling at the upper end of our increasing target range.<u+00a0> actual inflation is at 5.9 (percent), which is just within the target.<u+00a0> so you<u+2019>re going to have to look at all of the <u+2013> all of those. and what does that actually mean?<u+00a0> what it means is that we are going to have to continuously look at the data and see whether the risks that we had identified that we thought could lead to a higher increase <u+2013> being the exchange rate, being oil prices, being wage settlements <u+2013> whether they are getting better or they are getting worse.<u+00a0> put simply, we will continue to be data dependent in the manner in which we decide on this. ms. davidson:<u+00a0> i<u+2019>ve heard that somewhere before, like over at the fed.<u+00a0> (laughs.) so there have been some <u+2013> i<u+2019>m told <u+2013> some remarks from officials recently questioning the independence of the central bank.<u+00a0> does that concern you?<u+00a0> we<u+2019>re hearing similar sentiments here, again, in our presidential election, talking about political independence in the fed.<u+00a0> you know, does that worry you?<u+00a0> and what does it mean for sort of central banks being able to operate effectively? mr. kganyago:<u+00a0> it doesn<u+2019>t worry us at all.<u+00a0> can i say that you said officials?<u+00a0> there have been no officials in government who have raised issues about the independence of the bank.<u+00a0> but things have been raised. ms. davidson:<u+00a0> ok.<u+00a0> things have been said.<u+00a0> thank you. mr. kganyago:<u+00a0> ok?<u+00a0> and these things being raised about the mandate of the central bank and the way in which the central bank conducts itself, these are contestations you have in a democracy.<u+00a0> and in advanced economies, where central banks are perceived to be always powerful after the unconventional monetary policies, you are also having those contestations taking place.<u+00a0> and in a democracy, these things will always <u+2013> they will always occur. what i can say to you, what gives us in south africa so much confidence, besides the fact that the mandate of the reserve bank is derived from the constitution, its independence is enshrined in the constitution.<u+00a0> we know that should that be changed, you will need a higher threshold in government.<u+00a0> you would need to have a two-thirds majority.<u+00a0> but more importantly is that such a change will have to be certified by the constitutional <u+2013> by the constitutional court. so that gives us confidence.<u+00a0> but something of late has been giving us even more confidence, is that the wisest of people <u+2013> south africans who say that institutions of our democracy are important don<u+2019>t even think of interfering with institutions of our democracy is what gives us confidence.<u+00a0> south africans understand these institutions of our democracy, including the reserve bank, have served south africa well.<u+00a0> and the resilience of these institutions have been tested, and we have passed those tests with flying colors.<u+00a0> whether you are talking about the public project, whether you are talking about the independent electoral commission, whether you are talking of the office of the auditor-general, whether you are talking about the human rights commission, whether you talk of the courts, all of these institutions have asserted themselves. so you will have contestation in society.<u+00a0> and what we owe the founders of our democracy is these bequests that they had given us, which have been very strong institutions to protect our democracy. ms. davidson:<u+00a0> i guess a final question is <u+2013> i<u+2019>m not sure how much this affects south africa, but we<u+2019>re hearing a lot about weakness in the european banking sector, looking at negative rates, what the ecb is doing. deutsche bank has been in the news.<u+00a0> are you following developments there?<u+00a0> and <u+2013> mr. kganyago:<u+00a0> yes, we do.<u+00a0> we don<u+2019>t comment on the individual institutions. but when we hear that there are issues with the european banking system, what we would always then try and establish is what is the exposure of our banking system to the european financial system?<u+00a0> and we would then have to find out from them, are you exposed to the weak ones or are you exposed to the strong ones?<u+00a0> i<u+2019>ve got no doubt that the european authorities are alive to the challenges with the banking system in europe, and surely would deal with that. what i <u+2013> one word that i would like to leave with you is that today the world is having financial institutions that are stronger and more resilient than we had going into the global financial crisis.<u+00a0> capital bases are stronger.<u+00a0> regulators are on top of issues more than they were at the time of the global financial crisis.<u+00a0> the liquidity levels in the institutions are strong. but as you have correctly pointed out, when you have negative yields in the advanced economies, this poses a question.<u+00a0> there are insurance and pension funds which are having products and benefits that are defined in contracts, and when you are face with negative yields <u+2013> i think the last time i checked, some $12 trillion worth of outstanding bonds are trading in negative yields <u+2013> the investors are going to have to respond.<u+00a0> either they are going to try and renegotiate the benefits that they had given to the customers, or they are going to start taking significant risks.<u+00a0> and when they are going to take those significant risks, it could be posing new questions with respect to financial stability. ms. davidson:<u+00a0> [fed vice chairman] stanley fischer, in a speech yesterday, was talking about sort of this era of ultra-low rates and the decline in the natural rate of interest.<u+00a0> and his concern is that, you know, if factors continue to sort of push that natural rate lower, we<u+2019>ll sort of be stuck in this low-growth mode and forced to rely on unconventional policy.<u+00a0> he said it<u+2019>s something that really worries him.<u+00a0> is that on your mind as well? mr. kganyago:<u+00a0> well, you must know mr. fischer is talking about the u.s. economy and the advanced economies, which are facing zero lower bound. ms. davidson:<u+00a0> right. mr. kganyago:<u+00a0> we do not face that.<u+00a0> we still have very <u+2013> (inaudible). ms. davidson:<u+00a0> so it<u+2019>s not <u+2013> but in the sort of global context, it<u+2019>s not something that <u+2013> mr. kganyago:<u+00a0> i think in the global context what you would have to take cognizance of is that over the long period of time, these neutral interest rates had come down.<u+00a0> with all the difficulties in measuring what a neutral rate is, they had come down.<u+00a0> and they <u+2013> (inaudible) these lower rates are?<u+00a0> i do not think so.<u+00a0> even for the emerging markets, these neutral rates have come down.<u+00a0> but there is no doubt that the neutral rate for the emerging market economies is definitely higher than what the developed economies are. ms. davidson:<u+00a0> of course. mr. kganyago:<u+00a0> and i don<u+2019>t think that you could apply one neutral rate for all the advanced economies, and neither do i think you can apply one neutral rate for all the emerging market economies.<u+00a0> you<u+2019>re going to have to look for each economy what are the structural factors or what are the cyclical factors that could be driving lower or higher the neutral rate. (end) -- *nell henderson* *editor, global central banks* *the wall street journal* 1025 connecticut ave, 8th floor | washington, dc, 20036 w: (202) 862-9242 | c: (202) 567-1103 nell.henderson@wsj.com follow me on twitter at @nhendersonwsj
transcript: lesetja kganyago discusses monetary policy, commodity prices    - wsj
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