ContextAddress by Lesetja Kganyago, Governor of the South African Reserve Bank, at the Bureau for Economic Research Annual Conference, Pretoria, 2 June 2026.
Why it mattersSouth Africa's Governor argues against ignoring supply shocks, a clear statement in the global debate on how to react to the energy shock.
- Uncertainty is high, and the outlook has worsened.
- Some central banks wrongly look through supply shocks.
- Inflation can stay high if people see it as normal.
- Act on supply shocks rather than doing nothing.
- Keep inflation expectations anchored.
- Treat inflation targeting as a framework built for supply shocks.
Read the speech summary
1. From hope to a rate rise
At the annual conference of the Bureau for Economic Research, South Africa's central bank governor joked that uncertainty has fallen only because things are now more certainly worse. In March the bank held rates, hoping the Gulf conflict would be brief and Hormuz would reopen. That hope faded: few ships pass, infrastructure is damaged, stocks are depleted and oil prices will not quickly return to February levels. Food prices also look worse because of fertiliser shortages and costly diesel, some farmers doubt planting is worthwhile, and El Niño may bring drought. The committee therefore raised the repo rate from 6.75% to 7%.
2. Why respond to a supply shock
Critics say rates cannot fix oil prices or droughts, while textbooks present monetary policy as demand management. Neither view is right for a small open economy. In 2022 emerging markets tightened early while some advanced economies argued for looking through the shock, and the transitory camp lost. Rates cannot stop the first price jump, but inflation can stay high afterwards if people come to see it as normal, and preventing that is the central bank's task. Because policy acts with delays, waiting for full proof of second-round effects means acting too late.
3. First round or second round?
Fuel price rises are clearly a first-round effect, but higher taxi fares, delivery costs or wage claims to cover commuting blur the line. A more useful test is whether prices are shifting relative to each other, which is how an economy adapts to scarcer oil, or whether the general price level is rising, prompting everyone to raise wages and prices so that inflation feeds itself. Expectations therefore matter most. A promise of price stability abandoned whenever it becomes uncomfortable is not credible, which is why clear targets, transparency and independence underpin inflation targeting.
4. Lessons of the Great Inflation
The oil shocks of 1973 and 1979 became a lasting inflation disaster mainly because of weak policy responses; the Bundesbank and the Swiss National Bank avoided it and kept inflation near 3%. In 2008 a prominent economist predicted inflation targeting would fail under high oil and food prices, yet none of the 23 countries using it dropped the framework. Inflation targeting is in fact designed to handle supply shocks by anchoring expectations. With a new wave of shocks this decade and fresh memories of high inflation, credibility must be guarded.
5. Holding the new 3% target
The bank projects core inflation near 4% in early 2027. Higher rates support the rand and therefore import prices, and they tell firms that raising prices in strong demand will cost them customers, so that the burden does not fall on the old and poor. He ruled out returning to the 3-6% range, calling the 2002 retreat a major mistake. Inflation is expected at 4.4% this year and 3% by 2028, below what the old 4.5% goal implied. Auction yields remain about 150 basis points below early 2025, the spread over US Treasuries is the narrowest since 2013, and rating agencies have improved their outlooks. Further moves will be decided meeting by meeting, but the goal is a return to 3%.