Governor of the South African Reserve Bank Lesetja Kganyago delivered a public lecture at Rhodes University on May 4, 2026, focusing on the burning issue of inflation. This is an edited version of his speech:
Last month in Washington, International Monetary Fund Managing Director Kristalina Georgieva described the situation central banks face as “bad or very bad”.
South Africa falls into the first category: in a world of price pain, we are suffering like everyone else – but things could be worse.
We came into this shock with inflation at our new 3% target. The policy stance was reasonably well calibrated, so we did not need to make urgent changes.
We have a well-tested playbook for getting inflation back to target. In my speech today, I will unpack these points and discuss the outlook for monetary policy.
I will start with the recent trajectory. The last two years have been generally positive for the South African economy. There has been clear reform momentum, including the adoption of a new 3% inflation target. This progress was rewarded with lower borrowing costs, a stronger rand and improving confidence.
We exited the Financial Action Task Force grey list, and our credit rating was upgraded by S&P Global Ratings. Growth seemed to be steadying, and investment was beginning to grow again.
The global context was also quite supportive. Of course, we had the challenges of fragmentation, including higher United States (US) tariffs.
Nonetheless, many emerging markets – including South Africa – were enjoying higher commodity prices, renewed capital inflows, stronger currencies and lower interest rates. Global growth was proving unexpectedly resilient. The headlines may have been full of bad news, but the bottom line was good. The economic data were improving.
At the same time, there were clearly risks, including those stemming from geopolitical developments.
For us, as the South African Reserve Bank (SARB), those risks were top-of-mind. We did not know exactly what was going to go wrong, but there seemed to be too many things that could go wrong. This led to us moving cautiously. We steered clear of bigger cuts, like 50 basis points rather than the usual 25, and we avoided cutting at every meeting. For instance, we kept rates unchanged in our January 2026 meeting.
This meant our policy stance was not immediately rendered obsolete when trouble did come with the conflict in the Middle East and the closure of the Strait of Hormuz. We had inflation at exactly 3%, with core also at 3%, in line with our new target. This was a reasonably good starting point for confronting a severe shock.
For monetary policy, there is a well-established playbook for dealing with supply-side shocks. The central idea is that you look through the initial or first-round effects and focus on the second-round effects.
First-round effects are directly linked to the shock and happen fast: the oil price goes up, and then petrol and transport get more expensive. Monetary policy cannot do much about this. Our interest rate tool does not change global oil prices – and it also operates with a lag: if we move rates now, the main effects on the economy play out next year.
This timeframe means you cannot do much about inflation that is suddenly going to be higher next month. It is not in the window that is relevant for monetary policy.
What is relevant for monetary policy is that period after the shock has passed. Even if oil prices stick at current levels, 12 months from now, fuel inflation goes to zero.
It can seem paradoxical, but remember we are inflation targeters, not price level targeters. Our inflation measure uses a year-on-year comparison. For example, you compare the price in May 2025 to the price in May 2026.
If petrol goes from R20 a litre to R30, you have inflation of 50%. If petrol stays at R30 in May 2027, petrol price inflation will be 0%.
All this means a price shock exerts inflation pressure in the near-term, but, in the policy-relevant medium term, it can push inflation lower. Statisticians call this a base effect.
If this were the whole story, monetary policy would be easy. But we know from bitter experience that it is not so easy. The problem is that inflation does not always fall when the shock passes. Instead, inflation can be persistently higher.
This happens when the price shock broadens out into the economy: it is no longer just the one category, like fuel, that is more expensive, but everything. We call these second-round effects, and they tend to be most visible in inflation expectations and wages.
Second-round effects mark the process through which a one-off shock mutates into consistently higher inflation, which becomes entrenched as the new normal.
For central banks facing a price shock, the key is to manage the second-round effects. If a central bank has strong credibility – if everyone trusts inflation will revert to target soon – it can be possible to look through a shock without raising rates. But the look-through strategy has pitfalls.
One is that shocks have a bad habit of travelling in groups. If you commit to looking through shocks, and then two or three arrive one after another, trust in low inflation starts to fade.
For instance, if you have a temporary fuel price shock that lasts a year but, three months in, you also have a food price shock, and on top of that, the exchange rate weakens, you do not get 12 months of higher inflation and then lower inflation.
You get waves of higher inflation with no end in sight. In this context, it is probable that price and wage setters will start to make decisions as if they live in an economy with persistently higher inflation. And this is a self-fulfilling prophecy.
Given the risks to inflation and the uncertainty, it makes sense for us to keep our options open. In our next few meetings, we will have to make tough decisions about whether second-round effects are coming or whether we have enough space to look through.
As ever, we are not going to pre-commit to a path and give up optionality. We cannot offer certainty about our next steps. Instead, we want to maximise certainty about where inflation is going – specifically, that it is going back to target.
To read the full speech click on the link below:
https://www.resbank.co.za/en/home/publications/publication-detail-pages/speeches/speeches-by-governors/2026/kganyago-rhodes
