South African Reserve Bank Governor Lesetja Kganyago speaks with Guy Johnson and Francine Lacqua in an interview on Bloomberg Television’s “The Pulse” at the World Economic Forum’s annual meeting in Davos, Switzerland.
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Francine Laqua (FL): Let’s welcome Lesetja Kganyago. He’s the tenth governor of the Reserve Bank of South Africa. Thanks for joining us. We’ll talk about South Africa in just a moment Governor, but I just want to get your take on QE from the ECB. Emerging markets did not like QE from the Fed, are they going to like ECB QE even less?
Lesetja Kganyago (LK): What we have seen is that the impact of QE has been mixed. QE from the U.S. has a significant impact for many of us in the developing economies. We saw surges in capital flows, we saw our currencies appreciate which impacted our exports and so forth. So we have seen that but it is not clear what the impact of QE would be from the euro area. The jury is still out. It takes place at a time when the US has unwound and is moving towards normalisation of rates. So it’s difficult to call what the real impact would be because we have one important centre exiting the QE and another important centre setting in with QE.
Guy Johnson (GJ): Can we talk about the impact that oil is likely to have, clearly having a deflationary effect around the world. We’ve just seen a fairly significant swing from the Bank of England. If you take a look at the forward rate agreements in South Africa everyone was expecting the next move from your central bank to be up, now they’re beginning to buy into the possibility of it being down.What impact is oil having?
LK: Oil has had a positive impact on prices in South Africa because we are just the pump price of petrol on a monthly basis depending on what happens to international crude oil prices, and what happens to the exchange rate. If the decline in the oil price was accompanied by a stable exchange rate of the Rand you would have seen a more significant decline but what you have had is the exchange rate being a shock absorber and absorbing part of the decline in the oil prices. Clearly it will improve the inflation outlook but in the same manner that central banks when the oil price goes up that you do not adjust policy and say that we want to see the second-round effects kicking in and see that the increase in the oil price leads to a generalised increase in prices. You must apply exactly the same principle when the oil price declines. You’ve got to strip out the effects of the oil price, the effects of the food prices and then say what is happening to the rest of inflation and that is too early to call.