Kganyago explains why he went over National Treasury’s head on 3% target
South Africa’s central bank chief Lesetja Kganyago doubled down on his preference for a 3% inflation target, arguing that a lower goal could improve the country’s risk profile, reduce debt levels, and curb price-growth volatility.
He also noted that nine consecutive months of inflation being near 3% was something that couldn’t be ignored, nor could he let the opportunity slip away.
“This is something we hope to deliver with our new preference for having inflation settle at the lower end of our 3% to 6% target range,” Kganyago said in a speech posted on the bank’s website on Tuesday.
“This cannot be a promise, but it can be a serious aspiration.”
The central bank announced last month that it now prefers inflation to settle at 3% — the bottom of its target band, a move that drew disapproval from Finance Minister Enoch Godongwana who is yet to sign off on a new goal.
The National Treasury and the bank have been involved in technical work since February last year to formally adjust the current target.
The current 3% to 6% target band has been in place for 25 years and since 2017 the central bank has indicated that it prefers to anchor inflation expectations at the midpoint.
In the bank’s modeling framework, the neutral policy rate is about 7.25%. “Of this, 4.5 percentage points is inflation compensation and 2.75 percentage points is attributed to global rates plus country risk,” the governor said.
“If we lower inflation to 3%, then we can take 1.5 percentage points of inflation out,” Kganyago said.
“Lowering inflation to 3% will also reduce inflation volatility and country risk, the latter, perhaps by half a percent. As country risk and inflation falls, we could aim for a neutral policy rate of something more like 5.25%.”
South African inflation being near the floor of the monetary policy committee’s target range for nine successive months, presents an opportune moment to lower the target, he said.
“Opportunity knocks, and over the past year that opportunity has come fast,” Kganyago said. “Given the strong case for moving to a lower target at some point, it did not make sense to ignore this.”
Permanently lower inflation — and the resulting decline in interest rates —could also ease government borrowing costs and support efforts to stabilize the debt trajectory.
In its budget, the Treasury projected that public debt would peak at 77.4% of gross domestic product in the year through March 2026, slightly higher than previous forecasts.
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