This is one of South Africa’s biggest money mistakes: Reserve Bank governor

Reserve Bank governor Lesetja Kganyago says South Africa should consider revising its inflation target range downwards.

To protect the value of the rand, the South African Reserve Bank uses inflation targeting which aims to maintain consumer price inflation within a certain range. The current target range is between 3% and 6%. The value of the currency is therefore protected relative to domestic consumer prices.

Speaking to radio station 702, Kganyago said that while a revision downwards change should have happened several years ago, it was still possible to move the target to between 2% and 4%, and that this will be a topic of consideration for Treasury and the central bank going forward.

Kganyago said that talk of introducing a lower target inflation range had historically been considered as far back as 2002 by former finance ministers Trevor Manuel and Tito Mboweni, but it was decided at the time to avoid lowering the range.

He noted that the current target range was adopted in 2000 with the plan to shift it to 3% to 5% by 2004, and then subsequently to 2% to 4%. But the Argentine fiscal crisis in 2001 and a significant loss of rand value led to the central bank sticking with the 3% to 6% range, he said.

“If you were to ask me what is the biggest macro-economic mistake that we have made on the monetary front – it was exactly that. The correct thing to have done is to acknowledge the supply shock but expect the central bank to bring it back to back it in range.”

He added that this issue is not unique to South Africa, with other central banks also looking to revise inflation targets – typically closer to 2%. This gives far more leeway in times of crisis, he said. He added that higher target ranges entrenches higher inflation expectations.

“If we entered the crisis with inflation that was higher than the 4.5% that the Reserve Bank was aiming for in 2020, we would not have been able to provide the kind of support to the economy that we have been able to in the aftermath of the coronavirus shock. There is no virtue in higher inflation.”

“It is important to demonstrate to South Africans that authorities are committed to protecting the buying power of their income by keeping inflation in check. Tolerating higher inflation will not lead to higher income.”

He added that sticking to inflation targets provides its own form of certainty to price-setters and that engaging in conversations about a lower inflation range conversation would also provide some certainty.

“At the moment the inflation target is 3% to 6%, there is nothing stopping us from aiming for the 3% mark within this range. What is important is for us is to demonstrate that we mean business when we say we will control inflation.”

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