Kganyago pushes for new target in South Africa
South African Reserve Bank (SARB) Governor Lesetja Kganyago has again pushed for a lower inflation target in South Africa.
South Africa adopted its inflation target in 2000, which set the target between 3% and 6%.
The target range was supposed to be gradually lowered, going from 3% to 5% and eventually 2% to 4%, but this was delayed following a rand depreciation shock in 2001.
Since 2017, the Reserve Bank aimed to get price increases around the 4.5% midpoint of its target range.
“We have an opportunity to achieve permanently lower inflation and therefore permanently lower interest rates,” Kganyago told an audience at the University of Stellenbosch.
“Executed effectively, a lower target could be achieved at little cost – just as we moved to 4.5% at little cost.”
Although South Africa brought inflation back to 4.5%, its inflation rate is still relatively high compared to its peers.
“We have a relatively high inflation rate. We often speak as if this is a structural, inevitable thing and not a policy choice,” said the Governor.
“But the fact is, we could have a lower inflation target, like almost all our peers, and with it, lower inflation.”
The SARB has repeatedly called for the inflation target to be dropped to bring it closer to that of major economies, with the USA, EU, and UK having inflation targets of around 2%.
The high inflation target affects South Africa’s competitiveness and means businesses must alter wages, prices, and investments to avoid losing buying power.
Last year, South Africa had the fourth-highest level of inflation among the G20 countries, only beaten by Argentina, Türkiye, and Russia, which experienced either hyperinflation or war.
Kganyago said it was clear that the inflation target could only be reviewed lower while acknowledging that the process was complex and involved political and economic calculations.
That said, there are potential signs of life, with the Treasury saying that the goals were under review in February of this year.
Although the SARB tries to hit the inflation target, the Finance Minister sets it.
Investec Chief Economist Annabel Bishop said that a lower inflation target could be discussed when Finance Minister Enoch Godongwana delivers the Medium-Term Budget Policy Statement (MTBPS) at the end of this month.
“A lowering of the inflation target, likely from an annual average of 4.5% to 4.0%, would be a change that the National Treasury would make,” said Bishop. said Bishop.
Interest rates
With a lower inflation target still only hypothetical for South Africa, the SARB’s most significant upcoming decision, of which it has complete control, will be its next monetary policy meeting.
The Reserve Bank cut the repo rate by 25 basis points last month, bringing it to 8.0%—the first cut in four years.
This came from lower inflation, which dropped to 4.4% in August. The stronger rand following the Government of National Unity (GNU) ‘s information and softer oil prices brought inflation below the midpoint.
Inflation is expected to stay below the mid-point target of 4.5% for the coming months, which expands the scope for interest rate cuts.
Many economists expect the Reserve Bank to cut interest rates by 25 basis points further when it makes its next decision on November 21, 2024.
That said, Momentum Investments warned that South Africans should not get too excited about interest rates.
Momentum Investments said interest rates will likely end 2025 higher than before the Covid-19 pandemic.
Central banks do not want to lower interest rates too early, as this could lead to inflationary pressures. This was the case in Brazil, which looks set to hike rates further after doing so in September.
With reporting from Bloomberg
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