Reserve Bank’s new target could be years away

The South African Reserve Bank has pushed for a lower inflation target, but it could still take years for this to be introduced.

Reserve Bank Governor Lesetja Kganyago has consistently called for a lower inflation target in South Africa.

The frequent comments about a new target have created an expectation that it could be lowered soon.

South Africa’s current inflation target is between 3% and 6%.

Following the introduction of the current targets in 2000, it was expected to be gradually lowered, dropping from 3% to 5% and eventually 2% to 4%. However, this was delayed following a rand depreciation shock in 2001.

The Reserve Bank anchored inflation expectations around the 4.5% midpoint of its target range since 2017.

South Africa’s inflation target is far higher than other countries, with the USA and UK having inflation targets of roughly 2%. The high inflation target hampers South Africa’s competitiveness and means businesses must alter wages heavily to avoid losing buying power.

At the Medium-Term Budget Policy Statement and the November interest rate setting meeting, it was noted that the National Treasury and the SARB are still in discussions about lowering the target, but no timelines were provided.

Although the SARB is mandated to get inflation under control, the National Treasury sets the target.

Although Kganyago indicated that discussions are nearing their conclusion, Momentum Investments noted it could still be a while until there is another announcement about a lower inflation target.

“We have previously argued that current conditions are conducive to implementing a lower inflation target. This was on the basis of inflation trending lower and inflation expectations moderating,” said Momentum Investments.

“Following the 2.8% year-on-year inflation rate in October, inflation is expected to trend higher in the coming months, albeit remaining contained. It has been previously noted that it would not be ideal to implement a lower target when inflation is trending upward.”

It added that the delay so far is creating an impression that Treasury is primarily focused on fiscal consolidation.

It generally takes a lead time of two years for countries to implement a lower target range, so South Africa taking longer to reduce the target would not be unusual.

Interest rate cuts

Despite inflation dropping to a four-year low in October, the Monetary Policy Committee (MPC) of the SARB continued to act with caution and cut rates by 25 basis points, taking the repo rate to 7.75%.

“In the absence of a lower inflation target, we continue to project two more 25-basis point cuts in 2025 with the next one in January 2025,” said Momentum Investments.

“This would accumulate to a total of 100 basis points worth of cuts since the start of the cutting cycle in September 2024 and result in an interest rate of 7.25% at the end of 2025.

We acknowledge that a return of Donald Trump to the White House may raise protectionist measures which could lift inflationary pressures around the globe, limiting the extent of easing in countries like South Africa.

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