{"id":830576,"date":"2025-07-11T09:30:00","date_gmt":"2025-07-11T07:30:00","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=830576"},"modified":"2025-07-11T09:34:19","modified_gmt":"2025-07-11T07:34:19","slug":"the-big-problem-with-the-reserve-banks-new-target","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/business-opinion\/830576\/the-big-problem-with-the-reserve-banks-new-target\/","title":{"rendered":"The big problem with the Reserve Bank’s new target"},"content":{"rendered":"\n

FNB\u2019s economists warn that South Africa may take two years or more to benefit from a lower inflation target, and the country’s prices will have to remain benign for it to take root.<\/p>\n\n\n\n

This means the South African Reserve Bank (SARB) could hit a long-term pause on interest rates, or even hike them to stabilise inflation at the lower target.<\/p>\n\n\n\n

This is one of the factors that the Reserve Bank will need to consider in its path to taking the target lower.<\/p>\n\n\n\n

According to the latest Q2 2025 inflation expectations report from the Bureau for Economic Research (BER), forward-looking expectations have eased, already setting South Africa in good stead for this path.<\/p>\n\n\n\n

Inflation expectations from major sectors have been tempered downwards, with unions and analysts expecting the headline rate in 2025 to slow from 4.4% at the time of the previous survey to 3.9% in the latest.<\/p>\n\n\n\n

However, expectations over the medium term are for average inflation to rise.<\/p>\n\n\n\n

Expectations for 2026 are 4.3%, and 2027 expectations\u2014aligning with the two-year monetary policy implementation horizon\u2014are 4.5%. The five-year horizon expectations are 4.4%. <\/p>\n\n\n\n

While the SARB anchors its inflation target at a 4.5% midpoint of the 3% to 6% target range, it wants to lower this target to around 3%. However, current expectations are out of step with this.<\/p>\n\n\n\n

Inflation is currently sitting at 3%, which is well below the 4.5%. This is great news for interest rates, because it is below target and gives the SARB’s Monetary Policy Committee (MPC) room to lower them.<\/p>\n\n\n\n

However, if the target is lowered, this wiggle room disappears, and South Africa may be forced to hold rates for a long time or even face potential rate hikes to bring longer-term inflation lower.<\/p>\n\n\n\n

The SARB believes a lower inflation target will align South Africa with its global peers, prevent rapid price increases and result in lower interest rates in the long term. <\/p>\n\n\n\n

But FNB said this longer-term outlook will require time and stability to achieve.<\/p>\n\n\n\n

\u201cA lowering of the inflation target will require inflation to remain benign in support of even slower inflation expectations,” it said.<\/p>\n\n\n\n

The bank noted that when the 4.5% target was announced in 2017, <\/span>it took two years for inflation trends to shift <\/strong>in line with this<\/span>.<\/p>\n\n\n\n

This was supported by lower core inflation as large-ticket items such as housing inflation experienced structural weakness. The pandemic\u2019s inflation dip also supported the process. <\/p>\n\n\n\n

However, as inflation rose again from 2021 to 2023, so did average expectations. They have again taken about two years to recover<\/strong> from the end-of-2022 peak. <\/p>\n\n\n\n

This means that the Reserve Bank’s aim of stabilising inflation around 3% will not come quickly or easily.<\/p>\n\n\n\n

Although the SARB is responsible for pursuing the inflation target, the National Treasury sets it. The two groups have discussed lowering the target, and further announcements are expected soon.<\/p>\n\n\n\n

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Devil in the details <\/strong><\/h2>\n\n\n\n

Although muted current inflation levels will assist in containing average expectations, a look at the data shows different pressures.  <\/p>\n\n\n\n

FNB noted that analyst expectations are more forward-looking and tend to have lower average inflation expectations. <\/p>\n\n\n\n

Analysts expect inflation of 3.4%, 4.1%, and 4.2% over the 2025 to 2027 horizon, respectively. <\/p>\n\n\n\n

However, businesses expect inflation of 4.3%, 4.4% and 4.5%, respectively, while trade unions expect 4.0%, 4.3% and 4.7%. <\/p>\n\n\n\n

The five-year-ahead expectations are 4.0%, 4.5% and 4.7% for analysts, business and trade unions, respectively.<\/p>\n\n\n\n

Although analysts can influence pricing behaviour, business and trade unions are the primary price setters in the survey. <\/p>\n\n\n\n

\u201cThe higher expectations of these agents, bar the impact of actual economic impediments, suggest that an upside inflation bias could be upheld,\u201d said the experts from FNB.<\/p>\n\n\n\n

Households also maintain an elevated inflation outlook of 5.4% over the next year, and 8.5% for the next five years. This highlights the underlying inflationary pressures. <\/p>\n\n\n\n

Although inflation is muted right now, some items in the basket remain incredibly high. Household experiences of inflation are determined by spending patterns. <\/p>\n\n\n\n

Lower-income households will be more affected by food, while higher-income households are more sensitive to transport and insurance costs. <\/p>\n\n\n\n

Nevertheless, higher household expectations reflect the nuances beyond headline inflation readings. <\/p>\n\n\n\n

\u201cThis is a dynamic that will also affect how quickly the SARB is able to efficiently and sustainably achieve a lower inflation objective,\u201d said FNB. <\/p>\n\n\n\n

\u201cHigh administered inflation may need to be compensated for by further non-admin core disinflation, which suggests less monetary policy easing.\u201d<\/p>\n\n\n\n

Nevertheless, it is noted that the efficacy gained from a credible central bank and effective communication cannot be overlooked.<\/p>\n","protected":false},"excerpt":{"rendered":"

FNB warns that the Reserve Bank’s pursuit of a lower inflation target may mean fewer interest rate cuts, and it won’t happen quickly.<\/p>\n","protected":false},"author":95,"featured_media":828562,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[14829,76,3619],"class_list":["post-830576","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-opinion","tag-ber","tag-fnb","tag-sarb"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/830576","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/95"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=830576"}],"version-history":[{"count":11,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/830576\/revisions"}],"predecessor-version":[{"id":831189,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/830576\/revisions\/831189"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/828562"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=830576"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=830576"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=830576"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}