‘Looks like we’ve made it — Look how far we’ve come my [governor].” These lyrics from Shania Twain would have been appropriate to sing the praises of Reserve Bank Governor Tito Mboweni this week, as the country finally got one hand on the Holy Grail of the inflation target.
On Tuesday Statistics South Africa released figures showing that the CPIX (inflation minus mortgage rates) stood at 5,4 % in the year to September. This is the first time since late 2001 that inflation has fallen within the Reserve Bank’s target of between 3% and 6%.
It is also a far cry from the runaway, double-digit inflation of early last year, following the rand’s dramatic crash. We have come a long way, indeed.
More good news came on Wednesday when the agency reported deflation in production costs for the first time since the end of World War II. The producer price index (PPI) fell by 1% in the year to September.
The PPI serves as a lead indicator for CPIX, suggesting that a firm downward trend can be expected from the latter in the months ahead.
At the same time the Reserve Bank reported that broadly defined M3 Money Supply grew by 5,47%, below the expected 6,1%. Moreover, total domestic credit extension grew by 17,10%, a figure seen by economists as indicating a healthy appetite for credit to purchase durable goods in the face of falling interest rates.
But the inflation target is not only about getting there. The challenge is to maintain an annual average within the range.
Dennis Dykes, the Reuters economist of the year and chief economist at Nedcor, worries not so much about the near future, but the long term — when John Maynard Keynes said we will all be dead.
Just as the woes of last year were attributed to the falling rand, Dykes notes that reaching the target range is ‘very much a rand story”. He expects the rand to hold at its current levels for the near future — it reached R6,90 to the dollar this week — but believes it will drift to R7,80 to the dollar late next year. The current account deficit will undermine the value of the currency by making exports expensive and imports cheaper, he reasons.
Dykes expects the Reserve Bank to cut the repo rate at its December meeting but wonders whether this is a good idea, believing that it may fuel already robust consumer spending.
The long-term issues that Dykes would like to see addressed are administered prices and wage demands, both of which are closely linked to inflationary expectations.
He notes that wages need to be responsive to low and falling inflation, while ruling out the First World practice of holding them constant or even cutting them when inflation is extremely low.
Dykes believes the inflation target band allows the country to pursue robust economic growth without suffering the inflationary pressures that come with spending newly created wealth, ‘as long as people and the government behave as if they believe inflation will stay low”.
He expects economic growth to reach a modest 2% this year and 3% in the next.