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Gordhan to debate inflation targeting

South Africa’s inflation target remains in place but the government and central bank would soon start talks on the best way to manage prices, Finance Minister Pravin Gordhan said on Tuesday.

The Reserve Bank is mandated to keep inflation within 3% to 6% and while viewed positively by investors it has come in for fierce criticism from the ruling ANC’s trade union and communist party allies.

The framework is credited with helping keep inflation in check, but the Congress of South African Trade Unions says it has led to overly tight monetary policy, hurting the poor.

”At this stage, we see no reason to change the inflation target. We do want to signal, however, that the world out there is a fair amount of debate which we are monitoring,” Gordhan told reporters, possibly signaling talks on changing the policy.

”There are developments that we have to take into account and as the new governor gets into place we will have conversations both with her and other stakeholders to see how best we manage inflation and price stability in order to promote balanced and sustainable economic growth.”

Consumer inflation has been outside the band for more than two years, largely due to global factors, such as high oil and food prices, and price pressures are seen staying high because of expected big power price increases.

Eskom wants tariff increases of at least 45% a year for the next three years to help pay for more capacity.

The government has given its blessing to the tariff adjustments, effectively meaning it is okaying administered prices that make it increasingly difficult for the central bank to meet its target.

City councils also recently approved a 13% pay rise for their workers, double the top end of the band. Gordhan said the debate with the central bank should start soon, after new Governor Gill Marcus takes over in two weeks.

”That will be a process that unfolds I would imagine over the next two to three months as we begin this engagement between the new leadership of the Reserve Bank and the relatively new leadership in the Treasury, and also other cabinet colleagues who would also have an interest in this area,” he said.

The central bank has cut its repo rate by five percentage points to 7% this year, less than in other countries also battling through an economic downturn.

Reserve Bank Governor Tito Mboweni highlighted concerns about power prices when announcing the repo would stay steady after last week’s policy meeting. – Reuters

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