Lesetja Kganyago. (File photo/MG)
The governor of the South African Reserve Bank, Lesetja Kganyago, is setting his sights on reducing the country’s inflation target after achieving the 4.5% goal that the monetary policy introduced in 2017.
This is after inflation eased for four consecutive months this year alone, coming in at 3.8% for September from 4.4% in August and 4.6% in July, according to data from Statistics South Africa this week. The latest print is also the lowest inflation has been in more than three years.
In its September forecast, the Reserve Bank said it expected inflation to be contained below the 4.5% midpoint of its range through to the end of the forecast horizon in 2026.
The recent figures came in much lower than what economists had expected and pave the way for annual inflation to average around 4% in 2025, according to Investec chief economist Annabel Bishop.
“Overall, the year should average 4.2% year-on-year. This indicates the potential for at least a drop to a 4.0% year-on-year inflation target having an easier implementation if instated at the medium term budget policy statement next week,” she said.
While delivering a lecture at Stellenbosch University this month, Kganyago revisited discussions about lower inflation targets.
Without mentioning a specific target, Kganyago said: “I will focus on our move to 4.5% as the midpoint objective of monetary policy — a change we introduced back in 2017. All of this is relevant to our ongoing discussion about the inflation target and the desirability of moving to a lower target, in line with our peers.”
Bishop told the Mail & Guardian that the Reserve Bank has, on many occasions, highlighted the need to lower the inflation target to bring it closer to those of its key trading partners including Europe, China, the US and the UK, which all tend to be close to 2% year-on-year.
Stanlib economist Kevin Lings said matching the target with its peers would make South Africa more competitive in the global market, while consumers would also benefit from lower interest rates.
“If you can keep the inflation rate low, then you can assume that you could have a lower average interest rate, and that absolutely helps you. It helps any country. It makes the cost of doing business lower, the cost of capital lower and the cost of finance for households lower. It also should give you a little bit more currency stability.”
“If you’ve got a lower inflation rate, you would expect your currency to be more stable than it has been, and that’s beneficial again for budgeting and planning for business and the cost of imports and so on. I think it should make you more competitive and it should make it easier for households to afford housing or motor vehicles,” he said.
Inflation targeting was introduced in South Africa in 2000 to guide monetary policy and interest rate decisions and to support price stability.
Kganyago said that inflation and interest rates have been lower than they were before targeting. “Inflation has also been within the 3 to 6% target range, on average. However, this average has been on the high side of the target range.
“Since 2000, using the ‘targeted inflation’ measure, it has averaged 5.85%. We have also missed the target quite often, almost exclusively to the upside — we have been above the 6% upper bound of the target nearly 40% of the time, compared with only 1% of outcomes below the 3% lower bound.”
He said that from 2017, the monetary policy committee started aiming for the middle point of the 3% to 6% target of 4.5%.
“We were explicit that we wanted to be at the midpoint, over time. The range would be there to handle volatility, which is inevitable with inflation. But, over time, the Reserve Bank would always be working to bring inflation back to 4.5%.”
Lings did say, however, that more stability is needed before a target is penned.
“In the short term, inflation can easily stay below 4% and get closer to 3%, so if you’re the Reserve Bank, then given that you started cutting rates, given that inflation looks okay, the currency looks okay, then this is the time to keep cutting, and then later on the benefit of the petrol price will dissipate.”
“The inflation targeting discussion is coming at a time where you are in a good space in terms of inflation, but how realistic is it that that will continue if you get the economy going? And I’ve got my doubts about it,” he said.
Lings was referring to the lower inflation rates in categories such as housing, clothing and appliances, due to subdued economic activity. However, if economic activity picks up and growth accelerates, inflation in these categories is expected to rise.
Noting the fluctuating inflation, Kganyago said, “It is easy to understand moves in inflation caused by something like the petrol price. But, over longer periods, such as 10 years, these factors mainly create volatility, nothing more.”
“For the long-run price level, it is the central bank that must take most of the responsibility,” the governor said.
Given the current economic climate, Lings said an inflation target set around 4% would be a safer bet than a 3% target.
“It’s important to recognise that you’ve got to look at the policy that can be achieved based on realistic numbers, not based on a short period of time.
“I think we need an ambitious target, but not a target that is so ambitious that we struggle to achieve it, thereby undermining the credibility of the target,” Lings said.