In a move likely to affect the markets, finance minister Enoch Godongwana is expected to announce on Wednesday that the country will lower its inflation target to 3% — a major coup for Reserve Bank governor Lesetja Kganyago, who has spent months championing the policy change.
Business Times has been reliably informed that the announcement will be contained in the mid-term budget to be tabled on Wednesday. This is a surprising policy shift, as for months indications were that the National Treasury did not favour lowering the 3%-6% inflation target set in 2000 by then governor Tito Mboweni.
There was a tense standoff between the Treasury and the central bank in August after Kganyago announced the bank would henceforth base future interest rate decisions on a 3% anchor. A day after that announcement, Godongwana issued a terse statement saying a policy change on inflation targeting would be taken only in consultation with the cabinet and the president. He said he had no intention of making the inflation target announcement in the medium-term budget policy statement (MTBPS).
However, Business Times understands the minister changed his mind after meetings with global investment banks JPMorgan and Goldman Sachs. The Government Technical Advisory Centre (GTAC), a unit of the Treasury, has been investigating the possible economic effects of adopting a lower target, alongside the Bank.
Approached for comment on Friday afternoon, Godongwana referred Business Times to his August statement.
“I don’t talk about those things outside of the medium-term budget process,” he said. “Even if it is about revising the target upward or downward, I do not talk about those issues outside of the budget process, because sometimes people make speculations. Maybe I must refer you to my statement from the first of August on this matter. Stick to that statement for now.”
The Treasury said it was in a closed period ahead of the tabling of the MTBPS and could not comment.
Kganyago recently told Business Day in an interview that a policy guided by a lower and narrower inflation target would benefit the poor and that South Africa needed to get its inflation in line with levels similar to its peers globally.
“If you want lower interest rates, you should have a lower inflation target. So this sort of sounds counterintuitive, but the point is that no country has low interest rates and high inflation,” Kganyago said.
In September, in response to questions from Business Times, the Bank said the decisions of its monetary policy committee (MPC) were data-dependent and sensitive to the balance of risks to the outlook.
This is insane ... it means interest rates will be higher for longer. We already have a prime lending rate of 7.1%, which is the highest in the world and will further suffocate people in an economy that is struggling to grow beyond 1% [a year.
— Duma Gqubule, economist
“The inflation and repo rate projections from the updated quarterly projection model are a broad policy guide, which changes in response to new data and risks. South Africa’s inflation target is an outlier when compared with peer emerging markets and major trading partners.”
The Bank said South Africa’s realised inflation rate has been consistently above the median of emerging market and developing economies.
“Among the 149 emerging market and developing economies for which data are available, South Africa’s inflation rate ranked 94th in 2024, despite inflation averaging close to the 4.5% target midpoint.”
“Over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs, the Bank said.
“It is important to sustain this progress and to minimise uncertainty about the longer-term objectives of monetary policy. We welcome the recent moderation in inflation expectations and would like to see expectations fall further.
“This would expand policy space and make our framework more robust to shocks. The challenges of the global environment highlight the urgency of domestic reform for accelerating growth. The Bank’s main contribution is to deliver price stability.”
An economist said lowering the target would be welcomed by financial markets, but the benefits may not be
be evenly distributed. While bondholders stood to benefit, ordinary consumers were faced with the possibility of interest rates remaining higher for longer, and a double whammy of their future earnings remaining lower if wage negotiations are now going to be based on a 3% inflation target.
The economist, who asked not to be named, said when expectations for inflation are lower, those who hold government bonds and other types of bonds can realise higher real returns and gains on their notes.
This means a 3% target would allow bondholders, mainly local and global asset managers, and pension funds, to gain higher returns on the bonds they already hold.
At the same time, the shock to the economy of having to maintain rates higher for longer to keep inflation at 3% and below would affect consumers and possibly stifle growth.
When such a crucial decision is taken, there must be a balance between maintaining the stability of the financial system without compromising economic growth.
Independent economist Roelof Botha rejected the suggestion that a lower and tighter inflation target would benefit poor South Africans, saying attempts to officially adopt a lower target as policy should be stopped urgently.
“The statement that an inflation target point of 3% will be pro-poor is devoid of truth,” he said. “Any attempt to narrow South Africa’s current target range of 3%-6% for the consumer price index to a target point of 3% should be stopped in its tracks.
“Two issues are at stake here. First, whether a lowering of the inflation target is likely to benefit the economy from the perspective of growth and employment creation and, second, whether such a move would be to the advantage of lower-income groups and unemployed people.”
Botha said South Africa’s economy was in dire straits and urgently needed to be lifted from “paltry” economic growth rates of between zero and 1% to a level that would prevent unemployment from rising further.
“The fact that inflation has declined at a much faster pace than the modest reduction in the commercial lending rate directly, via the Reserve Bank’s repo rate, is testimony to the desire of the MPC to keep interest rates high, despite the absence of demand inflation.
“During 2021, the South African economy managed to stage a remarkably swift recovery from the worst effects of the lockdowns induced by the Covid pandemic in 2020, only to be halted in its tracks from 2022 onwards, when a low growth trajectory kicked in.”
Economist Duma Gqubule also slammed the planned announcement, saying the country’s GDP growth problem was greater than any inflation challenge. He said the recent cooling of inflation had nothing to do with monetary policy.
“For me, this is insane. First of all, it means interest rates will be higher for longer. We already have a prime lending rate of 7.1%, which is the highest in the world and will further suffocate people in an economy that is struggling to grow beyond 1% [a year].”
“There isn’t a problem of excess demand in the country where you need to control wages. We need to focus on the problem. Every spike in inflation has been caused by supply-side shocks … and there is nothing that the central bank can do about [these].”
Matthew Parks, parliamentary co-ordinator for Cosatu, said inflation has a devastating impact on workers, as it erodes their ability to feed their families, pay their debts or improve their lives, causing havoc in the economy, which is struggling to grow and create jobs.
“Inflation targeting needs to be handled delicately, be tightly managed and kept low to protect the working class. Equally, workers and the economy are struggling with a suffocatingly high repo rate. Inflation has fallen substantially. It is critical that as inflation decreases, so does the repo rate.”
Prof Raymond Parsons of the North-West University School of Business said previous remarks regarding the inflation targeting policy raised “a tangible element of uncertainty about when the final decision would indeed be taken” on an official inflation target.
“We now need certainty about a new inflation target. The debate and research have gone on long enough to establish a strong economic case for a lower inflation target,” Parsons said.
“A final decision announced in the forthcoming MTBPS on the issue will at least hopefully provide policy certainty on a new inflation target framework.”
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