Where are we with inflation targeting in South Africa? Are the South Africa Reserve Bank and finance minister Enoch Godongwana on the same page?
In its latest Monetary Policy Review (MPR), the Bank has again presented a strong economic case for a lower 3% inflation target, emphasising that its technical stress tests indicate the target is realistic and credible.
The current 3%-6% target range, with its midpoint of 4.5%, is clearly an outlier relative to comparable economies and makes South Africa less globally competitive.
In any event, with inflation fortuitously close to 3%, the Bank wants to seize the opportunity to “lock in” a lower, permanent fixed inflation target. Yet, in a previous statement on August 1, Godongwana categorically stated that he had no plans to announce a move to a 3% target in the medium-term budget policy statement (MTBPS), now due on November 12.
He emphasised that policy-making on the inflation target ultimately rested with the president and the cabinet, who set the target in consultation with the Bank and other key stakeholders.
Such a consultative process was followed when inflation targeting was first introduced in 2000 by then SARB governor Tito Mboweni and finance minister Trevor Manuel. This requirement to get wider “buy-in”, especially from governments, has also been reinforced by global experience.
Deciding on an inflation target is not seen as a purely intellectual or technical process; it also needs political and stakeholder support.
There are always trade-offs involved in policy, including monetary policy. The Bank has previously acknowledged that moving to a 3% inflation target would indeed mean keeping interest rates higher for longer and may involve a temporary loss of some growth but would eventually lead to lower interest rates, together with long-term gains in stable growth.
“Pain now, gain later” is the SARB’s persuasive mantra.
Legitimate differences of opinion among policymakers and economists could nonetheless emerge in weighing the so-called “sacrifice ratio” when deciding about the path to a lower inflation target.
The MPR has warned that aggressive US tariffs could shave 0.4% off South Africa’s GDP, and that export performance is vulnerable to current global headwinds. At the same time, the Bank has cut its 2025 growth forecast to 1.2% from 1.7% in April, and expects about 1.4% growth next year.
Job-rich growth is a high priority. The GNU rightly wants to see at least 3% GDP growth in the medium term. Amid the present economic upturn, a broader growth context exists within which decisions about implementing a new inflation path and target need to be assessed.
After all, a central bank can hit its target for the wrong reasons, as well as miss the target for the right ones.
The South African economy is also undergoing structural reforms that make the linkages to transmission mechanisms more uncertain. Hence, opting for a fixed inflation target regime may create unnecessary risks for central bank credibility.
Given ongoing structural and political changes — as well as external factors — is a specific inflation target more likely to be missed, as opposed to a (new) band?
Another source of uncertainty regarding price stability is the role of administered prices, such as Eskom tariffs, municipal rates, and education fees. The Bank has regularly emphasised the serious distorting impact that administered prices continue to have on the inflation outlook.
In the meantime, unless the finance minister’s unequivocal position has changed since August 1, it means there’s continued uncertainty as to how exactly, and when, any move to an inflation target of 3% will finally be officially decided.
It should cease for the MPC to preface its statements with the words “official target” and “preferred target”. The sooner any differences of view between the SARB and finance minister Godongwana on the inflation target are resolved, the better it will be for policy certainty.
Compromise and flexibility should be possible without endangering traditional roles.
Hitherto, it was settled that, whereas the cabinet sets the official inflation target, the Bank has “operational independence” in implementing it.
Over the years, this has provided a strong basis of consensual stability underpinning their respective roles. The SARB and the National Treasury have always worked closely to facilitate policy coordination.
The markets and business now need to see renewed convergence of official views on any new inflation-targeting framework, hopefully by the time of the MTBPS. This would provide the predictable trajectories required for future interest rate decisions, hence trends in borrowing costs for business and consumers.
Parsons is a professor at the North-West University Business School
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