South Africa set for big inflation change

South Africa’s Finance Minister Enoch Godongwana is expected to endorse a 3% inflation target this week, aligning fiscal policy with the central bank’s push to anchor prices at that level, according to a survey.

Of the 12 economists surveyed on the matter by Bloomberg, a majority foresee Godongwana officially adopting a lower inflation target when he presents his Medium-Term Budget Policy Statement at 14:00 on Wednesday. 

“Godongwana is expected to confirm a lower inflation anchor of 3%, replacing the current 4.5% midpoint of the South African Reserve Bank’s 3%-6% target band,” Bloomberg Economics Africa Economist Yvonne Mhango said.

“This move should help moderate wage and price increases and strengthen policy credibility.”

Fitch Ratings last month also said it anticipates the National Treasury will lower the target, but cautioned that it “doesn’t mean that it will strictly be implemented immediately.”

Central bank Governor Lesetja Kganyago said in July that policymakers now want inflation to settle at the lower end of the central bank’s 3% to 6% target range, which has remained unchanged since its adoption in 2000. They had aimed for the midpoint since 2017.

While Godongwana has not formally ratified the move, a joint statement by the Treasury and the central bank in September helped clear a sense of discord between the two authorities on the topic, warming investor optimism toward South African assets.

Since the SARB’s July shift, the yield on South African benchmark 10-year bonds has fallen 105 basis points to 8.75%.

Jeffrey Schultz, head of CEEMEA Economics at BNP Paribas, was a bit more guarded, reasoning that the MTBPS “will strongly tee-up the formalization of a lower 3% point target for inflation.” He added that “we think it will likely stop short of formally adopting such until we get closer to the next national budget cycle in 2026.”

Kganyago and his colleagues have argued that the current target is too wide and high, is out of line with trading partners and that a lower goal will help the country save on borrowing costs.

The central bank’s six-member monetary policy committee in September began using the 3% target to inform its decisions. The MPC kept the benchmark rate at 7% as it pursued that goal.

The bank’s quarterly projection model sees inflation peaking at 4% this quarter, before easing to 3% by end-2027.

Still, generous public-sector pay awards and potential slackening in fiscal discipline ahead of next year’s municipal elections may make the lower goal hard to reach, said Jee-A Van Der Linde, senior economist at Oxford Economics.

“Given South Africa’s constrained fiscal environment, the SARB is expected to do most of the heavy lifting to anchor inflation at 3%,” he said.

“The SARB is unlikely to reach its target by 2027 and beyond. Even so, in our view, markets will be content with lower-trending inflation and are unlikely to dwell on the target overshoot.”