Big changes to the SARB’s inflation rate target possible

South African Reserve Bank (SARB) Governor Lesetja Kganyago reiterated his support for lowering the country’s target inflation rate, and work is underway to make this happen before 2025.

Kganyago said there is “no virtue to be had” in high inflation, as it erodes to value of South Africans’ buying power.

The SARB has been attempting to bring the country’s inflation down sustainably within its target range by raising interest rates by a cumulative 475 basis points since the start of the current hiking cycle. 

The hiking cycle started in November 2021 and is ongoing, although the Monetary Policy Committee (MPC) has not raised interest rates since May last year.

At its July meeting, the MPC elected to pause the hiking cycle and has done so at every meeting since. South Africa’s repo rate has, therefore, been at an almost 15-year high of 8.25% since May 2023.

Kganyago has emphasised at every MPC meeting since July 2023 that, despite being paused, the hiking cycle has not necessarily ended, and the committee will remain data-dependent in its decisions.

He said interest rates will only be cut once inflation has fallen sustainably to within the SARB’s target range of 3% to 6% and is anchored around the mid-point of the range, 4.5%.

This has been the SARB’s target range since 2000 when it formally introduced inflation targeting.

Inflation targeting is a framework in which the central bank uses monetary policy tools, especially the control of short-term interest rates, to keep inflation in line with a given target. 

According to the central bank’s website, “Before adopting the inflation-targeting framework, the SARB used several different frameworks, including exchange rate targeting and money supply targeting.” 

“The inflation-targeting approach has been more successful. It has permitted a more realistic alignment between the SARB’s tools and objectives.”

“It has also enhanced transparency and accountability by giving the SARB a clear and publicly visible objective.”

For years, Kganyago has been a vocal proponent of lowering South Africa’s inflation target.

In September 2021, Kganyago said South Africa needs a point target of inflation of around 3% or 4% and not the current target range of 3% to 6%.

For perspective, the US and the European Central Bank have an inflation target of 2%.

Kganyago reiterated this view last year at the Peterson Institute for International Economics in Washington, where he said a 3% inflation target “would help dampen exchange rate volatility and sovereign risk, reduce the potential for upward drift in the real exchange rate, and materially lower debt service costs”.

He said this lower target would benefit fiscal policy and stronger growth, adding that structural reforms and key deregulations of transport and electricity are critical in South Africa. 

“But so too is a shift in fiscal policy back to predictable, transparent rules.”

At the start of April this year, Kganyago again told SABC News that he supports lowering the inflation target.

He said no final decision has yet been made on what a new inflation target would look like, but there has been progress to bring it down in consultation with the National Treasury.

However, he explained he is concerned that the current broad inflation band may be inadvertently fostering elevated inflation expectations.

He told SABC News that significant technical work is underway to lower the inflation target. 

“The important thing is to make sure that the process to arrive at the target is robust and evidence-based,” he said. 

“If you identify the risks attendant to the movement towards that target, you are able to set a timeline to achieve that target, and importantly, that you have in the toolbox of the central bank the ability to mitigate against the risks that might be associated with the move towards the target.”