Clock is ticking for South Africa’s golden opportunity

South Africa’s current low level of inflation is an unmissable chance to reduce the country’s inflation target and lock in the benefits of tame price pressures and cheaper borrowing costs.

“There is a really amazing opportunity right now,” David Fowkes, a South African Reserve Bank’s monetary policy committee member, told an audience on Tuesday in Soweto, south of Johannesburg.

“This is surely the best opportunity we’re ever going to get.”

South African inflation rose at an annual rate of 2.8% in April, which Fowkes noted was lower than that of Japan.

The bank’s current inflation target of 3% to 6% has been unchanged since it was introduced in 2000. The SARB favours shifting to a single point target and said last week that aiming for 3% would lead to lower interest rates than otherwise would be the case. 

Making that shift when price pressures are already at or below the new goal would involve far less pain than doing so when it is elevated, he said.

SARB research also finds that South Africa could save as much as R870 billion in debt-service costs over 10 years if it adopted a 3% goal and revised its borrowing strategy.

The central bank and National Treasury have been talking about revising the framework for several year,s and the SARB said last week that technical work was at an advanced stage.

“We’ve got to finish a discussion with the Treasury,” said the bank’s head of economic research, Chris Loewald, who is also a member of the MPC.

“We’re at the right place now to finalise those recommendations and get agreement on them,” he told the same event.