The South African Reserve Bank wants to lower the inflation target range because the country’s inflation rate is far higher than in other parts of the world.
South Africa is currently experiencing restrictive monetary policy, with the repo rate at a 15-year high of 8.25%.
The SARB’s Monetary Policy Committee (MPC) started hiking rates aggressively after the Covid-19 pandemic, where “wartime measures” included lowering interest rates to boost the economy.
However, inflation in South Africa started to increase dramatically following this, partly due to a substantial rise in fuel prices, the effects of load shedding, and a weakening rand amid a US Federal Reserve hiking cycle.
Inflation has since subsided, dropping from 5.1% in June to 4.6% in July.
This is 0.1 percentage point above the SARB’s 3% to 6% target range midpoint.
Speaking at a media event, SARB Governor Lesetja Kganyago stressed that lower inflation in July only reflects the bank’s past interest rate decisions – and that the upcoming September decision will be based on potential future moves in inflation.
Although Deputy Governor Fundi Tshazibana said that headline inflation could hit 4.3%, the central bank said it would be cautious as fuel and food costs, which drove inflation upwards in 2022, are incredibly volatile and linked to international price movements.
Despite the SARB’s careful approach, several economists and analysts expect it to cut interest rates when it meets in September amid declining inflation, the rand’s strong performance since the national and provincial elections and the expectation that the US Fed will cut rates in September.
Lower target
Although inflation has dropped lower, the SARB has regularly called for the inflation target to be reduced.
When it was introduced in 2000, the current 3% to 6% target range was supposed to gradually lower, going from 3% to 5% and eventually 2% to 4%.
However, this was delayed due to a rand depreciation shock in 2001. Since then, the objective has only translated into the midpoint target of 4.5%.
Although inflation improved, South Africa had the fourth-highest level of inflation among the G20 countries, only beaten by Argentina, Türkiye and Russia.
A 4.5% inflation target is high relative to South Africa’s peers, affecting its competitiveness.
South Africa’s 3% to 6% target is far higher than that of the USA, EU and UK’s 2%, China’s 3%
It also means businesses must adjust wages, prices and investments to avoid losing buying power.
Although FNB said that lowering the inflation target may have short-term costs to economic activity, it would have longer-term gains for borrowers, savers, and those with fewer financial buffers to protect themselves from elevated and volatile inflation.
The SARB wants reform, but MPC member and Adviser to the Governors, Dr David Fowkes, said it remains unclear what measures must be taken to lower the inflation target.
Although the SARB is independent, the Minister of Finance sets the inflation target, meaning that the decision would require government support. The SARB has called on the government to lower the inflation rate, but to no avail.
The Government of National Unity (GNU), which includes the ANC, the DA, the IFP, and five other parties, has called for faster reforms, which could help achieve a lower target, but this remains to be seen.
Talking about his experience with parliament’s Standing Committee on Finance, Kganyago said that the SARB was criticised over the country’s high level of inflation compared to other markets. But he again said that lowering the inflation target would be key in addressing this issue.
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