Citigroup (Citi) has added its voice to calls for the Reserve Bank to lower its inflation target, saying the mooted move will help lower interest rates in the long run.
“There is a discussion under way to lower the inflation target. That is something that is on our horizon for 2025 because 4.5% as a midpoint target has been successful when it was achieved,” said chief economist Gina Schoeman at the group’s Sub-Saharan Africa 2024 Economic Review and Outlook for 2025 on Thursday.
“But still, 4.5% as a target is higher than our trading partners and peers. Our competitiveness in SA needs to improve and to do that we need to lower the inflation target,” Schoeman said.
The US multinational lender’s comments add to a debate that has potentially polarised economists and policymakers, with its proponents saying that lowering the target promises to boost SA’s competitiveness and make South Africans less worried about their money.
But its critics are likely to point out that quick changes to the target could create economic uncertainty, and potentially choke economic growth with overly tight monetary policy.
“It doesn’t necessarily mean it has to go down to 3% immediately … in a low inflation environment, you may see the [Bank] start to consider a target close to 4% and that will help us to lower inflation over the long term and that in itself lowers interest rates,” said Schoeman.
Citi joins Bank governor Lesetja Kganyago in pushing for the biggest monetary policy overhaul since 2000 when SA introduced its inflation-targeting framework, in which it had planned to lower the target to 3%-5% and then 2%-4%.
The IMF has also weighed in, saying in the latest Article IV consultation that SA could benefit if it shifted to an inflation target at an appropriate time to lower inflation expectations.
However, the biggest hurdle to lowering the inflation is administered prices of electricity and fuel, with Eskom, the monopoly electricity provider, constantly getting double-digit tariff increases that are passed on to business and consumers.
Citi also weighed in on talks of Treasury introducing a fiscal anchor policy, which could put a constraint on fiscal policy that requires the Treasury to adopt a specific policy approach.
The goal of a fiscal anchor is to provide a sustainable long-term path for public finances. The Treasury in the medium-term budget policy statement said technical work was continuing on permanent measures to anchor fiscal policy and ensure debt sustainability and that a discussion document on the polarising measure would be released by end-March 2025.
Schoeman said the debt anchor was not a bad idea, provided fiscal discipline takes priority.
“While we know that the Treasury is not going to do it immediately, it is something that is being talked about. And whether there is merit to it or not, what we do believe that the National Treasury would want to do first would be to create a better track record of expenditure discipline.
“The fiscal anchor is all good and well, but if you look at other emerging markets, fiscal rules are also made to be broken,” Schoeman said.
“You have to design them very carefully and have full buy-in and be clear across the economy as to what you’re dealing with. It is better to implement fiscal rule once you’re sure that you condition the economy to a certain type of fiscal discipline. In SA’s case, that would certainly come from the expenditure side.”
SA’s economy contracted in the third quarter, primarily due to a 28.8% plunge in agriculture on lower field crops. Citi said the contraction was not a cause for concern, as the foundation has been laid for growth, with the entity hoping Operation Vulindlela 2.0 will replicate the success of the first leg of the joint initiative of the presidency and National Treasury to accelerate the implementation of structural reforms.
Schoeman said one of the successes of Operation Vulindlela 2.0 would be the progress it makes in turning around dysfunctional municipalities.
“If you’re in SA, particularly outside Sandton or Cape Town, which are more of the illustrious, more shiny perfect sides of the economy, and you go into the middle and low-income areas, you will see service delivery has absolutely failed,” she said, adding improvements in the municipalities would boost sentiment.
“It’s a big task and how it actually pans out, especially with 2026 local government elections coming, we don’t know. That is why we are eager to see detailed plans by Operation Vulindlela in the early parts of next year.
“But it is something we are hopeful for because not only will it have an economic impact but can also go far in helping to structurally lower inflation in the medium to long term.
Regarding the inflation basket, administered prices were one of the biggest issues. “If you reduced the inefficiencies in service delivery this would be a helpful measure to reduce administered prices inflation.”
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