A review of SA’s inflation target is still on the table, even though it was hardly mentioned in last week’s draft budget document, but Reserve Bank governor Lesetja Kganyago says he is waiting for the outcome of a Treasury review and will not act on his own to lower it.
In an interview at the weekend, the governor also reiterated growing concerns among central bankers globally about populist attacks on central banks’ independence, as well as on other institutions, that could pose risks for financial stability.
He pointed to the damage done by SA’s own experience with the hollowing out of institutions in the state capture era.
Kganyago was speaking after the Bank hosted the G20 finance track meeting and the Basel-based Bank for International Settlements’ bimonthly meeting in Cape Town.
He again highlighted the importance of the battle against inflation, saying, “Actually, consumers hate inflation more than central banks do, and they do not just want lower inflation, they also want last year’s prices.”
Kganyago has pushed hard for SA’s inflation target to be lowered, preferably to the 3% bottom of the current 3%-6% target range, to make SA more competitive with its peers and ease pressure on the exchange rate.
Actually, consumers hate inflation more than central banks do, and they do not just want lower inflation, they also want last year’s prices.
— Reserve Bank governor Lesetja Kganyago
The latest data shows inflation is at just 3.2%, up from 3% in December, prompting economists to argue it could be a good time to lock in the lower rate by setting out a path to a revised target.
Some believe, too, that the Bank may quietly be moving to an effective target of 3%, just as it did in 2017 when it started to signal it was aiming for the 4.5% midpoint of the target range, rather than being comfortable with keeping the inflation rate below 6%, as in the past.
The Treasury said in a debut macroeconomic review report released in February’s national budget that it was reviewing the target. Technical work had begun on an appropriate level for an inflation target for SA’s economic context, and whether this should take the form of a point or a range.
SA’s inflation targeting had broadly achieved its goals, but “inflation rates are higher than those of SA’s peers and trading partners, with adverse effects on competitiveness and putting pressure on the exchange rate”.
However, in the February 19 draft budget review there is a single sentence saying SA’s inflation targeting has proved to be effective, with no mention of the review.
Kganyago emphasised it was the Treasury that had started the review of monetary policy in 2020/21 as part of its macroeconomic review. It had commissioned outside academic research, which had recommended a lower target of 3%.
The Bank had assisted with the process, which was still running and the review was still on the table. The Treasury had commissioned a further paper on what an optimum inflation target would be. The technical work would culminate in a conference hosted by the Treasury and the Reserve Bank at end-March. The meeting would include domestic and international experts and former or current central bank officials. The minister and governor will evaluate the policy proposals from the meeting.
In tandem
Asked why he did not just impose a lower target, Kganyago said the relationship between the Treasury and the Bank was cordial. It was “useful to move in tandem, rather than just one moving on their own, and when the Reserve Bank was under attack successive ministers of finance — except one — had always protected the Reserve Bank and we want to continue to enjoy that protection”, he said.
Malusi Gigaba was former president Jacob Zuma’s finance minister in 2017. At the time, the Bank’s mandate and independence were under attack on several fronts, including from former public protector Busisiwe Mkhwebane and cabinet ministers who wanted bank licensing to be removed from the central bank’s supervisory authority.
At least four key financial regulators have had to step down in the US, where the new Trump administration has taken aim directly at the US Federal Reserve’s setting of interest rates, as well as at financial regulation, prompting several banks to chime in with calls for lighter touch regulation.
“There was a time when we were not worried and now we are worried about it [central bank independence] again, But it was not just about the central bank. It was about an attack on institutions,” Kganyago said echoing comments he made in a recent speech in which he warned that populism could be from the right or the left.
He pointed to attacks on law enforcement institutions in SA and the pushback against Zuma signing amendments to the Financial Intelligence Centre Act that could have prevented SA being greylisted.
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