Finance minister Enoch Godongwana has squashed the expectation that he will make an announcement confirming the move to a 3% inflation target in the medium-term budget policy statement, which will be tabled in parliament in either October or November.
This follows the announcement on Thursday by the Reserve Bank’s monetary policy committee that it has a preference to target inflation at 3% instead of in the official 3%-6% range and that its forecasting would be based on this target.
“Minister Godongwana has no plans to do this,” a statement by the finance ministry said on Friday, adding that extensive consultations in the government were needed.
“As I emphasised during the budget presentation, any adjustments to our inflation-targeting framework will follow the established consultation process. This means comprehensive consultation between National Treasury, the Reserve Bank, cabinet and relevant stakeholders — not unilateral announcements that pre-empt legitimate policy deliberation.
“Any changes to the target, if necessary, will follow this process that I have outlined above,” the minister said in a statement on Friday.
The Reserve Bank disclosed its go-it-alone shift to a 3% inflation target at a media briefing on Thursday to announce the 25 basis point cut in the repo rate to 7%.
The Bank has for the past four years called for the target to be lowered to make SA more competitive and ensure permanently lower inflation and interest rates. It has stepped up that campaign in recent months as inflation has trended lower to 3% or less, making it easier to set a lower target with less economic pain.
Since 2017, the Bank has targeted the 4.5% midpoint of the official 3%-6% target range. But governor Lesetja Kganyago said on Thursday that the Bank would now aim for the bottom of the range.
“All that we are doing today is to do exactly what we did in 2017 and say we prefer that, given where the inflation rate is, we prefer that we lock the gains there, and within this inflation target range we shall aim for the bottom of the range, which happens to be 3%,” Kganyago said.
The Treasury published a macroeconomic review last year in which it said a lower target should be considered. However, director-general Duncan Pieterse recently said the Treasury was still doing its own modelling.
While Godongwana has expressed broad support for the idea of a lower target and said it should be agreed by the minister and the governor, it is not clear whether he has been able to rally political support for that.
Kganyago made it clear the Bank had chosen its wording carefully and that 3%-6% was still the inflation target but that the Bank’s forecasts would now be based on the new 3% anchor. The Bank “will also continue working with the National Treasury to complete target reform and achieve permanently low inflation”.
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