When deputy finance minister David Masondo unexpectedly told the recent RMB summit that there could be an announcement on the inflation target “very soon”, the market reacted with enthusiasm.
The reaction was even more enthusiastic yesterday when the SA Reserve Bank’s monetary policy committee opted for a rather timid 25 basis point interest rate cut, but went big on the opportunities a lower inflation target could offer.
Fed up with how long it’s taking to get political sign-off for his proposal to lower the inflation target, Reserve Bank governor Lesetja Kganyago looks increasingly as if he is going ahead and in effect doing it anyway. At the very least he is applying strong pressure — by publishing scenarios that model what decisions the Bank would make and what the longer-term positives would be for inflation, interest rates and growth — if the target were in fact 3%.
How well the pressure will go down with the various partners in the government of national unity (GNU) is a question. It’s not that the prospect of a lower cost of living and structurally lower interest rates might not appeal, but there will be questions about what the costs might be to get there. In any event, the GNU has other priorities on its collective plate now, and the finance minister has other battles to fight.
In theory, while inflation targeting is a government policy the target itself is set by the Bank in consultation with the finance minister. In practice, the legal position isn’t that clear. And Kganyago was firm on Thursday that the Bank could in fact go it alone. “Of course we can go it alone. Will we do it? We do not think it is desirable. Inflation targets work because you have the entire government behind those targets, because you need more than monetary policy to achieve them,” he said.
Will the government be persuaded by the Bank’s new pitch? The governor has been pushing for a lower target for at least three years. The Bank has been rolling out research and convening conferences, and Kganyago clearly wants to grab the moment now — because the inflation outlook is looking so benign that the target could be cut without necessarily requiring much sacrifice in terms of higher interest rates and lower growth to achieve it.
Or so the scenarios indicate. Economists will be scrutinising them closely. And it’s the “more than monetary policy” part that could be one of the biggest concerns. Administered prices — those regulated or set by the government or public entities — have been running way ahead of inflation for years. Curbing them would require exactly the kinds of efficiency-boosting reforms to dysfunctional municipal finances or financially stressed state-owned enterprises that the government has been so slow to implement.
However, unless the government can put the lid on increases in administration prices such as water, rates or electricity, much of the burden of achieving a lower inflation target will fall on the private sector. Markets may love the idea of a lower target, but the politics of getting there could be complicated.
Kganyago is now in his third term as governor and it is said he wants the lower target to be his legacy. With inflation now below the bottom of the 3%-6% target range, Kganyago clearly wants to grab the moment. Economists will be scrutinising the Bank’s scenarios closely to check if they are plausible.
• Joffe is editor-at-large.
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