Consumer prices rose by a low 2.8% in April compared with the same time a year ago, Stats SA has reported, and the SA Reserve Bank expects inflation to average 3.2% in 2025.
Domestic inflation rarely drifts this low. Outside the Covid-19 shock of 2020, CPI inflation was last here two decades ago.
Data published this week indicates that GDP stalled in the first quarter of the year. Forecasters now expect the local economy to grow by a miserable 1% in 2025 — almost a full percentage point below the about 2% forecast at the beginning of the year.
Put in context, the IMF expects emerging markets will grow 3.7% on average over the course of the year. SA’s GDP growth averaged a lousy 0.5% in 2024 and an equally unacceptable 0.8% in 2023.
The grim GDP news comes after the National Treasury finally tabled a passable budget in parliament on its third attempt, an unprecedented occurrence in a country in which tabling of the budget has traditionally been little more than ceremony.
SA is experiencing a terrible combination of factors. Growth has stalled, and there is an uncomfortable level of political and therefore policy risk.
This is the context in which the Reserve Bank’s monetary policy committee decided to cut interest rates by 25 basis points to 7.25% last week and, more importantly, strongly proposed the reduction of the inflation target rate to 3% from the current 3%-6%, or in practice a target of 4.5%.
The Bank has long argued that the inflation target should be lowered to align with SA’s trading partners and support price stability. There is broad agreement that the appropriate target for SA is 3%.
The argument is about timing. Had it been up to the Bank’s governor, the target would have been lowered a long time ago. However, the finance minister also has a say, and the Treasury’s agreement has not been forthcoming.
There are compelling arguments for changing the inflation target now, but the Treasury’s reticence is understandable. Lowering the target will come at a cost to growth and the fiscus. Even the Bank’s bullish estimates suggest debt will rise as a percentage of GDP in the short term.
This is something the Treasury is wary of, even if modelling suggests debt levels will eventually decline. Moreover, the Bank’s modelling assumes many things go right and maximum gains are made from the change in the inflation target over a short period. More prudent assumptions would show more GDP loss in the short term, and a longer period before the fiscal implications swing from negative to positive.
The strongest argument for changing the target now is the current level of inflation. Inflation tends to work in five-year cycles, so the next opportune time might be some way off. There are costs associated with running inflation high, and we should arguably not pay them for another half a decade if we can help it.
If we change the target out of sync with the inflation cycle the output costs could be higher than if we do it now. It is likely that unduly tight monetary policy played a role in inflation remaining this subdued. To some extent, the economy has already paid the price of getting inflation here. We might as well change the target and lock in the gains.
The terrible growth dynamics and shaky politics make getting consensus over the target change difficult. I lean more towards the Bank’s argument, not necessarily because lowering the target will be as pain-free as it calculates but because it is the right thing to do from a macro policy perspective.
It will be far harder to attain the target if we do not seize the moment. The policy would be less costly had other reforms been more effective. However, we cannot wait for everything to be exactly in place before we move on this policy.
• Lijane is global markets strategist at Standard Bank CIB.
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