The Reserve Bank used May’s monetary policy committee (MPC) meeting to launch a full-on campaign for a 3% inflation target, publishing a 3% scenario showing how low interest rates could go if the target were 3% not 4.5%, plus a research paper showing how far government debt costs could fall.
The market is now fixated on the lower target, with expectations that finance minister Enoch Godongwana will make an announcement in the medium-term budget, if not earlier. Going into the July MPC meeting the question of when is top of mind. But there is a still a question mark over whether the minister will agree to change the target at all — and what the Bank will do if he doesn’t.
A strong case can be made for a 3% target, and the Bank has made the case compellingly, at least if you agree with the assumptions in its models. And with inflation already at 3% and the outlook benign, SA has a chance right now to reduce the target without taking too much economic pain.
But it is not just about economic logic. If the minister is to agree on a new target with the Reserve Bank governor he will need political buy-in. After the debacle over his budget, Godongwana surely feels he needs to touch base with all the main political actors. The DA could be expected to support a lower target. But the MK party would definitely push back, as would some in the ANC, not to mention the EFF, which has already put nationalisation of the Bank back on the parliamentary table.
The concern is that any formal move to lower the target could again elicit the populist calls made during state capture for the Bank’s mandate to be changed to target employment and price stability. Worse, it could put the Bank’s independence at risk. Ask Jerome Powell.
Perhaps the minister can navigate his way through SA’s fractured politics to convince the politicians that we all need a lower cost of living, lower interest rates and lower state debt costs — and that a lower inflation target offers us that. But Godongwana has said already he will not be rushed. An October announcement is far from certain.
There are at least three scenarios. The most unlikely is the minister says no. That would be mildly negative for the rand and long bond yields. Worse, it would be strongly negative for the Bank’s credibility, raising questions about tensions between the Treasury and Bank.
The more likely scenario is we remain in limbo. The Treasury says it’s still working on it. The Bank continues to publish 4.5% and 3% models and keeps everyone guessing about which it is really targeting. That already makes interest rates difficult to forecast, because the Bank has made its preference clear and is widely viewed as keeping monetary policy tighter than 4.5% would warrant.
The official target remains the 3%-6% the finance minister announced in 2000. But it’s up to the Bank to implement as it deems best. It decided in 2017 to aim for the midpoint. In theory there’s nothing to stop it now aiming for the bottom of the range.
The third scenario is exactly that: the minister tells governor Lesetja Kganyago he can’t announce a new target but will not stop the Bank going it alone. Kganyago has said going it alone is undesirable because inflation targets work best when the entire government is behind them. But if that’s not happening, he might grab the chance sooner rather than later.
The Bank would have to puzzle out how to communicate 3% credibly and effectively. It would also have to mull the political risks of going it alone. If all went to plan, with lower inflation and interest rates and higher growth in the next few years, the politicians might even be persuaded to make the new target official.
However, if global or local shocks caused a sharp spike in inflation and sharp hikes in interest rates, the Bank could find itself facing populist wrath without the political cover of an official target. The next few MPC meetings could be interesting.
• Joffe is editor-at-large.
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