“Low inflation is like reliable electricity: good policy means most people don’t have to worry about it. Unfortunately, just as we have load-shedding, so our high and wide inflation target means the currency suffers persistent value-shedding. We would like this to end.”
So said Reserve Bank governor Lesetja Kganyago as he sketched out his argument that SA should embark on a historic monetary policy overhaul and undo the mistakes of the past two decades when the government gave up on lowering the inflation target to 3%-5%.
We could not agree more.
High inflation is a public enemy, hurting the economy and undermining the mainstay function of the rand as a store of value even if wages were to keep up with growth. For a painful glimpse of what could happen if inflation is allowed to run out of control, look no further than Zimbabwe where the late former president Robert Mugabe’s disastrous stewardship of the economy combined with political meddling in monetary policy to destroy trust in the Zimbabwean dollar. The wild gyrations in the currency made it impossible for retailers to take it at face value because in a matter of days the payment might be worthless.
A live and unfolding illustration of letting inflation run amok, albeit because of an unorthodox economic policy, is in Turkey. President Recep Tayyip Erdogan, who is in control of economic policy-making, is of the view that central banks could promote slower inflation by cutting interest rates. The experimentation has come at a great cost for the Turkish people. Due to the well-documented slump in the lira, which is down by about a third against the dollar since the start of 2022, and rising global food and energy prices, inflation in Turkey exceeds 80%.
At home, inflation has been running well above the current wide target band of 3%-6% as transport and food costs surged. In August the soaring cost of living triggered the first mass protests against the government of President Cyril Ramaphosa, whose efforts to lift the floundering economy have been dealt a blow by Covid-19 restrictions and the slow pace of structural reforms that economists say are critical to putting millions into jobs and reducing poverty.
Kganyago appears to be entirely convinced by the merits of the argument made by the Patrick Honohan, Ireland’s former central bank governor and his Cypriot counterpart Athanasios Orphanides,, that SA should target an inflation rate of just 3%. That would rightly bring SA in line with other emerging markets such as India, which set a consumer inflation target of 4%, with a band of about two percentage points, in 2015. In June, Brazil, which has put itself on the front line of the global battle against inflation, kept its inflation target unchanged at 3% for 2025, with a 1.5 percentage point margin of error on either side, after gradually bringing the target down each year since 2005. SA’s inflation-targeting regime was adopted in 1999.
Whether Kganyago is successful in lobbying the Treasury and cabinet in setting the new lower target is anyone’s guess, but there are encouraging signs that the government is preparing to play its part in keeping inflation of administered prices in check. In April, finance minister Enoch Godongwana told parliament that SA will move into full regulation of fuel prices, laying the groundwork for competition in the sector that most economists agree will result in lower prices.
The three-way break-up of Eskom, which is seeking a more than 30% price hike from the regulator, Nersa, is one other way policymakers are playing the role. Under the plan, SA will have a state-owned independent grid operator that will buy power from multiple electricity operators — a scenario that probably will incentivise competing energy generators.
Kganyago’s remarks should put back on the agenda the implementation of an idea that will make many South Africans — subjected to almost daily disclosures of public corruption and hours of load-shedding — feel less stressed about money. It is a low-hanging fruit to add to an election campaign arsenal of any politician.
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