At a time when most economists expect the next interest rate move to be a cut, it’s quite unexpected to see some calling for SA’s inflation target to be shifted upwards from the 3%-6% at which the government pegged the target two decades ago.
Interest rates were hiked sharply in SA and across the globe in 2021 and 2022 when inflation started to climb as economies opened up after the Covid-19 pandemic and Russia’s invasion of the Ukraine caused fuel and food prices to spike. That certainly caused hardship to borrowers such as homeowners who have variable rate bonds that reprice every time interest rates change. The hardship has inevitably been reflected in higher rates of bad debt at the banks.
But in SA many poor people do not own homes and do not have mortgages. And whereas the more affluent can ride out high inflation and high interest rates, the poor are harder hit by the impact of inflation on their pay packets and living standards.
SA did a lot better in combating the inflation surge than advanced countries such as the UK and US. That was thanks to a firm inflation target and credible central bank. And it’s surely an argument for a lower target, not a higher one. Now that inflation is coming down, the way is open for lower interest rates sometime soon.
It’s a good time to start talking about a target that could get inflation even lower and make SA more competitive with emerging market peers whose targets are closer to 3% than 6%.
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