EDITORIAL: Inflation target statement is welcome

It might not have been a climb down as such. But it certainly had the welcome effect of doing some damage control.

Monday’s joint statement by the Treasury and the Reserve Bank on the inflation target was important simply because it was joint. That will allay concerns in the market about a rift between the two crucial institutions.

The concerns were sparked by finance minister Enoch Godongwana’s unexpectedly hostile 1 August counter to the Bank’s announcement that it would now aim for the 3% bottom of SA’s inflation target range, rather than the 4.5% midpoint.

The Bank has long wanted to reduce the inflation target and with inflation hovering at or below 3% it was becoming ever more impatient to seize the moment. It used its July monetary policy committee meeting to lower the effective target — even though it didn’t yet have the minister’s blessing.

And while the market had expected some sort of announcement from Godongwana at the medium-term budget later this year, the minister hastened to quash that idea, saying in his August 1 statement that he had “no plans” to confirm the move to a 3% target at the medium-term budget.

He had policymaking responsibility in this area, Godongwana sternly emphasised. Any adjustments to the inflation targeting framework would follow the established consultation process, “not unilateral announcements that pre-empt legitimate policy deliberation”, he said.

It was clearly a rebuke. And it spooked the market not just because the apparent tension between minister and Bank was so unusual, but also because of the uncertainty it created about how effective the Bank could be in achieving the new lower target in the absence of government support.

So while the Bank’s move to a lower effective target was widely welcomed by the market, benefiting bonds and the rand, there was still that slight overhang of uncertainty.

The latest statement should help to address that, even though it seems to say little that we didn’t know already. With inflation fading, the Treasury and Bank “have analysed and discussed the value of reducing inflation to levels consistent with the country’s trading partners”, the statement said, reiterating the Bank’s mantra of the past four years.

Research and consultation had highlighted the challenges of having a target band as wide as 3%-6%, as well as the long-term economic costs and entrenched inequality caused by high inflation, the statement said.

The Treasury itself in its February 2024 macroeconomic review had acknowledged that low and stable inflation was good for growth, it said. And so on.

We have long heard that a macroeconomic standing committee that includes both the Bank and the Treasury was working on a review of the inflation target. But the Treasury kept saying that it was still busy with its own modelling. So the real punchline of Monday’s statement is this: the technical work is finally drawing to a close.

The committee will make recommendations on the target to the minister and governor. “The minister of finance will make a formal announcement as soon as is practical to anchor expectations.”

It would presumably look like too much of a climb down for him to do so at the medium-term budget, now proposed for November 12. Perhaps before. Perhaps after. But the minister is getting there. Market expectations are already re-anchoring down to 3% as a result of the clear statement from the Bank at its July monetary policy committee meeting.

But the Bank took a big political risk by racing ahead of the minister. The risk now seems to be moderating. The minister and governor are talking, the Bank and Treasury are working together; they all agree low inflation is good. Whether they will all agree on how low and how to get there we don’t yet know.

If the Bank and Treasury align on some version of a new 3% target this would enhance SA’s chances of achieving lower inflation and interest rates. Any hint of a retreat at this stage could be negative for market sentiment.