Reserve Bank governor Lesetja Kganyago has reiterated his view that South Africa needs a lower inflation target, saying that while this might slow economic growth initially, it will yield results when inflation subsides.
He said a tighter inflation target would align the country with peer economies and allow for consumption patterns that would keep inflation in check for longer periods, and a lower path for interest rates as inflation gradually comes down.
Briefing reporters after this week's monetary policy committee (MPC) meeting, where the repo rate was cut by 25 basis points to 7.25%, Kganyago said the committee considered a scenario where the target for inflation is within the 3% band, as opposed to the current 3%-6% range.
“In this meeting, we also considered a scenario with a 3% inflation objective, which corresponds to the low end of our target range. For some years now, internal and external analysis has shown that our inflation target is too high and too wide.”
Kganyago said that in the scenario of a 3% inflation objective, growth is slower at first due to higher initial real rates but the economy does better later in the forecast as the rates begin to ease.
“Now that inflation has slowed, we have a chance to lock in lower inflation at low cost. This scenario illustrates that opportunity. For a 3% objective, our quarterly projection model shows a lower path for interest rates. Both our baseline and the 3% scenario have a cut in this quarter.
“However, rates move steadily lower in this scenario as inflation comes down. The policy rate falls to just under 6% rather than staying above 7% as in the baseline. Inflation expectations stabilise at 6% during 2026, held by the experience of lower inflation.”
He said that while the work being done by the central bank and the National Treasury — supported by the government technical advisory centre (GTAC) — to review the inflation target was at an advanced stage, the MPC’s own work on keeping inflation within range was beginning to yield fruit.
“This reflects the lower starting point, as well as a stronger exchange rate assumption and lower world oil prices. These factors offset pressure on fuel costs from the higher fuel levy announced in the budget. In addition, our previous forecast included VAT increases, which have since been cancelled.”
Tertia Jacobs, Treasury economist and fixed income specialist at Investec, said the latest MPC decision was in line with their forecast for inflation, as well as rates.
“Inflation is expected to be contained in the [next] nine to twelve months, leaving the door open for another 25 bps rate cut. That will be contingent, however, on where the inflation target is. If the target is lowered to say 3%, it could be more difficult to cut rates,” she said.
Jacobs noted that Kganyago had reiterated that a lower inflation target will need government buy-in and a reset of administered price increases at state-owned enterprises and local authority levels.
They managed to — literally just through good communication and credibility — anchor people’s inflation expectations to 4.5%, and they managed to achieve that target, that so-called mid-range, as their unofficial-official target ... without [always] having to increase interest rates
— Hannah de Nobrega, economist and quantitative analyst at Prescient Investment Management
“We think there is scope for a further 25 bps rate cut in the second half of the year, but that could be influenced by an uncertain global environment that could affect the SARB’s balance of risk assessment,” she said.
Hannah de Nobrega, economist and quantitative analyst at Prescient Investment Management, told Business Times that, historically, the Reserve Bank has been able to anchor inflation within the target significantly, but the central bank still felt that this target was too high.
“They managed to — literally just through good communication and credibility — anchor people’s inflation expectations to 4.5%, and they managed to achieve that target, that so-called mid-range, as their unofficial-official target ... without [always] having to increase interest rates,” she said.
De Nobrega said this approach would make for a lower neutral interest rate and allow for an easier growth cycle.
Frank Blackmore, lead economist at KPMG, said the Reserve Bank remained data-dependent and sought to ease some of the risks, such as the exchange rate.
“They have also taken into consideration that the VAT hike will not take place, also easing future inflation in that respect.”
He said the upside risk-scenario analysis — done by the MPC on the risk of stagflation, weak economic growth, and tight monetary policy reacting to higher levels of inflation due to trade wars and ongoing trade protectionism — highlighted important risks and insights.
“Another scenario, where they're reducing the target rate from a current ... 4.5% ... to the 3% objective — so the bottom of their 3%-6% range — puts us closer in line with many of our trade partners, as well as being closer to the median emerging market rate of about 3%.”
He said that in this scenario consumers would benefit from lower inflation, as it would preserve the value of their earnings and wealth in future periods. Given the low inflation that South Africa is now experiencing, this would be the right time to institute such a change.
Hayley Parry, facilitator at 1Life's Truth About Money, said Kganyago had offered cash-strapped consumers a lifeline with the 25 basis point reduction, which took the prime lending rate down to 10.75%.
“This is a number we have not seen since January 2023. What that means is that, for anyone paying back any debt, you are going to be able to save on [the] repayment.”
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