Reserve Bank governor Lesetja Kganyago has warned that prices of food, goods and other services could double every 12 years if the inflation rate peaks at the bank’s upper band of 6%.
Speaking to Business Times from the Group of 20 finance ministers and central bank governors meeting in Zimbali on the KwaZulu-Natal north coast, Kganyago said both the government and the Bank were of the view that an appropriate target should be lower than the current 3%-6% range set in February 2000.
The central bank recently organised a conference to reflect on 25 years of inflation targeting — attended by economists, academics and policymakers — at which a range of papers were presented, including one that suggested a 2% target would be more appropriate.
The research found that if inflation were to stabilise at the Bank’s current target of 4.5%, price levels will double every 16 years. If inflation rises to the upper band of 6% and remains there, prices will double every 12 years. However, should inflation plateau at a 3% rate, prices will double every 24 years.
“Now that is the conversation we should have with South Africans. Do you want prices doubling every 12 years, every 16 years, or every 24 years? [In] advanced economies, prices double every 36 years because they are targeting 2%,” he said.
Kganyago has been lobbying for a lower inflation target, arguing that the long-term economic benefits would outweigh any short-term hiccups. A technical committee established between the Bank and National Treasury — tasked with investigating the fiscal and economic effect of a lower target, and to make recommendations to the minister of finance and the cabinet — is concluding its report.
Inflation has been steadily cooling since the consumer price index overshot the target in 2022. It has mainly hovered under 3% this year, and is now at 2.8%. This has prompted the bank’s monetary policy committee to lower the repo rate to 7.25%.
However, several economists have cautioned that the economy could take strain from a lower target and not recovery quickly. Economists from FNB warned last week that it may take two years or more to benefit from a lower inflation target, and the country's prices would have to remain benign for it to take root. They said South Africa may be forced to hold interest rates at current levels for a long time, or even face potential rate hikes to reduce longer-term inflation.
You can’t say I’m going to achieve the target today, because it’s outside the policy horizon. Monetary policy works with a lag of two years
— Lesetja Kganyago, Reserve Bank governor
Casey Sprake, an economist from Anchor Capital, said at a media event in Johannesburg this week she was not convinced the economy was strong enough to endure a 3% target.
“The pure economist in me is not a fan of this lower inflation target. Our economy is simply not strong enough to handle an inflation target of 3%. There’s a lot of uncertainty in the market about why the Reserve Bank is doing this, given the nature of our economy,” Sprake said.
Kganyago said a two-year lag for the economy to adjust to a lower inflation target was a norm for those who set and implement monetary policy.
“You can’t say I’m going to achieve the target today, because it’s outside the policy horizon. Monetary policy works with a lag of two years.”
When the costs to the economy are calculated, a sacrifice ratio is used to determine how much output growth would have to be given up to bring inflation to a desired target. Kganyago said this calculation was done when inflation was about 4.5%, but that debate was now moot because inflation is at 2.8%.
“That is not a conversation we should be having now, because inflation is at 2.8%. So that makes that certified ratio almost negative, which basically means instead of [asking] how much output would we lose, it’s ... what do we gain by staying where we are.”
Meanwhile, the gathered finance ministers and central bank governors have made progress with lowering the costs of cross-border payments, especially in Sub-Saharan Africa, and are ready to present a report on this to G20 leaders in November.
Kganyago, who chairs the cross-border payments committee, said the region had made substantive progress in bringing the costs of cross-border transactions down — from as high as 10% to about 3.57% for every $100 sent.
He said stringent anti-money laundering regulations were identified as inhibiting efforts to lower costs. World banking regulators met the Financial Action Task Force — the global body working to combat money laundering and terrorist financing — which had since issued revised recommendations on cross-border payment regulations.
The entrance of new players who use technology to speed up remittances had also helped senders and recipients sidestep expensive administrative costs.
About $60bn (R1-trillion) in cross border payments were made in Sub-Saharan Africa in 2024.
Kganyago said increasing the speed at which these payments were made would help countries for which these remittances remained an important source of finance.
“There are developing countries where remittances account for a big chunk of their foreign income ... And so for those countries ... if you bring down the cost of remittances, you increase the speed with which they access [them].”
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