A low-intensity battle is brewing between the National Treasury and the Reserve Bank over control of monetary policy, specifically whether the inflation target should be lowered.
Observers were stunned on Thursday at the repo rate announcement when governor Lesetja Kganyago declared that the monetary policy committee (MPC) would now use forecasts with a 3% inflation anchor to inform future rate decisions.
Monetary policy has been anchored on a 3%-6% inflation target for the past 25 years. However, Kganyago and the Bank have been pushing to amend the policy to lower the target.
The move by the Bank prompted speculation that finance minister Enoch Godongwana would officially make an announcement on lowering the inflation target when he presents the medium-term budget policy statement (MTBPS) later in 2025.
On Friday Godongwana issued a statement saying he had no plans to make such an announcement. He insisted that the official policy on inflation targeting would be set by him, the cabinet, and the president.
“It is well-established that policymaking responsibility in this area resides with the minister of finance, working with the president and cabinet, who sets the inflation target in consultation with the South African Reserve Bank.
“The SARB then operates independently in its pursuit of the inflation target. As I emphasised during the budget presentation, any adjustments to our inflation-targeting framework will follow the established consultation process. This means comprehensive consultation between National Treasury, the Reserve Bank, cabinet, and relevant stakeholders — not unilateral announcements that pre-empt legitimate policy deliberation,” Godongwana said.
In an interview with the Sunday Times last November, Godongwana confirmed that a macro standing committee — a joint platform between the Treasury and the central bank — had recommended lowering the target, but he said he first wanted the impact on the economy to be measured.
“It may well be that it makes sense in economic terms to have a lower inflation target,” he said. “It leads to the benefit of the economy as a whole. But you don’t get there in a painless manner. To get there is tough. The question then is: what needs to be done?” the minister said, shortly after delivering the 2024 MTBPS.
Two weeks ago Kganyago warned that prices of food, goods and services could double every 12 years if the inflation rate peaked and remained at the bank’s upper level of 6%. He said Bank research found that if inflation were to stabilise at the midpoint of 4.5%, prices would double every 16 years. However, should inflation plateau at a 3% rate, it would take 24 years for prices to double.
“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.
Announcing a drop in the repo rate to 7% on Thursday, Kganyago said Bank projections showed the possibility of five rate cuts in the medium term should inflation remain at 3% or below.
“In our quarterly projection model, for a 4.5% objective, rates bottom out about 7%. By contrast, the forecast for a 3% objective has roughly five more cuts over the medium term, taking interest rates slightly below 6%.”
The minister of finance is angry because the Reserve Bank has decided to unilaterally change the inflation target, because that is officially what happened
— Dawie Roodt, economist
The Bank said its focus was shifting to getting inflation closer to the lower end of the target range.
“We updated the 3% forecast. Like the projections based on the target midpoint, this showed a near-term rise in headline inflation. A difference between the two forecasts, however, is what happens to core inflation. With a 3% objective, core inflation stays roughly where it is now, which is close to 3%,” Kganyago said.
Some economists have cautioned against moving towards a lower target.
Casey Sprake from Anchor Capital told a media event in Johannesburg two weeks ago that 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,” she said.
On Friday economist Dawie Roodt said the finance minister was technically correct as the Reserve Bank had jumped the gun with its announcement.
“Clearly there seems to be a bit of a clash between the two. The minister of finance is angry because the Reserve Bank has decided to unilaterally change the inflation target, because that is officially what happened.
“However, I think the Reserve Bank was getting impatient, and rightfully so, because this is a golden opportunity to lower the inflation target, and the minister of finance is not making a decision.”
Roodt said while the central bank was wrong in how it approached the issue, Godongwana was also at fault for taking too long to make the decision.
Redge Nkosi, executive director of Firstsource Money, said the Bank had to be reined in as the decision on where the target should be set was beyond its powers.
“It seeks to assume that it has to tell a political head charged with financial affairs where the target should be,” Nkosi said. “The Treasury must assert its power over the errant SARB; this is the only way [the Bank] will listen. It's deliberate undermining of the political head on financial matters.”
Tertia Jacobs, Investec Treasury economist, said the market would be paying keen attention to inflation data and expectations in the coming quarters and the medium term.
“Inflation expectations are a driver of lower inflation. We expect rates to move sideways, and there could be more cuts in 2026 if inflation expectations adjust downward.”
She said inflation is expected to rise in the second half of 2025 due to base effects averaging 3.9% in the fourth quarter, and the Reserve Bank may be reluctant to cut rates while inflation is edging higher.
Raymond Parsons of North-West University’s Business School said because the MPC had trimmed its growth forecast for 2025, the likelihood of further interest rate cuts this year was uncertain, especially given the new US tariffs on South African exports.
“There is global uncertainty because of US tariffs. South Africa now has to determine the complex economic impact of the higher US tariffs on the domestic economy and take shock-absorbent steps to ameliorate the situation.
“In a worst-case scenario, estimates range from a loss of between 0.4%-0.7% in South Africa’s economic growth, depending upon what remedial measures can eventually be taken.”
Neil Roets, CEO of Debt Rescue, said South African consumers were now on the precipice of impending financial disaster as a combination of global and local economic factors align to hit their pockets hard in the near term.
“Combined with high inflation, the move by the US could severely impact sectors such as agriculture, wine, metals, vehicles and manufactured goods, leading to increased costs of fuel, food and other essential goods — all of which are likely to trigger job losses and business closures.”
Saftu secretary-general Zwelinzima Vavi said the MPC’s move to base future rate decisions on a lower inflation target would have devastating consequences.
“The high interest rate regime that has characterised the [Bank] for many years now has contributed immensely to the poor growth of the South African economy. This was the case even when the 3%-6% target was adopted by the [Bank] in the early 2000s. The move to lower the target even further will have devastating consequences.”
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