South African Reserve Bank Governor Lesetja Kganyago expects the National Treasury and monetary authority to reach an agreement over a new inflation target, after his announcement last week that policymakers will now aim for 3% drew a terse reaction from the finance minister.
“Conversations continue and I have got no doubt we will find each other,” Kganyago told the bank’s annual general meeting in Pretoria on Friday. The working relationship between Treasury and the Sarb has “remained strong,” he said.
The central bank cut interest rates by 25 basis points to 7% on July 31 and unexpectedly announced that it now prefers to anchor inflation expectations at the floor of its 3% to 6% target.
Finance Minister Enoch Godongwana called the move unilateral and criticised it for breaching the “established consultation process” between the two institutions, who began reviewing the inflation framework last year. The target has not been revised since it was introduced in 2000.
Kganyago also said that while inflation is expected to tick up in coming months it is likely to be temporary, and is seen returning to around 3% over the medium term.
“To the extent that inflation settles at 3%, and that inflation expectations continue their move lower, the bank’s forecasting model shows lower interest rates” if it remains contained at current levels, he said.
South Africa’s annual inflation rate has hovered around 3% since October.
Money-market traders have added bets on rate cuts in response to the lower inflation goal.
Forward-rate agreements are now pricing in 21 basis points of easing, or an 84% chance of a 25-basis-point cut, by the end of this year, up from 14 basis points a week ago. The contracts are pricing in a total of 43 basis points of easing over the next 12 months.
FirstRand Chief Executive Officer Mary Vilakazi welcomed the bank’s intention to lower the target.
She told the AGM that it should support greater price stability and as “inflation expectations gradually adjust to a lower anchor of inflation of 3%, this will usher in an era” of lower rates in South Africa.
Policymakers have long advocated for a 3% goal, arguing that it would deliver lower borrowing costs and a more competitive economy over the medium term.
Some members of Godongwana’s African National Congress party have been critical of the central bank in the past for keeping interest rates high to curb price pressures, which they argue is at the expense of jobs and economic growth.
BLOOMBERG