By Thebe Mabanga
South Africa’s inflation target is under formal review, with the possibility of being lowered from the current range of 3% to 6%. This was confirmed in a joint statement by the National Treasury and the South African Reserve Bank on Monday.
At the most recent Monetary Policy Committee (MPC) meeting, Reserve Bank Governor Lesetja Kganyago indicated a preference for using the lower end of the inflation target band to guide inflation and anchor expectations.
This prompted the National Treasury to issue a statement clarifying the respective roles and mandates, noting that any official change has not yet been confirmed.
The statement also referenced the Covid-19 pandemic as a turning point for global inflation trends.
“Since the pandemic and its aftermath, domestic inflation has eased, and the debt trajectory tempered,” the statement noted.
“Monetary policy has been effective, and fiscal policy is actively moving to a more sustainable path for public finances. With the post-pandemic surge in inflation fading, National Treasury and the South African Reserve Bank (SARB) have analysed and discussed the value of reducing inflation to levels consistent with the country’s trading partners. South Africa continues to target inflation within the 3‒6% range, with the SARB focusing on anchoring inflation at the midpoint of the range, or 4.5%, since 2017.”
Covid-19 initially caused inflation to fall due to lockdowns and a slowdown in economic activity.
Inflation then began rising amid the global cost-of-living crisis triggered by the war between Russia and Ukraine, which pushed up oil and grain prices, as well as tensions and conflict in the Middle East, which disrupted key shipping routes and caused shipping costs to surge.
In response, South Africa cut the repo rate from 6.5% to 3.5% in 2020.
From late 2021, the Reserve Bank began raising the rate, reaching 8.5% by July last year, before starting to cut again a year ago.
“Over the past year, inflation expectations have shifted downward in line with softer inflation outcomes,” the statement noted, explaining the Reserve Bank’s July MPC announcement.
Meanwhile, in its 2024 Macroeconomic Policy Review, the National Treasury acknowledged that low and stable inflation supports economic growth and concluded that monetary policy goals have broadly been achieved.
“In this regard, additional technical work was undertaken by the Macroeconomic Standing Committee (MSC) of the two institutions to assess the appropriateness of the inflation target. As has been the practice, macroeconomic policy, including adjustments to the inflation target, will continue to be evidence-based,” the statement reads.
The MSC is expected to table recommendations for both the Minister of Finance and the Reserve Bank Governor.
“The Minister of Finance will make a formal announcement as soon as practical to anchor expectations.”
Inflation targeting uses interest rates—essentially the price of money—to control how much money is available, thereby influencing the rate at which prices rise.
South Africa adopted inflation targeting in February 2000.
Since then, it has been a point of contention between the African National Congress (ANC) and its left-leaning alliance partners, most notably unions, because rising interest rates are seen as punitive to workers.
A modification of the policy occurred in 2010, when the late Finance Minister Pravin Gordhan gave Reserve Bank Governor Gill Marcus a mandate to focus on growth and employment.
Marcus oversaw a period of rate decreases before raising rates toward the end of her term.
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