SA central bank governor urges lower inflation target

‘I take the view that 3% would be a good point target,’ Kganyago said. 
Image: Bloomberg

South Africa can keep benchmark interest rates low by shifting its inflation-targeting framework to a reduced, single-point target from the current 3%-6% range, central bank Governor Lesetja Kganyago said.

“If we want to keep interest rates low, the most important thing we can do is to lower the inflation target,” Kganyago said Wednesday in an online address to mark his appointment as an honorary professor of economics at the University of Stellenbosch.

A single-point target of 3% or 4%, with an error range of about one percentage point on either side, would help to better anchor inflation expectations, prevent any uncertainty associated with a broad range and boost the country’s competitiveness relative to its peers, he said.

“I take the view that 3% would be a good point target,” Kganyago said.

South Africa’s inflation-targeting framework is set to be examined as part of a macroeconomic review by the National Treasury, he said. Formal discussions about lowering the target have yet to take place with newly appointed Finance Minister Enoch Godongwana.

The target, first announced in 2000, is set by the finance minister in consultation with the central bank.

‘Major policy mistake’

The failure of policy makers to stick to plans to lower the target to 3%-5% by 2004 and then further down to 2%-4% was a “major policy mistake” as it entrenched higher inflation and higher inflation expectations, he said. “The target range of 3%–6% was eventually interpreted as a target point of 5.99%, resulting in nominal interest rates several percentage points higher than they might have been.”

While lowering the target could initially result in a less accommodative monetary policy stance, its long-term benefits would outweigh any pain caused at the onset, he said. It would be easier and cheaper to make the change with acceptance from those who set administered prices such as electricity and water, he said.

The bank’s monetary policy committee prefers to anchor price-growth expectations close to the 4.5% midpoint of its range, though that isn’t optimal, Kganyago said. While the annual rate of increase in consumer prices fell to a 16-year low of 3.3% in 2020, partly due to coronavirus-induced shocks, South Africa remained a high-inflation economy with a ranking of 88 out of 154 countries, the central bank said in April.

“We should really be benchmarking our performance to the high achievers in our class, not contenting ourselves with doing somewhat worse than average,” he said.

The central bank risks falling behind some of its emerging-market peers on normalizing monetary policy after it turned less hawkish at its July meeting, days after deadly riots that erupted in the eastern KwaZulu-Natal province and the commercial hub of Gauteng disrupted supply chains and weighed on economic activity. Still, inflation that’s set to remain well-anchored close to the midpoint of the target range could allow the bank to continue supporting a South African economy that is seen contracting in the third quarter.

The committee cut the key rate by 300 basis points from January to July last year to buffer the economy against the global fallout from the pandemic and the impact of local lockdown restrictions. Since the start of this year, none of the five MPC members have voted for further easing and the panel has consistently indicated that the next move will be up.

The central bank’s quarterly projection, which the MPC uses as a guide, implies one 25-basis-point increase from the current 3.5% by year-end. Forward-rate agreements, used to speculate on borrowing costs, starting in four months show traders see a more-than-90% chance of a quarter-point increase this year, while economists in a Bloomberg survey are only predicting policy tightening from the first quarter of 2022.

The MPC is due to announce its next interest-rate decision on September 23.

© 2021 Bloomberg



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The inflation numbers are total BS – every single person on the ground knows everything is more expensive…by a LOT! The CPI basket will always get amended for them to manipulate the figure….as if the low inflation should convince them they are running the country sufficiently….

Firstly you are Correct!

“If we want to keep interest rates low, the most important thing we can do is to lower the inflation target,” Kganyago said Wednesday in an online address to mark his appointment as an honorary professor of economics at the University of Stellenbosch.

1)Kganyago does NOT know what he is saying.
2)The idea of a inflation targeting is to keep inflation within a band… to control inflation
3)Interest rates are used to ensure that inflation is kept within the band.
4) He is saying he is going to lower the target and hence the interest rate will be lower …. something NOT right here
5)As per your point above inflation is higher than what is reported…. so it will always be outside of this lower band (target) that he talks about….
6)Yes, in the long run with controlled inflation …interest rates do fall…. BUT considering the situation in the South African economy…. I think we far from STABLE…. Reserve Bank Governor and his researchers KNOW this …. they also know that Inflation is misreported but turn a blind EYE.

Lower inflation target means we can drop the interest rate massively.
Good for short term boosts, terrible for long term pension investors.

Great for Government Debt.. which is why they’re doing it

And more hedonistic adjustments to help fudge.

The fact that we hold US dollars as reserves, and that the Reserve Bank inflate the money supply on top of the supply of dollars, implies that US inflation forms the basis of our inflation.

The Fed is chasing 4% inflation to get the economy to escape velocity. How will we reach the 3% goal under such circumstances? It means we need deflation in SA to compensate for US inflation.

S, soms voel dit vir my in SA lei ons beleide tot die eintlike inflasie en daarom kan ek jou punt van Rand deflasie verstaan. Hoe kan ons lae inflasie verwag as minimum loon met 100% in 6 jaar gestyg het. Eskom met gemiddeld 10% die afgelope 6 jaar seker, brandstof ook omtrent soveel. Kos, drank en veselpryse gaan baie moet styg. En laastens, die landbank sukkel finansiël wat finansierings koste ook gaan laat toeneem oor tyd, veral as inflasie gaan lei tot stygende rentekoerse.

Why not pay off more Dollar debt or buy more Dollars to lower the Rand and help create jobs?

A higher Rand is killing the mining sector.

Plus we compete better with a lower Rand.

Lower Rand helps create more jobs.

Lowering the inflation target now means increasing interest rates now. Not so sure increasing interest rates now is a good idea. South Africa is in a good position as is, our interest rates are not as low as other countries, we currently have a current account surplus thanks to the commodities boom, food price inflation is supposed to increasing at a decreasing rate (even though I don’t understand why food prices are not just dropping with all the bumper harvests we’ve been having recently), the only issue should be with transportation.

Since transportation is the second biggest component of the cpi after housing and utilities, reducing transportation costs for your average Joe would reduce inflation. And reducing transportation costs for the average Joe means targeting the taxis mafia, those guys break the train and bus services down so that commuters have to take the far more expensive taxis. So perhaps targeting the taxi industry will be easier than increasing interest rates, all fixing up the taxi industry requires is itchy trigger fingers.

(the biggest contributor to the cpi is housing and utilities, but fixing up the municipalities and Eskom is a bridge to far, food and non alcoholic beverages is the third biggest contributor to cpi).

End of comments.



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