Research firm raises questions about plans to cut inflation target

SA’s high administered prices will present a challenge to the SA Reserve Bank’s (Sarb’s) desire to lower the country’s inflation target of 3%–6%, in what would be the most significant monetary policy shift in more than two decades.

This is according to a policy paper released by Codera Analytics, a local research house and data provider, run by former Sarb and New Zealand central bank official Daan Steenkamp.

The paper cautions that the expressed desire by Sarb governor Lesetja Kganyago to lower the inflation target happens outside independent research to support such policy reform, and for the mooted reform to be successful it would need a social compact to reduce government-related inflation and align public sector wage demands to productivity growth.

It flagged administered prices, which include prices set by government agencies or regulators, such as electricity tariffs, water charges and fuel prices having played a key role in deviations in SA’s inflation from the inflation target.

It said inflation in electricity and other fuels, water and other services and fuel categories have growth at well above the mid-point of the inflation target, averaging 11.9%, 7.9% and 7.3% respectively since 2009.

“Electricity and other fuels prices, for example, are now over five times higher than in January 2008, compared to about 200% for water and other services, 191% for food and nonalcoholic beverages, and about 63% for clothing. Eskom’s aggregate standard tariffs have increased at almost 15% per year since 2010, compared to average CPI inflation of closer to 5.3% over this period,” the policy paper reads.

“Eskom’s current tariff plans imply that average electricity prices will have increased by 5.5 times its 2010 level by 2024/25, compared to expected consumer prices around 2.1 times its 2010 level by 2024/25, indicating a substantial shift in relative prices in the economy.”

The National Energy Regulator of SA (Nersa) recently approved a 12.7% tariff increase for Eskom for the 2025/26 financial year.

Codera said political co-ordination, including a social compact between the government, municipalities, the central bank, state owned enterprises, relevant regulators and labour unions would help to support the credibility plans to permanently lower trend inflation.

The policy paper said if administered prices are not reined in, efforts to reduce the inflation target might have undesired consequences, saying a key challenge the central bank faces if the target is to be lowered is that government-related inflation has consistently grown at well above the upper bound of the inflation target.

“As we have shown, in an SA context, a large proportion of SA’s high structural inflation owes to high administered price and government-related inflation. Since the central bank cannot directly affect prices in such categories, reacting to first-round price pressures in such inflexible price categories risks creating worse inflation volatility/price dispersion,” it said.

“An implication of essential goods and services like food or electricity driving high inflation dispersion is that monetary policy aimed at reducing inflation in interest rate-sensitive parts of the economy will tend to stifle economic growth in areas that are not experiencing above target inflation,”

“Lowering the inflation target without addressing such problems could impose large costs on the economy. Given that several government-related inflation components have pushed up headline inflation over the past decade, achieving a lower target would necessitate co-ordination with the government to address the high inflation driven by administered prices in SA.”

Kganyago in January said additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.

Steenkamp said taking a tough stance on inflation is certainly a good thing, but he doubts the SARB had done its homework on what the impact would be on the SA economy.

“We estimate that sustainably reducing inflation will be harder and more costly than the SARB assumes. In the absence of complementary government policies and buy-in from organs of the state and unions, the transition costs to a new target will be much higher. This would keep borrowing costs high for households and firms and potentially undermine the credibility of the SARB.”

Codera also weighed in on Sarb’s communication, saying transparency around monetary policy deliberations and clear communication are crucial to ensuring the market can assess whether the central bank’s judgements are reasonable and that it is credibly committing to its policy target.

“The SARB should also consider either publishing forecasts consistent with their policy stance or labelling their forecasts as independent ‘staff projections’ to be more consistent with best practice.”

Khumalok@businesslive.co.za