Lower inflation target will make SA more competitive, says Kganyago

SA Reserve Bank policymakers are in discussions on lowering the inflation target, governor Lesetja Kganyago said on Wednesday, adding that a lower target would make the country more competitive and bring the central bank in line with peers.

Kganyago said he preferred a decision that would lower the target from its current 3%-6% range “before we get to 2025”, but teams from the Bank and National Treasury were still identifying the appropriate range and risks associated with it.

“Our teams are in conversation now,” Kganyago said in an interview with Reuters. “The teams will advise the governor and the [finance] minister and say, ‘OK, this is the appropriate target and this is the appropriate timeline within which we have got to achieve the target’.”

SA introduced its inflation-targeting framework in 2000, and had planned to lower the target to 3%-5% and then 2%-4%. But the target was never lowered, something Kganyago views as a big mistake and has been vocal about for years.

He said the current band was too wide and served to anchor inflation expectations higher than the bank would like.

Regarding the general elections in May, he said there was huge uncertainty about the outcome, which was “keeping the country’s risk premium elevated”, referring to the additional return investors demand to compensate them for local risks.

Kganyago, whose term as governor was extended for another five years in March, said President Cyril Ramaphosa had tried to mitigate some of the uncertainty surrounding the country by ensuring stability in the leadership of key institutions like the SA Revenue Service and Reserve Bank.

Asked what he wanted to achieve in his third term starting in November, Kganyago said that “the job on the inflation front is not yet done”.

Over the longer term, the key to reducing the country’s risk premium lay in prudent macroeconomic and fiscal policies, he said.

Inflation picked up to 5.6% year on year in February, and the Bank expects it to fall to 4.5% only in the fourth quarter of 2025.

Kganyago dismissed the idea of using explicit forward guidance on interest rates as a way to further rein in inflation expectations, saying bank officials did not view it as a useful tool.

Reuters