Kuben Naidoo. Picture: BLOOMBERG
Kuben Naidoo. Picture: BLOOMBERG

In yet another dramatic week for the central bank as its inflation gauge continued to come under fire, Reserve Bank deputy governor Kuben Naidoo said there may be scope to alter the inflation-targeting band - but only to align South Africa with its trading partners.

Naidoo's comments were in response to Deputy Finance Minister Sfiso Buthelezi on Monday suggesting that the 3%-6% inflation-targeting framework may be hampering economic growth.

Buthelezi, speaking at the Gordon Institute of Business Science, said it may be time to debate the policy again.

"Who of us knows how we arrived at this 3%-6% ... It might have been the right policy at the time but when we are placed in the economic crisis we are facing of low growth, is it appropriate?" he said.

Urgent application

Inflation targeting enables price stability, a key element of monetary policy, which is the responsibility of the Reserve Bank. In the long term, price stability supports economic growth by safeguarding the value of the currency and pensions, and protecting low-income households from high inflation.

The public protector wants parliament to alter this function so that the bank focuses primarily on the socioeconomic wellbeing of citizens rather than inflation targeting. On Tuesday the Reserve Bank filed an urgent application in the High Court in Pretoria to interdict parliament, the public protector and the National Treasury from taking any action in this regard.

South Africa's inflation-targeting framework had been implemented in 2000, when the range had been deemed appropriate to get South Africa broadly in line with its major trading partners so that its exports wouldn't automatically lose trade competitiveness, said Naidoo.

The range was set by the government in consultation with the bank. At that time the average inflation rate for developed countries was about 3%, and 6% for developing countries. South Africa's inflation rate was close to 10%, he said. Today, the weighted average inflation rate for South Africa's trading partners is around 4%.

"You could even argue that there's a case for a lower inflation target today if you want to opt towards that original objective of using inflation targeting to maintain your competitiveness in a global way," Naidoo said.

Social backlash

Although the current inflation rate, at 5.3%, is on the descent, it remains high, which was "the product of an increasingly inefficient economy over the years" rather than a failure by the Reserve Bank, said Gina Schoeman, Citibank South Africa economist.

Professor Lyal White, director of the Centre for Dynamic Markets at Gibs, said that most developing countries - including South Africa - were "too vulnerable" and did not have the "consumer power to sustain a consumption-driven economy".

He added: "As soon as there's a slight spike in inflation we'll see most people being pushed out of the middle class. Most people in our types of societies are in the lower-middle-class bracket. It's the same as Brazil: as soon as there's a bit of inflation, it pushes people below and ... you see a social backlash."

Slashed

International group BMI Research on Thursday forecast that the Reserve Bank would be cautious if it decided to cut interest rates, as political tension threatens to prompt a sharp sell-off in the rand. BMI expects a 25-basis-point cut in 2017 and another 25 basis points next year.

The bank's monetary policy committee meets later this month. Naidoo did not want to speculate on the outcome except to say inflation targeting was flexible. Inflation has been out of the band for the past eight months and three times in the past four years. Interest rates have only been hiked six times, by a total of 200 basis points, over the past two years. He argued: "If we cut interest rates by 600 basis points to 1%, if we slashed the repo rate, do you think the economy is really going to grow at 3% or 4% sustainably?"

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