By Ntando Thukwana.
South Africa’s move to a lower 3% inflation target may be phased in by the end of 2027, potentially resulting in official interest rates moderating to below 6%, Bank of America said.
“We think moving to 3% is almost certain,” Tatonga Rusike and Mikhail Liluashvili, respectively an economist and strategist at the bank, said in a note. “The phase-in period could be two years — announced by end-2025, and the target reached by end-2027.”
Under that scenario, the lender sees the benchmark lending rate at 5.75% by the end of 2027.
South Africa’s monetary policy committee is meeting on Thursday to discuss its latest interest-rate stance and is widely expected to reduce borrowing costs by another 25 basis points to 7%. At its May meeting, the central bank said research showed that lowering the inflation target to 3% would lead to the benchmark declining to 5.79%, compared to its baseline showing the rate remaining above 7%.
While the long-term benefits of lowering the target would outweigh the short-term costs, the shift may have fiscal consequences, Bank of America said.
“The Treasury could lose some tax revenues associated with higher inflation,”it said. “Nominal government revenues could increase at a slower pace due to lower nominal GDP growth.”
Conversely, interest rates would be sustained at lower levels, potentially helping boost private-sector credit and economic growth, it said.
While technical work is under way to review South Africa’s inflation target, which hasn’t been adjusted in more than a quarter century, the nation’s finance minister has warned against rushing the process.
Central bank Governor Lesetja Kganyago has argued that the current tame inflation environment — with annual price growth currently at 3% — provides the opportunity to lock in lower inflation at a low cost.