By Lehlohonolo Lehana.
In the latest Medium-Term Budget Policy Statement (MTBPS),Finance Minister Enoch Godongwana confirmed that the inflation target is being reduced to 3%.
Godongwana said that, after careful consideration, he had decided to change the target for the first time in a quarter of a century.
The target will have a 1 percentage point tolerance band on either side to accommodate normal economic fluctuations.
This, Godongwana said during his speech on Wednesday afternoon, provides flexibility to accommodate any unexpected inflationary shocks.
The new target will be fully implemented over the next two years.
Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), has lobbied for a lower inflation target for months.
Asked during a media briefing if he feels “vindicated” now that the target has officially been lowered, Kganyago responded: “There’s only one winner – the South Africans who will enjoy a low-inflation economy, which would mean that the consideration about inflation is taken out of the decision-making process.”
He pointed out that South Africa’s inflation target “has always been a flexible one”, adding that the Sarb will pursue the target continuously and clearly communicate any deviations from it.
Kganyago said at the Sarb’s previous Monetary Policy Committee (MPC) meeting, the projected policy path indicated that five interest rate cuts of 25 basis points each could take place over the next two years.
However, the timing of these cuts will depend on the MPC’s assessment of incoming data, including the outlook for inflation and economic growth, at each meeting.
To ensure a smooth adjustment for households and businesses, the Reserve Bank is expected to guide inflation and inflation expectations gradually towards the intended target over the next two years.
South Africa’s average inflation rate has been higher than that of its trading partners and emerging market peers, eroding the country’s competitiveness and causing the rand to depreciate.
“Over time, reducing the inflation target to 3% will result in more cuts in interest rates than would be the case under a 4.5% target range, “according to the MTBPS.
A lower target will decrease inflation and inflation expectations, creating space for permanently lower interest rates, which will support household spending and investment, thereby boosting economic growth and job creation.
The MPC are set to meet again next month, with economists expecting a further 25 basis point cut, taking the repo rate to 6.75%.