For someone whose position on inflation targeting has been vindicated by Wednesday’s medium-term budget policy statement, South African Reserve Bank governor Lesetja Kganyago is not one to toot his own horn.
However, he withstood a tense standoff with finance minister Enoch Godongwana when he said in August that the SARB’s monetary policy committee would anchor its approach to setting the repo rate against a 3% inflation target.
After Kganyago said this, the finance minister came out swiping. He said there was no intention to change the official inflation target in the MTBPS and that it was not the place of the central bank or the MPC to set monetary policy on its own.
Then suddenly, everything changed. The MTBPS was tabled, and with it came an announcement of a downward adjustment to the official inflation target to 3%, as Kganyago had floated.
This is the first adjustment to the official inflation target in 25 years and a huge boost for those of the view that the repo rate is effective at slowing inflation.
In his opening remarks to a question ahead of the tabling of the MTBPS on Wednesday, Kganyago said: “When inflation walks through the door, public trust jumps out of the window and the money becomes worthless.”
Kganyago has also been quoted as urging action from central banks as soon as “the white in the eyes of inflation” come into view. It would be fair to say that Kganyago speaks about inflation as a great adversary to be unambiguously defeated.
However, unions, NGOs and even some economists expressed serious concerns about the impact of a tighter inflation target as the Sarb continues to use the repo rate to respond to inflation in an economy where households and businesses alike are struggling to cover their costs. But let Kganyago tell it, the benefits will accrue to all in good time.
In its analysis of inflation targeting, the National Treasury estimates in the MTBPS that the cost of living will increase “exponentially” under a 4.5% inflation target, but says that while prices will double in 16 years under a 4.5% target, they only double in 24 years under a 3% inflation target.
When inflation walks through the door, public trust jumps out of the window and the money becomes worthless.”
— SARB governor Lesetja Kganyago
The MTBPS compares South Africa’s outgoing inflation target band of 3% to 6% to the inflation targets and tolerance bands of countries such as Brazil, Mexico, the Philippines, Colombia, Hungary, Poland, Peru, the Czech Republic, Thailand, Australia and New Zealand.
Of all of these, South Africa had the highest inflation target at 4.5%, by virtue of that figure being at the centre of the official band. Brazil, the Philippines, Colombia, Mexico and Hungary all have a 3% inflation target while Peru, Czech Republic, Thailand and New Zealand have a 2% target.
Each of these countries has an inflation tolerance band that goes up to 4%, with Brazil’s tolerance band capping out at 4.5%, which is the midpoint of South Africa’s outgoing target band.
Rather than target bands and tolerance bands, large economies like the US, the UK, the EU and Japan all have a 2% inflation target.
The logic of South Africa’s inflation target announcement is that though the impact of a lower and tighter inflation target on government finances will be mixed in the short term, it is also expected to reduce the cost of living and borrowing, while boosting economic growth and revenues in the years ahead.
It is also clear that one of Kganyago’s weapons of choice in the war against inflation is rhetoric. When the central bank’s MPC sends a signal that the repo rate will be high in the short term, consumers and borrowers are more cautious when spending and taking on debt.
This behaviour bears out some of the outcomes that the MPC desires, and inflation is kept largely in check. While banks will benefit from some juicy net interest margins as a result of the SARB chasing a tighter inflation target, consumers have a lot of time to locate the benefit on their pockets. Sixteen years, to be precise.
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