Business News

Reserve Bank governor says South Africa should target lower inflation

Reserve Bank governor Lesetja Kganyago says South Africa should adopt an inflation ‘point target’ of around 3% or 4% with a margin of error on either side, instead of the 3% to 6% target range used currently.

In a public lecture at Stellenbosch University on Tuesday (7 September), Kganyago said that the last time South Africa had inflation rates this low for this long was in the 1960s.

“And that wasn’t because the economy was in crisis; the economy was actually booming. The low interest rates in the 1960s were possible because of low inflation. It follows that, if we want to keep interest rates low, the most important thing we can do is to lower the inflation target.”

Kganyago said a more appropriate target would be a point target of around 3% or 4%, putting South Africa in the same territory as its international peers.

“Given the uncertainties around inflation, it would be useful to bracket the point target with an error range: probably plus or minus 1 percentage point.

“We will not be able to control inflation precisely all the time, and it is useful to acknowledge that upfront. That said, it would be useful to have a clear point target rather than a range to anchor expectations and prevent any future target drift, like the one we suffered when the 3–6% target range morphed into a 5.9% target. I take the view that 3% would be a good point target.”

Kganyago said a step like this would involve some work and that part of this would be coordination with the government.

“The task of locking in a lower target will be fundamentally easier and cheaper if we get buy-in from administered price setters,” he said

“Stats SA reports a measure of inflation excluding administered prices, and this is already in the region of 3% – it has averaged 3.5% so far this year. This shows that much of the economy is already achieving lower inflation.

“Items like water and electricity need to be priced with lower inflation in mind, and lower prices would, in turn, help us lock in a lower target, anchoring expectations at permanently lower levels.”

Scared of reform 

Kganyago said getting these commitments would require a corresponding commitment and timeline for a lower target.

“The right way to do this would be through an exchange of letters between myself as the SARB governor and the minister of finance, whom the Constitution identifies as the person we should regularly consult with.”

He said this consultation process should also feed into the government’s debt management strategy to maximise the benefits of lower interest rates.

“I am well aware that this is a delicate moment for South Africa’s economic recovery, and also that global inflation has picked up.

“That said, I am even more painfully aware of a South African disease: we are scared of reform; we make every excuse to avoid it; we emphasise any short-term pain and discount any long-term benefits, and then we sit around wondering why our economy is stagnating, why our young people can’t find jobs, and why we are getting steadily poorer relative to the rest of the world.”

If the SARB is a credible and effective institution, then the public should expect it to deliver the number one thing in central banks’ power to achieve, which is low and stable inflation, he said.


Read: Capitec short-seller Viceroy fined R50 million.


Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button