South Africa Inflation Target Could Be Even Lower, Kganyago Says

JOHANNESBURG (Capital Markets in Africa) – Fresh from being reappointed for another five years, South African Reserve Bank Governor Lesetja Kganyago made it clear that he will keep on pursuing his mandate of low inflation and suggested the current target band may even be too high.

This comes after Kganyago and the central bank came under renewed criticism in recent months from labor unions and some senior members of the ruling party who want borrowing costs to come down. They argue that the drive for low inflation is misplaced and that the mandate should be expanded to include more focus on economic growth and job creation.

The decision in the early 2000s to target a range of 3% to 6% for inflation rather than 3% to 5% “was a terrible monetary policy mistake,” Kganyago said Wednesday in a public lecture in the capital, Pretoria. If the central bank, in consultation with the National Treasury, were to reform the target now, “we would likely go to either 3% or 4%, with a tolerance band of maybe 1 percentage point on either side,” he said.

President Cyril Ramaphosa two weeks ago reappointed Kganyago for a second five-year period, four months before his current term ends in November. He also named two deputies from the governor’s existing team. That was seen as a vote of confidence from the president in the Reserve Bank’s current leadership, even as people in Ramaphosa’s African National Congress are unhappy with the central bank’s steadfast approach to price growth.

The inflation target was set by the National Treasury after talks with the central bank. Current Finance Minister Tito Mboweni was the governor of the Reserve Bank when the range was determined and he started pursuing it. Mboweni defended Kganyago and the central bank when its mandate and role were being questioned by other ruling party officials.

Targeting 4.5%
The central bank has made it clear in the past 18 months that it prefers inflation anchored close to the 4.5% midpoint of the target band.

“What we are doing is completely consistent with our target and our mandate,” Kganyago said. “We have positioned South Africa to have permanently lower inflation.”

Inflation was 4.5% in June and has been at or below that level since December. The Reserve Bank cut its economic growth forecast for 2019 to 0.6% from 1% last week, saying it can only do so much to boost the economy

“South Africa’s growth problem is caused mainly by structural, factors, like a constrained electricity system as well as policy uncertainty,” Kganyago said on Wednesday. “Given these constraints, a monetary policy that tolerated higher inflation for the sake of more demand would have yielded, at most, relatively small and temporary benefits, at the price of long-term costs.”

The central bank’s modeling shows a 25 basis-point rate reduction, like it announced on July 18, will only boost growth by 0.1 percentage point a year later, in the absence of other structural reforms by the government, he said.

The Reserve Bank “can deliver low and stable inflation,” Kganyago said. “But balanced and sustainable growth also requires contributions from many other parts of government and society.”

Source: Bloomberg Business News