South African policymakers are considering lowering the central bank’s inflation target, according to the governor, Lesetja Kganyago.
He suggested to the news agency Reuters that a reduction from the current 3% to 6% range could enhance the country’s competitiveness and align the central bank more closely with its international counterparts. Kganyago expressed a preference for adjusting the target before 2025.
The discussions, involving teams from the South African Reserve Bank (SARB) and the National Treasury, aim to determine an appropriate new range and assess associated risks.
This move follows South Africa’s adoption of an inflation-targeting framework in 2000, with previous plans to lower the target not actualized. Kganyago has been a long-standing advocate for reducing the target range, considering the failure to do so a significant oversight.
Kganyago criticized the current inflation target range (3% to 6%) for being excessively broad, arguing it leads to higher inflation expectations than desired by the South African Reserve Bank (SARB).
He also highlighted the substantial uncertainty surrounding the upcoming general elections in May, noting that this uncertainty contributes to maintaining a high risk premium for the country. This premium represents the additional return investors require to offset local risks.
Furthermore, Kganyago mentioned that President Cyril Ramaphosa has taken steps to reduce some of this uncertainty by promoting stability within crucial institutions, including the revenue service and the central bank itself.
This comes after Kganyago’s term as SARB governor was extended for another five years, underscoring a commitment to continuity at the helm of the central bank. In his upcoming third term starting in November, Kganyago emphasized that his work concerning inflation control is ongoing and far from complete.
He believes that the pathway to diminishing South Africa’s risk premium fundamentally rests on the implementation of prudent macroeconomic and fiscal policies.
Notably, inflation in South Africa escalated to 5.6% year-on-year in February, and according to projections, the central bank anticipates it will decrease to 4.5% by the fourth quarter of 2025.
Kganyago’s focus remains steadfast on achieving a more stable and lower inflation environment, aligning with his efforts to adjust the central bank’s inflation target range.
Read also:
