BUSINESS NEWS - For almost a decade, the South African Reserve Bank (Sarb) has used an inflation target range of 3% to 6%.
Officially, this target remains in place and is central to its effort to protect the value of the currency in the interest of sustainable economic growth.
Unofficially, there has been a subtle yet distinct change in tone from governor Lesetja Kganyago about Sarb’s inflation targets in recent months.
In a speech delivered at its annual general meeting in July, Kganyago highlighted that monetary policy had been successful in achieving its objective of keeping inflation within the target range of 3% to 6%, but said the Monetary Policy Committee (MPC) would “react should there be second-round effects that take inflation significantly away from the midpoint of the target range”.
The comment echoes the sentiment the governor expressed at the March MPC meeting: “While these developments [lower inflation forecasts] are welcome, the MPC would prefer to see inflation expectations anchored closer to the midpoint of the target band.”
Professor Jannie Rossouw, head of the School of Economic and Business Sciences at Wits, says under Kganyago’s leadership there has been a subtle shift from focusing on the entire target band to the midpoint of 4.5%.
The fact that Kganyago explicitly mentioned this in his address at the recent shareholders meeting sends a clear message around the Sarb’s policy, he adds.
This suggests that the Sarb is – albeit unofficially – targeting inflation of around 4.5%.
Johann Els, head of economic research at Old Mutual Investment Group, says eventually there may be an official change in the target regime. For now this thinking will filter through to its interest rate decision.
“They realise they can’t hike interest rates now,” Els says. “That is why their statements are so hawkish.”
Since the introduction of inflation targets, the top end of the target band – 6% – has unfortunately become the anchor around which consumers base their inflation expectations, Rossouw says. The Sarb wants to lower this anchor closer to 4.5%.
But what could have informed the unofficial policy shift? Particularly since the Sarb has been fairly successful in keeping inflation in check?
A possible explanation may be that CPI inflation has remained largely inside the target band of 3% to 6% between 2011 and 2016, even though the rand weakened substantially over the period
