Inflation target concerns from SARB chief Kganyago

Lesetja Kganyago

Cape Town – South African Reserve Bank Governor Lesetja Kganyago has reiterated his call to lower the country’s inflation target, warning that maintaining the current 3%-6% range will increase government debt-service costs.

Speaking at a South African Reserve Bank conference in Cape Town on Thursday, he argued that a lower inflation target — potentially a single-point 3% — would enhance South Africa’s competitiveness and lead to lower long-term interest rates.

“Keeping inflation where it is or allowing it to get higher means that government is going to pay more in debt-service costs, and so the cost of the higher inflation target is not insignificant,” Kganyago said, according to Bloomberg.

However, critics fear that tighter monetary policy to achieve a lower target could hurt growth and employment in a country already facing high joblessness and poverty.

Kganyago stated that since the introduction of inflation targeting 25 years ago, South Africa’s economy has seen a reduction in inflation levels.

“We enjoy much lower interest rates. Back in 1998, the repurchase rate was above 20%. Today, it is just 7.5%, which is higher than the lows experienced during the pandemic, of course, but well below the averages of previous decades,” SABC News quoted him as saying.

Finance Minister Enoch Godongwana has acknowledged the need for political support to revise the target but cautioned that such a move might be premature, given the country’s urgent infrastructure and economic development needs.

The debate over adjusting the inflation target has been ongoing.

Since 2017, the SARB has emphasised a preference for the midpoint of the 3%-6% range, aiming for 4.5%. Proponents of lowering the target argue that aligning with other emerging markets, which often have lower inflation targets, could enhance economic stability and investor confidence. ​

Conversely, some economists warn that reducing the inflation target without comprehensive structural reforms could lead to higher real interest rates, potentially stifling economic growth.

Article written by