SARB Governor Lesetja Kganyago again pressed for a lower inflation target in South Africa. “It is now 24 years since we had the inflation target and we have to ask questions about how optimal the current inflation target is,” Kganyago said. He didn’t say how close they were to a conclusion, but noted that other emerging market economies have lowered their inflation to around 3%. Whether the governor is laying the groundwork for a change in the central bank’s mandate, which is set by National Treasury in consultation with the SARB, remains to be seen. Any official proposal to change the target would likely face significant political opposition. However, a strong case can be made to do so as it would support South Africa’s longer-term economic outlook.
Lowering the inflation target would lend fundamental support to the ZAR, even though it would assist in lowering interest rates more permanently. This follows as a more predictable inflation environment could enhance the rand’s value by attracting foreign investment. Relatively higher inflation guarantees that the ZAR will lose more ground over time on a purchasing power parity basis. Moreover, lowering the inflation target implies keeping rates higher for a while longer in the short term to anchor lower inflation expectations, before they can decline structurally without affecting the ZAR.