SARB Governor Lesetja Kganyago was on the wires yesterday, once again advocating for a lower inflation target. Speaking at the University of Stellenbosch, Kganyago emphasized that achieving a lower target could be done with minimal cost, as demonstrated when the SARB anchored inflation at 4.5%. He acknowledged that South Africa’s inflation rate remains relatively high but argued that it is not an inevitable outcome, but rather a policy choice. He stressed that a lower inflation target, aligned with global peers, is attainable despite challenges such as government-administered prices like electricity and municipal services.
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. Therefore, any talk of lowering the inflation target should be mildly supportive of the ZAR.