NICOLA MAWSON
South African Reserve Bank (SARB) Governor Lesetja Kganyago has again hinted at a tighter headline inflation policy targeting, noting that the current range of 3% to 6% was higher than the country’s peers and placed South Africa at a competitive disadvantage.
In the SARB’s annual report released yesterday, Kganyago said South Africa’s inflation remained stubbornly higher above 5%, and was now above that of several of the country’s peers, with South Africa’s comparative performance among other G20 countries deteriorating.
Kganyago pointed to the Macroeconomic Review published by National Treasury in February, which argued that it was important to reconsider the 3% to 6% target.
“South Africa can and should have lower inflation,” Kganyago said.
The SARB’s 3–6% inflation target range has been one of the most important considerations in the monetary policy decisions that have seen interest rates being raised and maintained at a 14-year high of 8.25% for six consecutive meetings.
Old Mutual Group chief economist Johann Els said that it was unlikely that National Treasury would set a new inflation target soon.
Els said this may only happen in 2026, with the SARB then being given time to implement it.
Currently, he said, South Africa was in rate-cutting territory, with the first declines anticipated towards the end of the year at the latest.
The SARB expects inflation to sustainably reach the midpoint of 4.5% towards the end of next year.
This picture has deteriorated since May, when its monetary policy committee forecast indicated that the consumer price index would stabilise at the required midpoint of 4.5% from the second quarter of 2025.
South Africa had the fourth highest rate of inflation in the G20 last year, behind only Türkiye, Argentina and Russia, all of which are countries with much more adverse monetary dynamics.
Els said this position has declined from 2022 when the country was “right in the middle of the pack, ranking 10th”.
With the International Monetary Fund projections showing South Africa will slip to third-worst G20 country from 2026 leaving it ahead of only Argentina and Türkiye, this is set to get worse.
“For all the pride we take in our monetary policy, at the SARB this is not much to boast about,” said Kganyago.
A major part of the problem, Kganyago said, was the fact that South Africa’s targeting policy had not been changed from the 3% to 6% range in nearly 25 years, which he sees as a “relatively high inflation target”.
“We are the rare country that has never reformed the target,” he said.
Kganyago said it was never intended that the country would keep this objective “for ever” and it had previously set a new one of 3% to 5%, which was “unfortunately abandoned” after the sell-off in the rand in 2001.
“This was a policy mistake and thus left us with unfinished business,” he said.
Even interpreting the current target as an objective of 4.5% was high when compared with South Africa’s peers, which adversely affects competitiveness, said Kganyago.
“It also means a bad user experience for our people.”
Kganyago explained that an inflation rate of around 4.5% forced everyone to adjust prices, wages and investments routinely to avoid losing buying power.
At the same time, vulnerable people do not have either the knowledge or power to make these changes, leaving them to fall behind as their income declines, he said.
Moreover, a relatively high target means that the rand will follow a weakening trend, always losing ground to currencies that hold their value better, said Kganyago.
Kganyago also noted that, while the current policy rate will start easing this year, there are upsides to the forecast, including “persistently elevated rates from advanced economy central banks, especially the US Federal Reserve; higher and less stable inflation expectations; and new fuel and food price pressures”.
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