Reserve Bank set to aim for a lower range

A change in policy to lower the inflation target range may be on the cards as inflation continues to ease.

A change in policy to lower the inflation target range may be on the cards as inflation continues to ease.

According to Statistics SA, production prices dropped to 3.6% year on year in July, from 4% in June. This comes after consumer prices fell below the 5% mark last week for the first time since November 2015, easing to 4.6% year on year in July, from 5.1% in June.

As inflation continues to fall well within the 3%-6% target range, many economists said the Reserve Bank was likely to ease policy rates further at the next monetary policy committee meeting in September after the surprise 25-basis-point reprieve to 6.75% for the first time in five years at the previous policy committee meeting in July.

On Wednesday night, Reserve Bank governor Lesetja Kganyago vehemently defended the Bank’s policy of inflation targeting amid rising criticism.

He suggested, however, that the inflation target range should be readjusted.

“A frank reassessment of the 3%-6% inflation target range, which is now almost 18 years old, would probably conclude that the target should be lower,” Kganyago said in a public lecture at Unisa Graduate School of Business Leadership.

Kganyago explained that most emerging markets had targets of about 3% or 4% and that SA should be aiming for an inflation rate in line with its trading partners.

His comments come after sustained attacks on the Reserve Bank’s mandate. In mid-August, the Bank won its application to have Public Protector Busisiwe Mkhwebane’s remedial action to change its constitutional mandate, which would effectively put an end to inflation targeting, set aside.