Sarb changes its tune on inflation

UNOFFICIAL PLAN FOR ANCHOR POINT TO BE 4.5% Economist warns of rates hike.

For almost a decade, the South African Reserve Bank (Sarb) has used an inflation target range of 3% to 6%. Officially, this target remains in place and is central to protect the currency.

Unofficially, there has been a subtle yet distinct change in tone from governor Lesetja Kganyago about Sarb’s inflation targets.

In a speech at the annual general meeting in July, Kganyago highlighted that monetary policy had achieved its objective of keeping inflation within the target range of 3% to 6%, but that the monetary policy committee (MPC) would “react should there be second-round effects that take inflation significantly away from the midpoint of the target range”.

Professor Jannie Rossouw, head of Wits School of Economic and Business Sciences, says that under Kganyago there has been a subtle shift from focusing on the entire target band to the midpoint of 4.5%. That he explicitly mentioned this in his address suggests the Sarb is – albeit unofficially – targeting inflation of about 4.5%.

Johann Els, head of economic research at Old Mutual Investment Group, says eventually there may be an official change in the target regime. For now, this thinking will filter through to its interest rate decisions. But “they realise they can’t hike interest rates now”, Els says.

The top of the target band – 6% – has become the anchor around which consumers base inflation expectations, Rossouw says. The Sarb wants this anchor to be closer to 4.5%.

But what informed the unofficial policy shift? A possible explanation may be that CPI inflation remained largely inside the target band between 2011 and 2016 despite rand weakeness. Els says this was an abnormal period as inflation usually rises when the currency weakens that much, but due to economic weakness the passthrough was limited. The Sarb may fear that future shocks could push inflation up.

However, he warns against moving towards an inflation target of 4.5% in the short term, as the economy is very weak and it would mean the Sarb has to hike rates.

They realise they can’t hike interest rates