Kganyago backs an inflation target set at 3%
Reserve Bank governor Lesetja Kganyago has reiterated his call for a shift in SA’s inflation targeting to a specific percentage near the bottom of the current range, even as he acknowledged it may entail short-term costs and needs support from government price setters.
SA’s central bank has nursed the economy through the shock of the Covid-19 outbreak and lockdowns by cutting the benchmark interest rate to the lowest level in about five decades and keeping it there, even as emerging-market peers such as Russia, Brazil and Turkey have increased theirs. That is because SA has comfortably kept inflation within the 3% to 6% target.
Speaking in a virtual address to Stellenbosch University, Kganyago said on Wednesday that 3% would be “a good target point”. The Bank’s current communication is to emphasise its preference to keep inflation anchored at the 4.5% midpoint of its target range.
A lower target may imply a less accommodative policy for
SA, whose economy shrank by 6.4% in 2020 and whose unemployment rate is more than 34%.
“I am well aware that this is a delicate moment for SA’s economic recovery and also that global inflation has picked up,” Kganyago said.
However, he stressed that SA was “scared of reform” and makes “every excuse to avoid it”, emphasising any short-term pain over long-term benefits.
“Then we sit about wondering why our economy is stagnating, why our young people can’t find jobs, and why we are getting steadily poorer relative to the rest of the world.”
Kganyago said the shift could be achieved only with buy-in from the government, the dominant setter of administered prices for items such as water and electricity, which are key contributors to inflation.
Kganyago credited the 21year-old inflation targeting framework with helping to drive interest rates lower, benefiting households and businesses as they navigate the impact of the Covid-19 pandemic.
The past failure to revise the original target range — which was meant to shift down on “a clear glide path” to reach between 2% and 4% — was a “major policy mistake”, said Kganyago “because it entrenched higher inflation and higher inflation expectations”.
A more appropriate target would be a point target of about 3% or 4%, putting SA in the same territory as its peers, he said, adding that it would be useful to bracket the point target with an error range of plus or minus one percentage point.
“The task of locking in a lower target will be fundamentally easier and cheaper if we get buy-in from administered price setters,” said Kganyago, though he said that no formal discussions about adjusting the inflation target have yet been held with new minister of finance Enoch Godongwana.
GETTING BUY-IN
Administered prices, which are typically regulated by a government entity or regulator, have consistently outstripped headline inflation. Entities such as municipalities have faced criticism for hiking prices on items such as rates and services to contend with inefficient cost structures, wasteful expenditure and a shrinking customer base.
Stats SA reports a measure of inflation that excludes administered prices, and this has averaged 3.5% so far this year, Kganyago noted. The overall rate in July was 4.6%.
“This shows that much of the economy is already achieving lower inflation. Items like water and electricity need to be priced with lower inflation in mind, and lower prices would in turn help us lock in a lower target, anchoring expectations at permanently lower levels,” he said.
The Bank needs to “construct a conversation” with government price setters to ensure they understand that “price increases that are faster than the pace of the rest of the inflation in this economy is detrimental to this economy and will be detrimental to them too”, said Kganyago.
The Bank ’ s inflation targeting policy has been a constant source of criticism from quarters such as organised labour — which has argued that it should keep interest rates low, irrespective of higher inflation, in the hope of fuelling economic growth and employment.
But Kganyago defended inflation targeting as a simple, realistic and transparent policy. Targeting other factors such as unemployment “could have turned good policy into bad”.
The ability of monetary policy to overcome structural constraints — such as poor educational outcomes and rigid labour legislation — was “slim to none”, he said.
“Our labour market is so dysfunctional, this excuse would rule out ever raising rates — a policy that would leave us in the worst-case scenario of high unemployment and high inflation,” he said.