Is a lower inflation target really worth the political fallout?

The South African Reserve Bank's push to revise the rate downwards might be missing the point entirely

- Natale Labia

Does inflation targeting work? And if so, what should the target be? After surviving yet another week of political turbulence and internecine bickering, South Africa's increasingly rickety coalition government might be about to face yet another thorny dilemma: the push by the South African Reserve Bank to lower the country's inflation target to below 3%, from the current band of 3% to 6%.

Speaking on Monday, 30 June, Reserve Bank governor Lesetja Kganyago reiterated his argument for a lower inflation target, saying the current rate undermines the value of the rand and contributes to persistent price increases. The bank, along with the National Treasury, is "almost done" completing a technical review of the inflation targeting framework and plans to submit recommendations to Kganyago and Finance Minister Enoch Godongwana shortly.

"Although an inflation rate of 4.5% may seem moderate, it still causes prices to double every 16 years," Kganyago noted in the bank's annual report. "This is hard to reconcile with our constitutional obligation to safeguard the value of the currency."

The central bank aims to anchor inflation expectations at the midpoint of its 3% to 6% target, but this range is now under formal review. With May's inflation reading at 2.8%, Kganyago and his colleagues see an opportunity to lock in gains and update a framework that has remained unchanged since its introduction in 2000.