3% inflation target despite short-term growth challenges

FINANCE Minister Enoch Godongwana's decision to lower South Africa's inflation target to 3% — ending a 25-year framework of targeting a 3% to 6% range — has bolstered the rand and will bring relief to millions of South Africans.

- NICOLA MAWSON

Godongwana announced during Wednesday's presentation of the Medium-Term Budget Policy Statement (MTBPS). While conceding that the move will make life harder in the near term, especially for economic growth, the minister says the new target, which takes effect immediately and will be phased in over the next two years, will “enhance price stability”.

Aligning fiscal and monetary policy

Clarity on the move towards the lower inflation target of 3% was something on Anchor Capital economist Casey Sprake's wish list. She says Godongwana's endorsement aligns fiscal and monetary policy.

“While the South African Reserve Bank (SARB) had already been informally targeting this level, the formal adoption by National Treasury cements a clear and cooperative policy framework that enhances credibility and reinforces the SARB's independence,” Sprake says.

Godongwana's statement did, however, come with a caveat in the form of a one-percentage-point tolerance band. “The one-percentage-point band provides flexibility to accommodate any unexpected inflationary shocks,” he says.

Long-term gains versus short-term pain

“Over time, the lower target will decrease inflation expectations and inflation, creating room for lower interest rates. This supports household spending and business investment, boosting economic growth and job creation,” says Godongwana.

Yet the short-term fiscal costs of a lower target — which include lower nominal gross domestic product and revenue growth — will make achieving fiscal targets more challenging, says Godongwana.