South Africa's finance minister and central bank governor at odds over inflation target
South African Reserve Bank Governor Lesetja Kganyago and Finance Minister Enoch Godongwana rarely disagree in public, but they have been at odds on this issue. Godongwana on Friday dismissed expectations that he would quickly endorse the bank's preference to aim for 3% inflation rather than the middle of the 3%-6% target range.
Kim Silberman, portfolio manager at Matrix Fund Managers, said Thursday's SARB announcement raised "questions around where the mandate for inflation targeting sits".
Markets nevertheless cheered the decision, with South African government bonds outperforming and yields at five-year lows. They are set for a 2.2% return this week, outstripping Turkey, Chile, Brazil and Mexico.
Piotr Matys, senior FX analyst at InTouch Capital, said the SARB's commitment to anchor inflation would have long-term benefits.
"But over the short term it could prove a risky move, being an additional burden on the economy that faces the prospect of tariffs to the U.S."
Many investors' base case was that the target would eventually be lowered, but Kganyago going it alone gave investors a jolt.
"The decision itself was no surprise to the market. It was the SARB's explicit preference to aim for the lower 3% band of its existing 3-6% CPI target, ahead of the National Treasury formally adjusting the target lower, that caught most by surprise," said Jeffrey Schultz, Head of CEEMEA Economics at BNP Paribas Markets 360.
Kganyago says the current target band is too wide and erodes competitiveness, while Godongwana says decisions on the target should not be taken without the necessary technical and political engagements.
Inflation has moved below the current 4.5% target, and inflation expectations have dropped below that figure. Kganyago said on Thursday that the bank could lock in these gains and make sure that South Africans benefit from them.
Godongwana, without openly disagreeing about inflation, said he wanted to stick to procedures for making any target changes.
"Any adjustments to our inflation-targeting framework will follow the established consultation process," he said in a statement on Friday. "This means comprehensive consultation between National Treasury, the Reserve Bank, Cabinet, and relevant stakeholders – not unilateral announcements that pre-empt legitimate policy deliberation."
Lowering the inflation target could cause some short-term pain. Some analysts, like those at Goldman Sachs, expect the central bank may front-load interest rate cuts. That's based on inflation forecasts more benign than those of the central bank. But equally, it may find itself constrained and need to keep them higher for longer to combat global risks and to force prices lower.
Wages and prices also adjust slowly, likely resulting in lower spending, faltering investment, and job losses before benefits can be felt. Trade unions have previously voiced their objections.
Governor Kganyago pointed to Section 224 of the constitution, which states the bank must protect the value of the currency, Silberman said.
"According to the MPC (Monetary Policy Committee), this decision is procedurally equivalent to when the SARB announced in 2017 that it would explicitly target 4.5%," said Silberman at Matrix Fund Managers.
"Despite any possible tensions between the two institutions, we do not expect that the latest change in the MPC's reaction function with respect to targeting 3.0% will be retracted," she added.
At Thursday's briefing, Kganyago said: "Changing policy is never easy."
"What you can't do is to refuse to make a decision, because there are costs to a policy. There are costs in sticking to the existing target as well," he said.
The finance ministry has previously voiced concerns about the impact on consumers, said Annabel Bishop, chief economist at Investec.
"But the MPC has said it will be flexible in aiming to achieve 3% sustainably."
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