Rethinking South Africa’s inflation target

In recent years, there has been a significant debate around South Africa's inflation target, with calls for a lower and narrower range to enhance economic competitiveness. The current target range, established in 2000, sits between 3 per cent and 6 per cent, with the South African Reserve Bank (SARB) aiming for a midpoint of 4.5 per cent. However, SARB Governor Lesetja Kganyago's advocacy for a lower target has not received widespread support from the government and stakeholders. To contribute to this discussion, Codera has released a policy paper exploring the adjustments needed without excessive economic costs. During a recent interview on CNBC Africa, Dr. Daan Steenkamp, CEO of Codera Analytics, shed light on various research gaps in the SARB's approach to redefining the inflation target. He emphasized the need to determine the optimal inflation target for South Africa, measure appropriate inflation levels, communicate any target reviews effectively, and plan a smooth transition to a lower target. Dr. Steenkamp highlighted the lack of formal policy documentation and independent research in the SARB's current approach, raising concerns about the potential economic costs of a drastic shift in the inflation target without adequate preparation. He warned that a lower inflation target without government buy-in could have significant financial implications for the private sector, potentially costing billions. Discussing the associated economic risks, Dr. Steenkamp pointed out that lowering the inflation target would require structural and fiscal reforms to mitigate adverse effects. He stressed the importance of supportive fiscal policies that reduce government debt burdens over time to complement the benefits of a lower inflation target effectively. When considering the transition to a lower target, Dr. Steenkamp outlined two primary risks: unexpected short-term costs and the challenge of achieving an ambitious target without necessary support from key stakeholders. He noted that a poorly managed transition could damage the credibility of the central bank and increase adjustment costs for the private sector. In terms of communication and managing the transition effectively, Dr. Steenkamp highlighted the critical role of the SARB in articulating the long-term benefits of a lower inflation target. Building trust, providing evidence to support the transition, and improving communication strategies are essential for bolstering the central bank's credibility and ensuring a successful adjustment. In conclusion, the reevaluation of South Africa's inflation target presents complex challenges that require careful consideration, thorough research, and strategic communication. Balancing the short-term costs of transitioning to a lower target with the long-term economic benefits calls for collaboration between the central bank, government, and key stakeholders to safeguard the country's economic stability and credibility.