MTBPS: South Africa reduces inflation target to 3% to combat rising cost of living

Finance Minister Enoch Godongwana has officially reduced South Africa's inflation target to 3% with a tolerance band of 1 percentage points on either side over the next two years in a bid to ease the elevated cost of living on consumers.

This new target immediately replaces the previous target range of between 3 and 6% with a midpoint of 4.5%, which has been implemented since 2000.

Over the past year, the National Treasury and the South African Reserve Bank (Sarb) conducted joint research on the benefit of a lower inflation target on the economy and the fiscal framework.

South Africa's average inflation rate is higher than trading partners and emerging market peers, which erodes the country's competitiveness and causes the rand exchange rate to depreciate.

Higher inflation also increases the cost of living to the detriment of households, particularly the poorest and most vulnerable.

Treasury said although the impact on government finances will be mixed in the short term, this change is expected to reduce the costs of living and borrowing while boosting economic growth and revenues in the years ahead.

Godongwana on Wednesday said fiscal and monetary policies, the twin pillars of economic governance, must work together to lower inflation and borrowing costs for households and firms, while keeping debt-servicing costs affordable.

He said the study to assess the impact of a lower target on the economy and the fiscal framework has now been concluded and recommends a revision to the target to strengthen the framework and enhance price stability by better anchoring inflation expectations and aligning South Africa to international best practice."

Today I announce a new inflation target for South Africa of 3% with a 1 percentage point tolerance band.

This decision follows agreement between the Governor of the South African Reserve Bank and my consultations with the President and Cabinet," Godongwana said.

"The 1 percentage point band provides flexibility to accommodate any unexpected inflationary  shocks. This is in line with South Africa’s approach to inflation targeting, which has always been a flexible one, looking beyond short-run deviations in inflation."

Godongwana said the Sarb will pursue the target on a continuous basis and clearly communicate any deviations from the target.

Over time, he said 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. The short-term fiscal costs of a lower target, which include lower nominal GDP and revenue growth, will make achieving fiscal targets more challenging," Godongwana said.

"Yet the long-term benefits of taking this step far outweigh these costs. We remain committed to ensuring that our macroeconomic policies serve the best interests of all South Africans."

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