(Bloomberg) -- South African Reserve Bank Governor Lesetja Kganyago delivered a strong argument for lowering the 3% to 6% inflation target that has guided policymakers for the last 24 years.
“We have an opportunity to achieve permanently lower inflation and therefore permanently lower interest rates,” Kganyago told an audience at the University of Stellenbosch on Thursday. “Executed effectively, a lower target could be achieved at little cost – just as we moved to 4.5% at little cost.”
The SARB adopted the inflation target in 2000. In 2017, it began explicitly communicating it was aiming to anchor price expectations around the 4.5% midpoint of its target range.
“We were clear that we wanted inflation at 4.5% and we delivered.,” Kganyago said. Still, South Africa’s inflation rate has remained relatively high.
“We have a relatively high inflation rate. We often speak as if this is a structural, inevitable thing, and not a policy choice,” he said. “But the fact is, we could have a lower inflation target, like almost all our peers, and with it, lower inflation.”
In February the Treasury said the goals were under review.
Kganyago said it was clear that the inflation target can only be reviewed lower, while acknowledging that the process was complex and involved political as well as economic calculations.
The reserve bank last month lowered borrowing costs by 25 basis points to 8% after inflation slowed and policymakers revised their forecasts to show price pressures remaining at or below 4.5% through 2026.
Easing inflation pressures have been buoyed by softer oil prices, improved global financial conditions and a stronger rand, helped by positive sentiment that followed South Africa’s formation of a business-friendly governing coalition after its May 29 election.
Officials noted in their semi-annual monetary policy review published Tuesday that pricing in financial markets signals another quarter-point cut next month at the central bank’s last policy meeting of the year. They said such pricing was not out of line with the county’s macroeconomic outlook.
Officials will deliver their rate decision on Nov. 21.
(Adds more comments from Kganyago from fifth paragraph.)
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