Deputy Finance Minister David Masondo acknowledged that South Africa’s current inflation target is too broad and needs to be narrowed.
Delivering a keynote speech at the Money Summit 2025, held at the Sandton Convention Centre in Johannesburg, Masondo noted that the technical work done by both the National Treasury and the South African Reserve Bank (Sarb) shows that the current range of between 3% and 6% needs to be adjusted.
The National Treasury signalled recently that the review of the current inflation target is nearing completion.
Reserve Bank governor Lesetja Kganyago has repeatedly stated that a 3% anchor would provide greater long-term benefits than the current 3% to 6% range.
Masondo said in his speech that the current inflation targeting framework was introduced “way back in 1998″.
“[The] intention was to target 3% to 6% for 2002 and 2003 and narrow it to 3% to 5 % for 2004 and 2005. However, a spike in the rand in 2001 and other shocks accelerated inflation above target in 2002. It then became clear that the target would be missed for a protracted period, and thus the planned change was put off.
“Clearly, the original thinking was for the framework to have a lower target, but be sufficiently flexible to consider prevailing conditions when changes are to be made. So, the current review should be understood in that context.”
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Masondo stressed that price stability through inflation targeting is one way the government attempts to lower the cost of debt.
The mandate is to ensure stability and low inflation. Stable prices mean stable interest rates – keeping living costs lower for consumers and business costs lower for producers.
“All these are likely to impact economic growth positively,” he said.
Although critics argue that low inflation is associated with high unemployment, the reality is that low levels of inflation mean lower production costs, increased international competitiveness, higher consumer demand, and higher profitability.
“There is plenty of empirical support [for these arguments],” Masondo noted.
Higher profitability means companies can hire more workers, reducing unemployment and setting the economic conditions for the tax base.
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“On the contrary, high inflation increases production costs/ the cost of doing business as workers demand more wages to compensate for the erosion of purchasing power. High inflation also reduces international competitiveness and consumer demand, leading to a decline in firms’ profitability.
“This will likely increase unemployment as firms respond to lower profitability by reducing production and shedding jobs. This is detrimental to economic growth,” Masondo said.
Read the minister’s full key note address here.
This article was republished from Moneyweb. Read the original here.