Kganyago says CPI near 3% seen yielding lower rates
South African Reserve Bank Governor Lesetja Kganyago said inflation is expected to quicken over the next couple of months before cooling and that if it holds at current levels its forecasts predict lower interest rates.
“We expect this uptick in headline inflation to be temporary, and we look forward to inflation coming back to around 3% over the medium term,” he told the bank’s annual general meeting in Pretoria on Friday.
“To the extent that inflation settles at 3%, and that inflation expectations continue their move lower, the bank’s forecasting model shows lower interest rates if inflation remains contained at current levels.”
The central bank cut rates by 25 basis points to 7% on July 31 and unexpectedly announced that it prefers inflation to be at the floor of its 3% to 6% inflation target. That drew a terse response from Finance Minister Enoch Godongwana that made clear he had not granted his permission for the move.
The central bank target has not been revised since being introduced in 2000.
Policymakers have long advocated for a 3% goal, arguing that it would deliver lower borrowing costs and a more competitive economy over the medium term.
Godongwana issued a statement the next day criticising the unilateral move for breaching the “established consultation process” between the bank and the Treasury.
He also ruled out an announcement on inflation targeting when he presents the country’s mid-term budget review in October. He did not comment directly on the economic merits of a lower inflation goal.
Some members of his African National Congress party have been critical of the central bank in the past for keeping interest rates high to curb price pressures, which they argue is at the expense of jobs and economic growth.
The central bank and Treasury have been reviewing the inflation framework since last year. South Africa’s annual inflation rate has hovered around 3% since October.
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