South African policymakers are in discussions on lowering the central bank's inflation target, its governor said on Wednesday, adding that a lower target would make the country more competitive and bring the central bank in line with peers.
Lesetja Kganyago told Reuters he personally preferred a decision that would lower the target from its current range of between 3% and 6% "before we get to 2025", but that teams from the South African Reserve Bank (SARB) and National Treasury were still identifying the appropriate range and risks associated with it.
"Our teams are in conversation now," Kganyago said in an interview. "The teams will advise the governor and the (finance) minister and say ok this is the appropriate target and this is the appropriate timeline within which we have got to achieve the target."
South Africa introduced its inflation-targeting framework in 2000, and had planned to lower the target to 3%–5% and then 2%-4%. But the target was never lowered, something Kganyago views as a big mistake and has been vocal about for years.
He said the current band was too wide and served to anchor inflation expectations higher than the bank would like.
Regarding the general elections in May, he said there was huge uncertainty about the outcome which was "keeping the country's risk premium elevated", referring to the additional return investors demand to compensate them for local risks.
Kganyago, whose term as SARB governor was extended for another 5 years last month, said President Cyril Ramaphosa had tried to mitigate some of the uncertainty surrounding South Africa by ensuring stability in the leadership of key institutions like the revenue service and central bank.
Asked what he wanted to achieve in his third term starting in November, Kganyago said "the job on the inflation front is not yet done".
Over the longer term, the key to reducing the country's risk premium lies in prudent macroeconomic and fiscal policies, he said.
Inflation picked up to 5.6% year-on-year in February (ZACPIY=ECI), and the bank only sees it falling to 4.5% in the fourth quarter of 2025.
Kganyago dismissed the idea of using explicit forward guidance on interest rates as a way to further rein in inflation expectations, saying bank officials did not view it as a useful tool.
