South Africa cuts inflation target to 3 per cent, first change in 25 years

South Africa’s Finance Minister Enoch Godongwana lowered the country’s inflation target to 3% on Wednesday, the first adjustment to the target in 25 years.

The new target will have a 1 percentage point tolerance band either side and comes after consultations with the president and cabinet, Godongwana said in a mid-year budget review in Africa’s biggest economy.

“This new target immediately replaces the previous target range of between 3% and 6% and will be implemented over the next two years,” Godongwana said in a speech to lawmakers.

South Africa’s central bank Governor Lesetja Kganyago has been pushing for a lower target and said in July that the bank would effectively target 3% inflation, rather than the target range in force since 2000.

The budget review also showed the National Treasury now forecast a slightly smaller consolidated budget deficit this year of 4.7% of gross domestic product (GDP), compared to May’s forecast of 4.8% of GDP.

South Africa’s debt to GDP ratio is seen stabilising at 77.9% this fiscal year, higher than the 77.4% estimated in May.

The Treasury’s economic growth estimates for this year and next have been revised down to 1.2% and 1.5%, from 1.4% and 1.6% respectively.

“This new target immediately replaces the previous target range of between 3% and 6% and will be implemented over the next two years,” Godongwana said in a mid-year budget review speech.

The new target will have a 1 percentage point tolerance band either side and comes after consultations with the president and cabinet, Godongwana added.

The transition to the lower target would have to be carefully managed to ensure the government maintains its long-term fiscal consolidation goals, he said.

Kganyago has long advocated lowering the inflation target, arguing the band was uncompetitive and misaligned with international peers.

The budget review showed the Treasury forecast a slightly smaller consolidated budget deficit this year of 4.7% of gross domestic product (GDP), compared to May’s forecast of 4.8%.

South Africa’s debt to GDP ratio is seen stabilising at 77.9% this fiscal year, higher than the 77.4% estimated in May.

The Treasury’s economic growth estimates for this year and next have been revised down to 1.2% and 1.5%, from 1.4% and 1.6% respectively.

Analysts welcomed the move, viewing it as a signal of policy discipline amid global uncertainties. “Aligning closer to peers like the US and eurozone will boost investor confidence,” said economist Azar Jammine of Econometrix. The rand strengthened 0.8% against the dollar post-announcement. However, labour unions expressed concern that tighter monetary conditions could curb wage growth and job creation in a country with 32% unemployment. Godongwana stressed that lower inflation would ultimately support sustainable employment by preserving purchasing power.

Reuters