A “convincing” case of low inflation targeting

  • South African Reserve Bank Governor Lesetja Kganyago told the Financial Times that there are compelling cases of SA lowering its inflation target.
  • The 4% to 6% target has been implemented for over 20 years.
  • Kganyago also believes the country is strong enough to survive rising international interest rates.

South African Reserve Bank President Lesetja Kgany told the Financial Times There are “convincing cases” to lower the bank’s inflation target, which is currently between 3% and 6%.

The target range has been set since 2000, and banks want to be more specific in 2017, bringing inflation closer to the midpoint of 4.5%.

Almost all major powers have lowered their inflation target in recent years, Kganyago told a British publication: “In order for South Africa to remain competitive, our inflation is in line with that of the countries we compete with. It’s important to be. “

Inflation targeting guides banks’ decisions regarding interest rate fluctuations. The closer inflation goes above the target limit, the more likely it is that interest rates will rise.

Consumer inflation has been below 6% for more than four years, but surged to 5.2% in May, rising from nearly 3% for months.

Inflation targeting must be agreed between the Minister of Finance and the Governor of the Reserve Bank.

Source: Statistics SA

“SA is less vulnerable than last year”

Rand has been hit hard recently after Federal Reserve Chairman Jerome Powell said the US central bank would begin discussions on reducing bond purchases. The Federal Reserve Board also recently said it expects two rate hikes by 2023, faster than economists thought.

In recent months, the South African market has benefited from a strong influx as global investors demand higher interest rates and yields in a world where interest rates in many countries are near or below zero. Rising US interest rates will make investors less likely to invest in South Africa and may curb their desire for more risky assets.

The Fed’s recent comments have raised concerns about the repetition of the 2013 “tapered tram.” The US central bank has shown that it will begin to reduce (“taper”) quantitative easing after putting about $ 2 trillion into the market after the financial crisis. As a result, it has been sold in South Africa and other emerging markets.

 Source: Schroeder

But Kganyago told the Financial Times South Africa has enough financial resources to survive the rise in international interest rates, saying “this year is less vulnerable than last year.”

Although still tense, South Africa’s government finances now look better than expected. The budget deficit (Rant 552 billion) over the past year is 11.2% of GDP, Bloomberg reported.. This was much lower than the government’s own expectations, thanks to surprisingly strong tax revenues and curbing national spending.

Source: News24

A “convincing” case of low inflation targeting

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