MTBPS: Godongwana reduces inflation target to 3%

Finance Minister Enoch Godongwana has reduced the inflation target to 3%, with a one percentage point tolerance band. 

He announced the bold move while tabling the medium-term budget statement in Parliament on Wednesday afternoon.

Lowering the inflation target has been a point of contention between the Treasury and the reserve bank for some time, but on Wednesday afternoon, Godongwana conceded that the benefits of a lower inflation target would outweigh the costs, especially for cash-strapped consumers.

It’s been the advice of experts three years ago already that government review its inflation target of between 3% and 6%.

South Africa’s average inflation rate is higher than its trading partners and emerging market peers.

While adopting a 3% inflation target will initially slow gross domestic product and revenue growth, Godongwana said that future benefits would outweigh this. 

"Over time, the lower target will decrease inflation expectations and inflation, creating room for lower interest rates. This supports household spending and business investment, boosting economic growth and job creation." 

Lowering the target aligns the country with international best practice and makes the cost of borrowing cheaper. 

"The short-term fiscal costs of a lower target, which include lower nominal GDP and revenue growth, will make achieving fiscal targets more challenging."

The reserve bank is now expected to guide inflation towards the 3% target over the next two years. 

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