Economists welcome Treasury’s endorsement of new inflation target

Some economists have welcomed the National Treasury’s endorsement of a new inflation target in a widely anticipated move.

Minister of Finance Enoch Godongwana finally confirmed the revision to the framework, introduced in 2000, during the Medium-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday.

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The inflation targeting is a framework in which the central bank uses monetary policy tools, especially the control of short-term interest rates, to keep inflation in line with a given target.

The target band has been adjusted to 2% - 4% from 3% - 6%, with the midpoint of the range moving to 3%.

The South African Reserve Bank will guide inflation and inflation expectations towards the new target over the next two years.

While it strengthens policy credibility and aligns with the goal of lower inflation expectations, North West University Business School economist Raymond Parsons said it also entails short-term fiscal and growth trade-offs.

Economists at Nedbank said one of the key benefits of the lower inflation target will be lower interest rates.

The lower interest rates will help reduce debt service costs, freeing up more fiscal resources for the social wage and infrastructure investment.

Treasury’s own projections reflect a repo rate trajectory that falls to 6.75% by end of 2026 and 6.25% by end of 2027.

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