Rand rallies after Masondo signals change to SA inflation target 'soon'

The Money Show's Stephen Grootes interviews Goolam Ballim, chief economist at Standard Bank.

The rand rallied on Wednesday, after the Deputy Finance Minister indicated that South Africa could introduce a lower inflation target.

Speaking at an investment conference in Cape Town, David Masondo is quoted as saying an announcement on an appropriate inflation framework for the country would be made 'soon'.

In afternoon trade, the rand traded at 18.0775 against the dollar, about 1.1% firmer than Wednesday's closing level.

While the Reserve Bank has made its intention to adjust the inflation target clear for some time, the notion that this is seemingly imminent, has come as a surprise, says Standard Bank chief economist Goolam Ballim.

"The market was surprised to the extent that it did not anticipate this being imminent, hence the stronger rand this afternoon."

Goolam Ballim, Chief Economist - Standard Bank

Referencing the fact that public participation was invited when the current target was set 20 years ago, Ballim says the circumstances then were very different to now.

In terms of the independence of the Reserve Bank, it should be allowed some leeway in being able to push the target band lower, he goes on.

The downside is that there may have to be some growth sacrificed, though.

"I think there will be pockets of society that will say growth sacrifice... could be too much when growth is weak and SA's economic status is fragile to some degree. Call it, say, half a percentage point over the following 12 months following an inflation targeting-lowering experiment..."

Goolam Ballim, Chief Economist - Standard Bank

"One would argue that public consultation speaks to the democratic nature of framing and shaping monetary policy, but at times you need to be slightly more assertive, particularly when you're pursuing a long-term goal which can be beneficial in an environment where there are going to be some near-term costs."

Goolam Ballim, Chief Economist - Standard Bank

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