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Finance Minister Enoch Godongwana at a pre MTBPS press conference.
Minister of Finance Enoch Godongwana has set a new inflation target of three percent, with a one percentage point “tolerance band.”
Delivering the Mid-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday, Godongwana says the one percentage point band allows flexibility to accommodate any unexpected inflationary shocks.
The minister says this is in line with South Africa’s approach to inflation targeting, which has always been a flexible one, looking beyond short-run deviations in inflation while affirming that the Reserve Bank will pursue the three percent target on a continuous basis.
“This new target immediately replaces the previous target range of between three and six percent and will be implemented over the next two years.”
Godongwana says over time, the lower target will decrease inflation expectations, creating room for lower interest rates.”
He told the National Assembly that, while a lower inflation target will decrease inflation, it will create space for permanently lower interest rates to cushion household spending and investment, support economic growth and create jobs.
However, he adds that a lower inflation target will initially slow nominal GDP growth, given that tax receipts are linked to nominal GDP.
He said this will reduce fiscal space, while the real value of public debt will decline more slowly which would maintain the benefits of a lower inflation target and outweigh the costs.
“The long-term benefits of taking this step far outweigh these costs,” added Godongwana.
