South Africa lowers inflation target for first time in 25 years

South Africa cut its inflation target to 3% on Wednesday, marking the first adjustment in 25 years, with Finance Minister Enoch Godongwana saying that over time this will lessen inflation expectations and create room for lower interest rates.

Godongwana announced the change to the target, from South Africa’s previous range of 3%-6%, after central bank governor Lesetja Kganyago said in July that it would be targeting the bottom of the band rather than the range.

“This new target immediately replaces the previous target range of between 3% and 6% and will be implemented over the next two years,” Godongwana said in a mid-year budget review speech.

The new target will have a 1 percentage point tolerance band either side and comes after consultations with the president and cabinet, Godongwana added.

The transition to the lower target would have to be carefully managed to ensure the government maintains its long-term fiscal consolidation goals, he said.

Kganyago has long advocated lowering the inflation target, arguing the band was uncompetitive and misaligned with international peers.

The budget review showed the Treasury forecast a slightly smaller consolidated budget deficit this year of 4.7% of gross domestic product (GDP), compared to May’s forecast of 4.8%.

South Africa’s debt to GDP ratio is seen stabilising at 77.9% this fiscal year, higher than the 77.4% estimated in May.

The Treasury’s economic growth estimates for this year and next have been revised down to 1.2% and 1.5%, from 1.4% and 1.6% respectively.

• By Kopano Gumbi and Sfundo Parakozov. Additional reporting by Colleen Goko in Pretoria and Wendell Roelf in Cape Town.