SA Insight - SARB’s inflation target: 4%, not 3% or 4,5%
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The South African Reserve Bank’s (SARB) inflation target is currently under review by the National Treasury (NT) as part of a broader macroeconomic policy review for the country. The SARB indicated it would prefer an explicit point target for inflation rather than the current inflation band of 3-6%. It also indicated it favours a lower-point target than the current mid-point of 4,5%, with a 3% or 4% target mentioned as the preferred level.
We have conducted our own review of the inflation target. While South Africa’s current target band is high compared to peers, we believe a point target of 4% is more suitable than a 3% target given domestic price dynamics. A 4% target rather than a 3% one would also minimise risks to credibility and a potentially high sacrifice ratio the SARB faces.
Within this context, we provide an analytical framework to analyse the yield curve adjustment under a lower inflation target. We think of the potential move in the yield curve in three stages. The SARB’s credibility in reaching the target would determine how long it takes to shift from the first stage to the last stage.
As far as a timeline is concerned for the broader macroeconomic policy review underway by the NT, the MTBPS indicated that a “…draft review document, due at the end of March 2022, will form the basis for workshops, public discussions and additional research. A final review is expected to be published in 2023”.
We have conducted our own review of the inflation target. While South Africa’s current target band is high compared to peers, we believe a point target of 4% is more suitable than a 3% target given domestic price dynamics. A 4% target rather than a 3% one would also minimise risks to credibility and a potentially high sacrifice ratio the SARB faces.
Within this context, we provide an analytical framework to analyse the yield curve adjustment under a lower inflation target. We think of the potential move in the yield curve in three stages. The SARB’s credibility in reaching the target would determine how long it takes to shift from the first stage to the last stage.
As far as a timeline is concerned for the broader macroeconomic policy review underway by the NT, the MTBPS indicated that a “…draft review document, due at the end of March 2022, will form the basis for workshops, public discussions and additional research. A final review is expected to be published in 2023”.