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The Citizen
2 hours ago
- Business
- The Citizen
A 3% inflation target: What it means for SA markets, and will it solve our debt issues?
Some economists believe the governor of the Reserve Bank could even announce the 3% inflation target on Thursday, along with the repo rate. The South African Reserve Bank has been making the case for a lower inflation target since 2021, and it now looks like the proposal is gaining traction. What does it mean for South African markets and, importantly, for South African debt? The South African Reserve Bank (Sarb) formally adopted inflation targeting in February 2000 and set the target range between 3.0% to 6.0%. At the time, average annual inflation for the preceding 5 years was 6.4% and the target was consistent with global practices and those of South Africa's emerging market peers that were also grappling with persistently high inflation. Fast-forward 25 years, and much has changed. Central banks in emerging markets narrowed and lowered their inflation targets, with several converging around 3%. South Africa, despite having a strong and credible central bank, remains an outlier with a higher inflation target. ALSO READ: What lowering the inflation target will mean for SA Sarb started arguing for lower inflation target in 2017 In 2017, the Sarb began to argue for a lower inflation target, and the Monetary Policy Committee (MPC) began to explicitly target the midpoint of the 3.0% to 6.0% range at 4.5%. The Sarb's motivation for lowering the target is clear: lower inflation would reduce the economy's average interest rate over time, bringing the cost of borrowing down and resulting in billions of savings of debt service costs for the fiscus over the next ten years. If successful, the combination of stronger real growth and lower borrowing costs could lower the cost of capital across the economy, potentially driving investment and also lifting valuations across multiple asset classes. However, Felicia Makondo, fund manager at PSG Asset Management, says the transition to a lower inflation target is not without risks. 'To lower inflation, the MPC typically increases the repo rate. South Africa is already grappling with weak gross domestic product (GDP) growth, supply-side bottlenecks and fragile consumer demand. 'High interest rates are likely to stifle already fragile growth even further in the short term. In addition, if inflation expectations are not successfully lowered to the 3.0% level, the result would be more volatile inflation and a loss of credibility.' ALSO READ: Will repo rate be cut on Thursday or is it too tight to call? What happened in Brazil when it set its inflation target at 3% She says the experience in Brazil provides a cautionary tale. 'The country lowered its inflation targets too, but fiscal dominance and political pressure at times undermined the central bank's credibility and inflation expectations remain above their 3% target. 'Brazil's experience illustrates the challenges of anchoring expectations and highlights that loose fiscal policy can undermine monetary policy credibility.' A lower inflation target implies that the Sarb will be more hawkish and less tolerant of inflation surprises as it pursues anchoring inflation expectations lower over the implementation period of two to three years. Makondo says, as we saw in June, the global macroeconomic environment is volatile and susceptible to sudden shocks, such as the geopolitical tensions in the Middle East between the USA, Iran, and Israel, which pushed oil prices from US$66 per barrel to US$80 per barrel. 'In a 3.0% inflation targeting regime, such external shocks from a fragile global environment could elicit a stronger monetary response from the Sarb. This means potentially keeping the repo rate higher in the short term to defend the credibility of the lower inflation anchor.' She points out that the shift to a lower inflation target would mark a structural change in the country's macro framework. 'For investors, this introduces both opportunity and risk: the transition will not be linear, and it will depend on the Sarb's ability to maintain its credibility and guide inflation expectations lower without stifling an already struggling economy. 'In the interim, investors should position for a world where lower inflation and tighter policy coexist and where portfolio strategy must adapt to a more anchored, but possibly more demanding, macro regime.' ALSO READ: Lowering the inflation target will cost us – expert Sarb says SA could see almost R1 trillion saving with lower inflation target Nick Balkin, chief investment officer at Foord Asset Management, points out that the Sarb circulated estimates of almost R1 trillion in interest savings over a decade if the target is lowered. 'The thesis is that better price discipline will pull down borrowing rates, shrink Treasury's debt service bill and release scarce funds for social priorities. The arithmetic appears neat but does not take into consideration one of the main reasons putting upward pressure on borrowing costs: the deteriorating credibility of government. 'I have spent two decades investing in South African debt and equity markets. During that time, the Sarb generally delivered on its mandate to keep prices stable within the target range. However, real economic growth barely averaged 1% a year since 2014. 'Stabilising prices did not unlock capital expenditure or boost economic growth. If anything, it was the weaker growth that helped keep inflation in check.' ALSO READ: Reserve Bank governor wants lower inflation target Lower inflation target not a silver bullet for lower borrowing costs Balkin says lower inflation does not automatically mean lower borrowing costs for the South African government. 'Firstly, South Africa's bonds have much higher average maturities than for many other emerging markets. 'Even if yields fell meaningfully tomorrow, the interest line in the national budget would decline only gradually as outstanding bonds mature and are refinanced at lower borrowing rates over time. 'Secondly, lower inflation would result in lower nominal economic growth (nominal growth is equal to real economic growth plus inflation). As a result, South Africa's troubling debt-to-GDP ratio – which is measured against nominal GDP – would continue to deteriorate, with the denominator lower than it would otherwise be. 'Without meaningful, structural state interventions to address the root causes of constrained economic growth, the debt burden may even worsen. Thirdly, South Africa's risk premium – the yield above US Treasury yields demanded by bond investors – is another binding constraint. 'Strip inflation out of current bond yields, and investors still demand a real return of roughly 5% – double that of comparable emerging economies. The risk premium compensates investors for weak governance, unreliable energy supply and unresolved fiscal risks – not for an inflation target that is set too high.' He says unless these underlying fundamentals improve, global capital will continue demanding a high spread over US Treasuries, regardless of the official inflation target. ALSO READ: Repo rate: Will Reserve Bank cut or err on side of caution? Treasury has other option to reduce borrowing costs 'National Treasury also has other options to reduce borrowing costs, including shifting debt issuance away from long-dated, fixed-rate bonds towards Treasury bills, floating-rate notes and inflation-linked securities – assets that already carry lower yields. 'The Sarb's stewardship of price stability is one of democratic South Africa's macroeconomic successes. Central banks earn credibility by meeting the targets they set. A lower target that proves hard to attain, for many reasons, would force the Sarb either to tighten policy sharply or tolerate repeated misses. Neither outcome would enhance the Sarb's standing.' Balkin points out that lowering the inflation target may promise a quick political win but warns that it offers only a faint hope of materially lower funding costs. 'South Africa's fiscal arithmetic improves meaningfully only when two conditions hold: when the economy grows at a faster pace than outstanding debt and the country risk premium narrows. Achieving both depends on structural reform, fiscal consistency and reliable service delivery – not on fine-tuning the inflation target.'
The Citizen
3 hours ago
- Business
- The Citizen
June salaries stabilised after months of decline, but adverse external factors remain
If you earn a salary you will be glad to hear that there is some relief coming, but the dark cloud of US tariffs still hovers. Salaries stabilised in June after three months of decline, supported by a favourable inflation environment and an anticipated interest rate cut on Thursday. Salary earners may see some relief from financial pressures, but external factors are still expected to weigh on future earnings and unemployment levels. Take-home pay, tracked in the BankservAfrica Take-home Pay Index (BTPI), held steady in June after three months of moderation. 'The nominal average take-home pay was R17 310 in June, showing a marginal 0.1% decline on May's R17 325. 'However, this was still notably above the R15 514 level of a year ago,' Shergeran Naidoo, BankservAfrica's head of stakeholder engagements, says. However, Elize Kruger, an independent economist, says while the first six months of BTPI data signals 2025 will, on average, be a good salary year, the economic outlook has deteriorated in recent months. ALSO READ: Take-home pay slides for third month with grim job opportunities and earnings Significant moderation in inflation helped salaries Real take-home pay, adjusted for inflation, moderated marginally by 0.2% to R14 804 in June, compared to R14 827 in May, but was still notably up on year-ago levels. 'The significant moderation in consumer inflation during 2024 had a positive impact on the purchasing power of salary earners and the scenario is continuing into 2025, with the latest headline inflation at only 3% for June,' Kruger says. After a challenging few years for salary earners, due to the sluggish local economy and the elevated inflation rate, 2024 turned out to be the best year since 2015, with an average real salary increase of 1.5%. 'With inflation forecast to average 3.5% in 2025 unlike the 4.4% in 2024 and the broader industry suggesting an average salary increase above 5%, 2025 will be the second consecutive year of a real increase in earnings.' Kruger says in addition to supporting salary earners' consumption expenditure and softening the impact of global headwinds on the local economy, the favourable inflation environment created ample scope for the South African Reserve Bank (Sarb) to cut interest rates further. 'Carpe Diem Research Services forecasts a 25 basis points cut at the Monetary Policy Committee (MPC) meeting tomorrow. This is likely to be the final cut in the current downward cycle.' ALSO READ: Salaries decreased by 2% in April, but higher than a year ago 2025 volatile but real consumption held up well Despite 2025 turning out to be a volatile year so far, real consumption expenditure held up well, which is an encouraging sign for an economy heavily reliant on consumer spending. Even with confidence levels slipping in the first quarter, the level of real final consumption expenditure by households was 2.8% higher compared to a year earlier. Early indications from Statistics SA indicate that the performance continued in the second quarter, with real retail sales in the first five months of the year up by 4.3%. Uncertainty and low confidence could affect employment and salaries However, Kruger points out that the general economic environment deteriorated in recent months, with downward revisions to growth prospects locally and globally and high levels of uncertainty, fuelling low confidence and a pause on investment decisions. ALSO READ: Decrease in take-home pay reflection of mounting economic pressure 'This could affect employment levels and earnings in the coming months, in an economy with an already high unemployment rate of 32.9%. In addition, tensions between the US and South Africa, coupled with uncertainty over the tariff landscape beyond 1 August, present a growing concern for the economy and its trade outlook. 'As such, it remains of utmost importance that the South African government prioritise its diplomatic engagement with US authorities to negotiate a favourable trade regime to avert job losses in sectors such as automotive and agriculture, which would otherwise face severe impacts,' Kruger says.
IOL News
5 hours ago
- Business
- IOL News
SA expects just one more interest rate cut this year as inflation rises
South Africans are likely to only get the benefit of one more interest rate cut this year on Thursday as inflation is set to rise in the coming months. Investec chief economist Annabel Bishop said that this was despite the South African Reserve Bank having the space to cut interest rates by as much as 1.5 percentage points this year and in 2026. The Bank's Monetary Policy Committee (MPC) will make the interest rate announcement tomorrow afternoon. 'With CPI inflation expected to average just above 4.0% year-on-year in the MPC's forecast period, the current 7.25% repo rate could afford to drop,' said Bishop. However, she said additional cuts of up to 1.5 percentage points are not expected this year. This would bring the prime lending rate down to 10.5%. Bishop's view aligns with that of other economists, with Old Mutual chief economist Johann Els having said that there will likely be a 0.25 percentage point cut this week, while Standard Bank's group head of South Africa macroeconomic research, Dr Elna Moolman has also argued that there should be a cut.
IOL News
a day ago
- Business
- IOL News
How the Rand's pressure mounts ahead of key interest rate decision and US trade deadline
The rand is under pressure, hovering at R17.90 against the dollar. Image: Armand Hough /Independent Newspapers The South African Reserve Bank's interest rate decision on Thursday comes at a critical moment, just one day before South Africa's deadline to secure a trade deal with the US expires. Failure to reach an agreement could add 30% to the cost of exports to America, threatening thousands of jobs and weighing on economic growth, while the rand trades weaker near R17.90 against the dollar amid mounting uncertainty. Andre Cilliers, currency strategist at TreasuryONE, added that the rand is trading weaker around the R17.90 level as the rally in the dollar and the lack of any good news on the tariff front ahead of Friday's deadline weigh on the local currency. In Investec chief economist Annabel Bishop's weaky rand note, she said that the pending deadline to strike a deal with the US – with South Africa seemingly have not made progress – would be negative for the local currency. The trade tax order, signed by US President Donald Trump on July 7, follows a suspension of his April 2 'Liberation Day' tariffs, which he placed on pause following an extremely negative market reaction in America. The rand is hedgy ahead of the interest rate announcement and the Trump trade deadline. Image: Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Advertisement Next Stay Close ✕ The US dollar has risen on the optimism around the progress ahead of the deadline on Friday, which the US's Commerce Secretary Lutnick said will not be extended, and countries which have not struck deals will see July's reciprocal tariffs apply, said Bishop. Nolan Wapenaar, co-chief investment officer at Anchor Capital, said It seems certain that South Africa isn't going to have a deal with the US by Friday. 'I expect that everyone is aware of this by now and there I don't expect a massive impact as we move into August,' he noted. More likely the loss of export revenue will weight on the trade balance adding negative pressure to the rand over time, said Wapenaar. 'Most industries won't really notice, while a handful of sectors, like auto manufacture, will suffer a significant impact,' he said. Wapenaar added that this will translate into job losses and economic losses in a few sectors. 'Economists are all modelling to estimate the impact and, from what I am seeing, this will shave about 0.7% off economic growth. Just not nice,' he said. In 2023, South African exports to the US accounted for around 2.2% of gross domestic product, while around 426,000 of jobs are linked to exports to the US. On the back of both the US Federal Reserve and the South African Reserve Bank announcements on interest rates this week, TreasuryONE expects the rand to remain vulnerable to dollar moves. 'However, a break above the R18.00 is likely to attract exporter inflows,' he said. Bishop also noted that the local currency had weakened on a likely interest rate cut in this week. IOL
IOL News
2 days ago
- Business
- IOL News
Sarb's potential shift to 3% inflation target could benefit South African economy
Analyses undertaken by the Sarb, the National Treasury, and other experts highlight significant potential benefits from reducing the inflation target to 3%. Image: File Economists have concurred that the South African Reserve Bank (Sarb) could help lower the borrowing costs, boost investor confidence, and economic growth by reducing its inflation targeting to 3% per annum. This comes as discussions have emerged regarding whether South Africa's current inflation target midpoint of 4.5% is consistent with price stability and whether adjusting it to a lower rate might help secure the current trend of low inflation Analyses undertaken by the Sarb, the National Treasury, and other experts highlight significant potential benefits from reducing the inflation target to 3%. Recent comments from the Sarb about potentially lowering the inflation target led market participants to recalibrate inflation expectations downward. According to the Bank of America (BofA) Global Research's latest South Africa Viewpoint on Monday, there is more to gain and less to lose by moving to 3% inflation target. 'We think moving to 3% is almost certain. The Sarb would not have intensified its desire if it did not have buy-in - at least in private if not publicly. Markets would not have reacted positively if the moves were in doubt,' said Tatonga Rusike, BofA's sub-Saharan Africa economist. 'An announcement could be made with the concurrence of the finance minister at either of the upcoming MPC meeting(s) - the Mid-term Budget presentation in October or the Budget 2026 presentation in February. Inflation is already benign and does not require the Sarb to change its current rate cycle. 'Other than influencing expectations through moral suasion, work still needs to be done in publishing the advantages of the 3% inflation target to the non-technical public, price setters and labour unions. South Africa moved from 3-6% to a 4.5% mid-point target in 2017. Reaching it was helped by central bank credibility and supportive supply-side factors - low oil and food prices. The Brent oil price averaged $63 per barrel between 2017 and 2019 while food inflation averaged 7% in 2017, 3.2% in 2018 and 3.1% in 2019. This made it easier to reach 4.5% and the central bank was cutting the policy rate through the cycle. Earlier this year, Sarb Governor Lesetja Kgayango said one particular issue that both advanced and emerging market economies grappled with was making sure that their targets were efficient and aligned with clear and practical definitions of 'price stability'. 'Most advanced economies have settled on maintaining inflation targets at 2%, while emerging markets are closer to the 3% mark,' Kganyago said. 'Early adopters of inflation targeting have updated their frameworks to better reflect changing realities on the ground, with Armenia being the latest central bank to also reduce its target to 3%.' In its latest annual report, the Sarb said the 'main concern with South African inflation is not our ability to hit the target. Rather, it is that our target is high compared to other countries.' The bank said although an inflation rate of 4.5% may seem moderate, it still causes prices to double every 16 years, and this is hard to reconcile with its constitutional obligation to safeguard the value of the currency. Investec chief economist, Annabel Bishop, said concurred with the advocacy for a lower inflation target, asserting that such a move would foster a more advantageous interest rate environment. 'A persistently lower rate of inflation would result in a lower interest rate environment which in turn would benefit the economy, the bond market and consumers. At 3% year-on-year inflation the neutral interest rate would be 5% not 6.5% with inflation at 4.5% year-on-year,' Bishop said. 'In addition, higher than expected tax collections would allow for a reduction in the fiscal deficit and so could reduce the borrowing requirement, again positive for the bond outcome, although the market has largely adopted a wait and see attitude.' BUSINESS REPORT
