{"id":144107,"date":"2025-11-20T04:00:07","date_gmt":"2025-11-20T04:00:07","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/144107\/"},"modified":"2025-11-20T04:00:07","modified_gmt":"2025-11-20T04:00:07","slug":"lower-inflation-target-corporate-influence-or-economic-strategy","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/144107\/","title":{"rendered":"Lower inflation target \u2014 corporate influence or economic strategy?"},"content":{"rendered":"

The SA National Treasury\u2019s decision<\/a> to lower the central bank\u2019s inflation target to 3% is hard to understand. Finance minister Enoch Godongwana was himself quoted in the Financial Times on November 12 suggesting it will \u201cmake achieving fiscal targets more challenging\u201d. However, he also justified the policy choice by suggesting that \u201cover time, the lower target will decrease inflation expectations and inflation, creating room for lower rates\u201d. <\/p>\n

This quote reflects a questionable state of reasoning among some of SA\u2019s chief macroeconomic policymakers. In the first instance, it is reasonable to expect that the extremely low inflation target will be achieved through a higher policy interest rate that represses investment demand. To explain the fallacy in the minister\u2019s reasoning, it is akin to shopkeepers barring entrants to their store and celebrating the fall in customers since \u201cnow it will be necessary to lower prices, which will in turn increase customers!\u201d <\/p>\n

Interest rates are a policy tool. If the minister has a strong, mandated preference to \u201ccreate room for lower rates\u201d it is unclear why he would identify a lower inflation target as the means to realise this. One argument concerns the effects of inflation targeting on inflation expectations, but the view that inflation targeting is effective at anchoring long-term expectations is disputed by recent studies published in leading economics journals.<\/p>\n

More generally, this episode raises concerns about democratic mandates and suggests the tail may be wagging the dog. The public would be within their rights to ask why the Reserve Bank appears to be proposing changes in the mandate set by a democratically elected government. Moreover, when the Bank\u2019s governor initially proposed a reduction in the inflation target, the finance minister appeared, at first, to have been opposed to the idea. Correspondingly, the public would be justified in querying the motives behind this shift. <\/p>\n

The public would be within their rights to ask why the Reserve Bank appears to be proposing changes in the mandate set by a democratically elected government.<\/p>\n

The Sunday Times reported earlier this month that Godongwana \u201cchanged his mind after meetings with global investment banks JPMorgan and Goldman Sachs\u201d. This after the Financial Times had reported in June that similar lobbying by corporate finance took place earlier this year but was more cautious about suggesting it would find local support emphasising the \u201cpolitical minefield for President Cyril Ramaphosa\u2019s fragile coalition government\u201d. These concerns seem to have been unfounded and the policy has been introduced with little public contestation and debate. The ambivalent response from union federation Cosatu to a policy change that is likely to increase unemployment is a surprise. <\/p>\n

To the external observer it is hard to conclude other than that this unusual and seemingly rushed policy choice is yet another manifestation of the extreme deference to corporate power in this administration. This is an irony of the prevailing response to \u201cstate capture\u201d.<\/p>\n

Read: Wisdom of lowering inflation target questioned in parliament<\/a><\/p>\n

A response to crises of state capture that merely hands critical levers of the state to new corporate actors and interests leaves much to be desired. Painful lessons provided by globally powerful and \u201crespectable\u201d influencers (such as McKinsey, Bain and the consulting arms of KPMG, Deloitte and PwC) have not been learnt. <\/p>\n

Aside from questions of mandates and democratic deficits, this policy choice has economic implications that should be robustly debated. SA has a stagnating economy; in constant dollars the average South African is about as poor as he or she was in 2006. The average conceals SA\u2019s exceptional inequalities, but the country undoubtedly needs a long-run growth strategy. <\/p>\n

A lower, more restrictive inflation target arguably runs strongly against that growth objective because rapidly developing countries require high rates of investment demand that may well generate inflationary pressure. Policy is required to offset this pressure, but the tools of an inflation-targeting central bank are arguably too crude or imprecise. <\/p>\n

Painful lessons provided by globally powerful and \u2018respectable\u2019 influencers … have not been learnt.<\/p>\n

During South Korea\u2019s famed period of rapid industrialisation (1961-79), according to World Bank data the annual inflation rate, commonly in double digits, would have met SA\u2019s new inflation target just once. If the Bank of Korea had intervened to cool the economy by raising rates it stands to reason that South Korea now might look a little more like SA rather than the industrial powerhouse it in fact became. <\/p>\n

The Bank might respond to this argument by indicating that it has research suggesting a lower inflation target will raise the investment rate or share of GDP. How compelling is this argument? Some of the descriptive evidence it marshals is cherry-picked or spurious and driven by outliers. Using World Bank data \u2014 if one drops Argentina, a high-inflation low-investment outlier \u2014 there is no evidence that \u201ccountries with lower inflation tend to have higher investment rates\u201d. <\/p>\n

For its more technical analysis, the Bank\u2019s underlying characterisation of investment behaviour appears to arbitrarily assume a weak effect of interest rates on investment and a large sensitivity of inflation expectations to the inflation target, which would unsurprisingly tend to favour hawkish conclusions.<\/p>\n

The reasoning behind this recent policy shift is hard to follow. It has a thin basis in research, is strongly associated with the interests or priorities of corporate elites, has a weak public mandate and arguably considerably forecloses the prospects of addressing structural stagnation problems. It warrants public outrage and reversal. <\/p>\n

Why does this matter? This debate is not purely academic or restricted to the domain of economics. The desire for a developmental programme is politically irrepressible in a country with SA\u2019s history. If the political centre continuously fails to offer an outlet for the aspirations of much of the public, political competition may cause violent challenges to the democratic system. <\/p>\n

Developmentalism has had an authoritarian edge in other contexts and it would be a surprise if postapartheid SA escaped a political brand of its own. It is correspondingly unsurprising to observe the recent Afrobarometer survey results showing the increasing popularity of military rule and the continued emergence of public figures adopting a militaristic posture. <\/p>\n

An antidote may be a developmentalist model that shows due appreciation for democratic values. For one reason or another contemporary elites in the political centre appear unwilling to entertain this idea and continue to toy with a range of trivial, nonsensical or empirically unsupported ideas promoted by corporate backers with motivations opaque to the public. It does not have to be so. <\/p>\n

Aboobaker researches and teaches development economics at the University of Manchester. Also read:<\/p>\n

Residential property market set for a boost on 3% inflation target<\/a><\/p>\n

SA businesses brace for trade dip despite lower inflation target, Sacci survey shows<\/a><\/p>\n

STUART THEOBALD: S&P upgrade sparks hope for SA\u2019s investment grade return<\/a><\/p>\n

Consumer inflation at more than one-year high<\/a><\/p>\n

Ratings upgrade and rate cut likely as SA targets lower inflation<\/a><\/p>\n

SA\u2019s 3% inflation target sets sights on price stability and investor confidence<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"The SA National Treasury\u2019s decision to lower the central bank\u2019s inflation target to 3% is hard to understand.…\n","protected":false},"author":2,"featured_media":144108,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[138,97178,97173,97183,97172,97179,97184,97177,219,97186,97181,76404,97176,3508,97175,97182,97185,97174,111,139,69,97187,97180],"class_list":["post-144107","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-corporate-influence-south-africa","tag-corporate-lobbying-sa","tag-democratic-mandates","tag-economic-growth-strategy-sa","tag-economic-implications","tag-economic-strategy","tag-economic-strategy-sa","tag-economy","tag-enoch-godongwana-inflation","tag-fiscal-targets","tag-growth-strategy","tag-inflation-targeting-debate","tag-interest-rates","tag-interest-rates-south-africa","tag-investment-demand","tag-macroeconomic-policy","tag-macroeconomic-policy-sa","tag-new-zealand","tag-newzealand","tag-nz","tag-south-africa-inflation-target","tag-state-capture"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/144107","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=144107"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/144107\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/144108"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=144107"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=144107"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=144107"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}