Economists back SARB’s new 3% inflation target
Ogone Tlhage
Local economists say the South African Reserve Bank’s (SARB) plan to adopt a stricter 3% inflation target is likely to usher in a lower and more stable price environment across the region, with Namibia set to benefit through reduced inflation and eventually lower interest rates.
The shift follows a recent announcement by South Africa’s finance minister, Enoch Godongwana, that the SARB will move to a 3% inflation target with a 1% tolerance band. As the anchor economy in the Common Monetary Area (CMA), South Africa’s monetary stance effectively guides interest-rate decisions in member countries, including Namibia.
Simonis Storm economist Almandro Jansen said the new target immediately limits how far the Bank of Namibia (BoN) can diverge from South Africa’s rate path.
“For Namibia, the immediate implication is that BoN has less room to aggressively cut rates, as doing so would widen the interest-rate gap with South Africa and risk capital outflows, pressure on foreign-exchange reserves, and ultimately pressure on the currency peg,” Jansen said.
In the longer run, he noted, Namibia stands to gain from importing a lower inflation environment.
“This means that, once South Africa has successfully cemented its 3% target, Namibia should likewise experience a lower structural level of domestic inflation and, eventually, a lower domestic interest-rate regime, including a reduced prime rate over the cycle.”
Lower borrowing rates expected
Academic Dr Omu Kakujaha-Matundu agreed that anchoring inflation to a lower target could strengthen confidence in the economy.
“Prices will now generally be lower. With low inflation comes low interest rates, which is good for consumers and for government debt cost, particularly us that have huge domestic debt,” Kakujaha-Matundu said.
However, he warned that the shift may be met with resistance from labour unions seeking wage increases. “The unions may not be happy as they are accustomed to asking for 5% or 10%, so they will have to get accustomed to a lower inflation,” he said.
He added that reaching the lower target could require short-term pain. “To get to a lower target, in the short run, you may have to make sacrifices like hike interest rates, which may result in loss in output, but that is temporary,” Kakujaha-Matundu said.
Independent ecnonomist Herbert Jauch stressed that the new framework leaves the BoN with less flexibility. “Any decision of the SARB affects Namibia and only minor deviations are possible under the current pegging arrangement,” said Jauch.
Central bank sees long-term benefitsIn a statement issued this week, the BoN said the SARB’s lower inflation target is expected to lead to reduced inflation and softer interest rates in South Africa over the medium to long term.
The bank’s analysis shows that Namibia would also experience more stable and lower inflation as a result.
“An analysis carried out by the BoN has found that a lower inflation target of 3% in South Africa will result in low and stable long-term inflation in Namibia, which is ultimately good for the objective of price stability. Moreover, the eventual decline in inflation is expected to lead to a reduction in interest rates in the medium term,” it said.
Local economists say the South African Reserve Bank’s (SARB) plan to adopt a stricter 3% inflation target is likely to usher in a lower and more stable price environment across the region, with Namibia set to benefit through reduced inflation and eventually lower interest rates.
The shift follows a recent announcement by South Africa’s finance minister, Enoch Godongwana, that the SARB will move to a 3% inflation target with a 1% tolerance band. As the anchor economy in the Common Monetary Area (CMA), South Africa’s monetary stance effectively guides interest-rate decisions in member countries, including Namibia.
Simonis Storm economist Almandro Jansen said the new target immediately limits how far the Bank of Namibia (BoN) can diverge from South Africa’s rate path.
“For Namibia, the immediate implication is that BoN has less room to aggressively cut rates, as doing so would widen the interest-rate gap with South Africa and risk capital outflows, pressure on foreign-exchange reserves, and ultimately pressure on the currency peg,” Jansen said.
In the longer run, he noted, Namibia stands to gain from importing a lower inflation environment.
“This means that, once South Africa has successfully cemented its 3% target, Namibia should likewise experience a lower structural level of domestic inflation and, eventually, a lower domestic interest-rate regime, including a reduced prime rate over the cycle.”
Lower borrowing rates expected
Academic Dr Omu Kakujaha-Matundu agreed that anchoring inflation to a lower target could strengthen confidence in the economy.
“Prices will now generally be lower. With low inflation comes low interest rates, which is good for consumers and for government debt cost, particularly us that have huge domestic debt,” Kakujaha-Matundu said.
However, he warned that the shift may be met with resistance from labour unions seeking wage increases. “The unions may not be happy as they are accustomed to asking for 5% or 10%, so they will have to get accustomed to a lower inflation,” he said.
He added that reaching the lower target could require short-term pain. “To get to a lower target, in the short run, you may have to make sacrifices like hike interest rates, which may result in loss in output, but that is temporary,” Kakujaha-Matundu said.
Independent ecnonomist Herbert Jauch stressed that the new framework leaves the BoN with less flexibility. “Any decision of the SARB affects Namibia and only minor deviations are possible under the current pegging arrangement,” said Jauch.
Central bank sees long-term benefitsIn a statement issued this week, the BoN said the SARB’s lower inflation target is expected to lead to reduced inflation and softer interest rates in South Africa over the medium to long term.
The bank’s analysis shows that Namibia would also experience more stable and lower inflation as a result.
“An analysis carried out by the BoN has found that a lower inflation target of 3% in South Africa will result in low and stable long-term inflation in Namibia, which is ultimately good for the objective of price stability. Moreover, the eventual decline in inflation is expected to lead to a reduction in interest rates in the medium term,” it said.
