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You're listening to Strictly Business
Podcast with Lindsay Williams.

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The South African economy is stuttering.

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GDP is anemic, the PMI in negative
territory, and I think that's seven months

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in a row.

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And also business confidence is under
pressure.

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But on the upside, the round is stable,
the bond market nice and steady,

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and inflation well below the South African
Reserve Bank's 3% to 6% target range.

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So is it time for change when it comes to
that target range?

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With me is Vivian Tabra.

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investment director at 91 in Cape Town.

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Inflation is doing well.

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Let's start with that, Vivian, and then
move on to is the 3% to 6% still relevant?

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Yes.

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So, inflation is doing well.

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I think although the last print was a
little bit higher than was expected for

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the first time in many months,

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what we did see was we saw that the
surprise really came through on the food

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side and that can be explained away,

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but there was still a positive of surprise
on the core side.

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So inflation is very much under control.

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I think the market is generally expecting
inflation now to turn upwards into the

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back part of this year and gradually

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converge back to 4.5%.

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But I think if we look at where the rand
is now, we've actually got a stronger rand

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again,

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and we look at sort of the international
situation, and we look at the anemic

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growth that you've mentioned,

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there's a chance that those forecasts are
going to be revised down again.

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and that we're going to see inflation
better behaved for longer because there's

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certainly no demand pressure in the
economy

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at all.

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I like that phrase, by the way, better
behaved for longer.

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And this is where we lead on to inflation
targeting.

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Is it time to change?

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But anyway, finish what you were going to
say and then we'll move on to that knotty

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problem.

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Yes.

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And I was going to say, certainly our
governor believes that it's time to

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change.

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And I think the timing is good.

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generally at a time when inflation is well
contained, it is behaving well,

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it's the time where the costs of sort of
moving to a lower target are going to be

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lower.

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Those short-term costs that the market is
likely to have to bear.

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What difference does it make and why do we
have this target range?

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I mean, is it as simple as this to a
layman?

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If it goes above 6%, say, given the
current range, then you raise rates.

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If it goes below 3%, then you cut rates.

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Obviously, there are lots of other factors
to take into consideration, but that's

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what many people believe.

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Yes, and that is a very simplistic way to
look at it.

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But essentially, what we need is we need
anchored inflation, anchored inflation

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expectations.

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It drives stability in the economy.

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It drives growth.

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It helps with so many different things.

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It helps protect the value of the rand.

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So there are so many positives from having
well-contained inflation.

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And if we look at the paper that the
Reserve Bank put out around what they want

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to do and why they see inflation at

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a lower level.

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lower target level being so important, we
can understand what the impact would be.

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So, if we look at what's happening in
South Africa at the moment, debt interest

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costs are growing faster than nominal GDP.

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So, we're reaching a point where it's
difficult to stabilize things.

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Lower inflation, lower real interest rates
make it easier for the man in the street

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to budget,

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it makes easier for businesses to invest,
and it makes it then easier for the

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economy to grow.

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Let's look at that working paper that you
referenced there.

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It comes from the South African Reserve
Bank.

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I want to read something from it.

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It says here, an inflation target of 3%

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in tandem with a strategy that emphasises
short-term and inflation-linked borrowing

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could generate almost

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R870 billion in savings on debt service
costs over a decade.

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That's a really big number.

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Is it realistic?

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I think it is.

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They've done their homework well.

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It is very realistic.

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If we look at the shape of the South
African curve and we look at what we pay

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to issue bonds and we look at the real
interest

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rate that's being paid at the moment to
try and keep inflation at these lower

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levels,

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you can see how much is being spent on
debt service costs.

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So government spends 20% of its revenue on
debt service costs and 5% of GDP.

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That's a huge amount of money.

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If that is brought down, that money can be
spent on other things.

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things like infrastructure that will feed
back into the economy and give much more

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bang for back.

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The working paper does issue a warning
that says that not moving soon in reducing

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the inflation rate creates risk.

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That space to issue debt in the short end
of the yield will disappear.

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So clearly, the paper has a look at the
markets, a fixed income, for example.

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What do you think that the reduced
inflation target would do to the markets?

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Well, I think we've already seen that
the...

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the talk of the reduced inflation target
is positive for the markets.

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I mean, now sitting with a situation where
the South African 10-year yield has

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dropped below

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10% today for the first time in three
years.

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So that is a positive.

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Obviously, there are other drivers there
as well, but there's growing confidence

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that this is something that is imminent.

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So I think it is a positive for the market
overall.

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That is not to say that, you know, if we
land up with higher prints as we go

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through to the backside of this year, uh,

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It means that rates won't stay higher for
longer to sort of anchor inflation

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expectations.

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But it does mean that the positive impact,
certainly on the longer end of the curve,

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is starting to evidence itself.

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So the market is already factoring in a
potential change in targeting.

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There is, of course, a juggling act to be
done by the South African Reserve Bank's

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Monetary Policy Committee.

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And that is, of course, with growth.

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And if growth stays where it is.

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I mean, the last print we saw on a month
on month basis was.

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minus 0.1%. And the yearly figure, gosh,
it depends who you believe, but let's call

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it 1.1, 1.2%,

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something like that, Vivian.

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People are going to say, you can cut rates
now, please cut rates so that we can get

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the economy going.

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On the other hand, that does have
implications for inflation, as you've

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said.

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Yes,

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but also maybe somewhat less big
implications for inflation given the state

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of demand.

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And also given the composition of our
inflation basket.

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So really what we need for inflation to
stay lower for longer is we need those

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administered

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price levels to come down.

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We need them to rise in line with the
inflation target, where over the last few

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years,

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their increases have been way above the
sort of 4.5% level that the SAAB has been

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targeting.

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So that is quite key.

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What we don't want to see is we don't want
to see these.

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big increases in administered prices
continue to be the case because that is

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impacting on inflation

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expectations and that is stopping
inflation expectations from coming lower.

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The SAAB is hopeful that if the target is
lowered that inflation expectations

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will converge with that lower target by
the end of 2027 but a lot of that will

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depend on what happens to administered

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prices.

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Do you think that the government of
national unity will listen to words like

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yours and say, yes, you're absolutely
right,

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we have to control administered prices?

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Or is it too politically controversial?

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I think it's becoming less and less
politically controversial.

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I think we're sitting at the stage now
where the Department of Finance is now

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considering it.

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We had our Minister of Finance coming out
yesterday and saying that it is being

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looked at, the paper, but they're
undecided at the moment.

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But certainly the pressure is growing and
the pressure is growing from all sides.

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And actually, we even had the OECD come
out in the last day or two saying that

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they supported a

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lower inflation target for South Africa.

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And we are higher than our emerging market
peers.

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Most of our emerging market peers in Latin
America are sitting at 3%.

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And once you start looking at Asia, those
rates are even lower.

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A lot of them are at 2%.

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What do you think at 91?

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We think that they should move there.

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We do think that there is likely to be
some short-term pain.

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I don't think that can be avoided.

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But over the longer term, it is certainly
something that would be welcomed by 91 and

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by the markets generally.

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Vivian, thank you very much for your time
and your analysis.

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Vivian Tabor is Investment Director at 91
in Cape Town.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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since we are critically thinking human
beings these views are always subject to

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change revision and rethinking

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