A major labour federation has sharply criticised the proposal to lower South Africa’s inflation target, setting the stage for a contentious week of key economic announcements.
The South African Federation of Trade Unions (SAFTU) has publicly rejected the 3% inflation target advocated by the South African Reserve Bank (SARB), arguing that the move would harm economic growth, increase borrowing costs, and severely diminish consumers’ purchasing power.
This rejection comes after Deputy Finance Minister David Masondo defended the lower target, stating that a stable and reduced inflation rate supports economic competitiveness, boosts demand, lowers borrowing costs, and strengthens employment creation. He also noted that, politically, it could help prevent social unrest.
The debate unfolds ahead of two critical data releases: Statistics SA is set to publish the Consumer Price Inflation (CPI) figures for August on Wednesday, followed by the SARB’s interest rate decision on Thursday.
SAFTU issued a stark warning, stating that lowering the inflation target to 3% would result in “lower economic growth, higher borrowing costs, and diminishing purchasing power for consumers.” The union federation argued that with already sluggish growth prospects for 2025, such a move would undermine any progress toward easing the country’s “catastrophically high unemployment rates.”
“Reducing the inflation target will hamper job creation, lead to high indebtedness, and generally [create] an unviable economy,” a representative stated. The federation further cautioned that diminished purchasing power would lead to low consumer demand and, consequently, stifled economic growth.
In contrast, the executive director at the Centre for Risk Analysis offered a different perspective, suggesting that alignment between National Treasury and the Reserve Bank is positive. He pointed out that South Africa has lagged behind other emerging markets in lowering its target from the current 3-6% band.
“Overall, it’s the right kind of thing to aim towards,” he said. However, he cautioned that the path to achieving this goal must be carefully managed over the long term, not approached in a “bull in a China shop” manner.
He also highlighted significant external risks that could derail the implementation of a 3% target, factors beyond the control of the SARB and Treasury. These include the international oil price and the strength of the US dollar.
“We’re quite reliant and exposed to international oil price increases that then feed into domestic economic activity, manufacturing, etc.,” he explained.
Meanwhile, Old Mutual Group chief economist Johann Els provided insight into the upcoming SARB meeting. He expects the Monetary Policy Committee to hold interest rates steady on Thursday. Furthermore, he predicts no further interest rate cuts before 2027, but also does not foresee any hikes in the immediate future.
The disagreement between the labour federation and government officials underscores the difficult balancing act facing policymakers: taming inflation to ensure long-term stability without stifling the fragile economic recovery and exacerbating the nation’s unemployment crisis.