Inflation Targeting in South Africa

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DECLARATION

I, Pieter Frans Kruger, declare that the entire body of work contained in this assignment is my own, original work; that I am the sole author thereof (save to the extent explicitly otherwise stated), that reproduction and publication thereof by the Stellenbosch University will not infringe any third-party rights, and that I have not submitted it previously in its entirety or in part for obtaining any qualification.

19595956

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INFLATION TARGETING IN SOUTH AFRICA

Written by

         Pieter Kruger

19595956

1. Table of Contents

2.        Introduction        4

3.        What is inflation targeting?        6

4.        The appropriateness of Inflation Targeting        6

5.        Inflation Targeting in South Africa        7

6.        What are the advantages of inflation Targeting to an economy?        9

7.        What are the disadvantages of inflation Targeting to an economy?        10

8.        Preconditions for inflation targeting        10

9.        Inflation targeting, economic growth and employment        11

10.        Is inflation targeting still relevant today        11

11.        Conclusion        12

12.        List of Sources        13

1. Introduction

Over the last 30 years the South African Reserve Bank (SARB) has followed three very distinct policy regimes when it comes to inflation targeting. During the early eighties when South Africa was isolated from the international community the Reserve Bank monetary policy in containing inflation was not very successful.

The second period pre 2000 and after South Africa became a democratic state the SARB under the leadership of Chris Stals had better results in maintaining lower inflation through informal inflation targeting.

The period after 2000 till present, saw the SARB follow an explicit inflation target regime which has been moderately successful. This framework was implemented by the SARB when monetary policy placed considerable emphasis on price stability to bring inflation rates down.

The main objective of the SARB which have has been consistent over time is the protection of the value of the rand by maintaining a stable inflation rate and stable exchange rate. Although the SARB managed to maintain stable inflation movements it was less successful with regard to keeping the exchange rate stable. Although comparing the implicit period with the explicit inflation regime it has been more successful in keeping average inflation levels lower.

Although economists have a general consensus that monetary policy should be focussed on price stability many still have different options on how this can be achieved. Many countries across the globe(“Central Bank News: Inflation Targets,” 2016) have adopted inflation targeting in their monetary policy  framework and New Zealand was the first country to adopt this strategy in 1990 followed by countries such as Brazil, Chile , Australia, Canada, UK and Sweden shortly after that. Today over 58 countries have set an inflation target policy as part of their monetary policy framework. South Africa adopted inflation targeting as a formal framework on their monetary policy on 23 February 2000 and in 2002 a target was specified on the basis of a CPI rate of between 3% and 6%(“Central Bank News: Inflation Targets,” 2016) and this has been in place ever since.

While the evidence with respect to inflation targeting in countries who have adopted it is generally positive, the jury is still out if inflation targeting has delivered the results as a monetary policy objective.

In this paper I will address the reasoning why inflation targeting was introduced in South Africa, the flexibility of the framework of inflation targeting, advantages to other alternatives and if this monetary policy objective is still relevant today.

Figure 1: Inflation targeting countries