Inflation Targeting in South Africa
22 Pages Posted: 21 Oct 2008
Abstract
South Africa had formally introduced a policy of inflation targeting (IT) in February 2000. By December 2001, the governor of the South African Reserve Bank, after reading the latest statistics, was concerned with the disappointing economic data. Economic activity had slowed drastically, to the point that the country appeared to be heading for a recession. The gloomy statistics forced the governor to consider whether the country had pursued the right policy. Persistently high unemployment, one legacy of the apartheid era, meant that South Africa did not have the luxury of waiting for new policies to bear fruit. With the inflation forecast to exceed the mandated target, the governor would have to tighten monetary policy, which would further restrict investment. Was it is time for South Africa to change course?
Excerpt
UVA-BP-0507
Rev. Dec. 22, 2015
Inflation Targeting in South Africa
Tito Mboweni was troubled. After a long debate (and not without controversy), South Africa had formally introduced a policy of inflation targeting (IT) on February 23, 2000, just six months after he had been appointed governor of the South African Reserve Bank (SARB). In the years preceding this new policy, inflation had trended downward, albeit with periodic surges (Figure 1). Mboweni believed the ad-hoc, opaque targeting of inflation that guided SARB policy decisions over the previous few years should be replaced by an explicit, transparent, rules-based target. Others worried that a strict IT policy would unnecessarily tie the SARB's hands, that discretionary monetary policy could be a powerful tool the SARB should not discard.
Figure 1. Inflation and the discount rate (through February 2000).
Sources: International Monetary Fund, Haver Analytics.
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Keywords: inflation targeting, unemployment, monetary policy, investment
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