Inflation and growth in south africa cambridge journal of. A proposed programme for implementation by the central bank of nigeria 3 provide an input into addressing these issues, especially as regards resolving the technical, administrative and practical problems for a transition to inflation targeting as a framework for monetary policy in nigeria. Since the 1990s, inflation targeting was used more and more in sa, but in an informal and eclectic way. Central banks use interest rates to steer price increases toward a publicly announced goal sarwat jahan. Inflation targeting appears to have been successful in increasing the transparency of monetary policymaking and in lowering significantly the rate of inflation in these countries, without any negative consequences for output. This volume focuses on the experiences of brazil, chile, czech republic, indonesia, south. In south africa, formal inflation targeting was adopted by south african reserve bank sarb in the february of 2000, with an objective of maintaining cpix1 inflation between the targetband of 3 percent to 6 percent by 2002, using discretionary changes in repurchase repo rate as its main policy instrument. By december 2001, the governor of the south african reserve bank, after reading the latest statistics, was concerned with the disappointing economic data. Identifying monetary policy rules in south africa with inflation. The journey to inflation targeting international monetary fund. A twoyear phase in period followed, with the 2002 target set at 3% to 6% for the annual average cpix inflation rate. South africas annual inflation rate was 4,5% in january, higher than that recorded in december 4,0% and november 3,6%. Since the introduction of the inflation targeting monetary policy, the country largely succeeded in containing.
South africa is among a number of countries that have adopted inflation targeting as their monetary policy framework since 1990. Jul 30, 20 on wednesday last week, statistics south africa statssa released the june consumer price index numbers. Inflation targeting monetary policy, inflation volatility. Mar 10, 2010 inflation targeting is the right policy for south africa, the international monetary fund imf said on wednesday. Repo rate raised by 400 basis points in four steps. Economic activity had slowed drastically, to the point that the country appeared to be heading for a recession. Inflation targeting has its flaws but is the least bad option for south africa as monetary policy should be used to create price stability, central bank deputy governor kuben naidoo said on. Prior to adopting the inflation targeting framework, the bank had adopted a number of frameworks.
During the first period, from 1980 to 1989, monetary policy was not successful in containing inflation. There is evidence of growing concern regarding south africas. However, in the empirical literature there is no consensus on the existence of a phillips curve in present times. Main drivers of sas inflation rate south african market. At the time of the announcement the cpix rate was near 7%. Vermeulen september 11, 2015 abstract it is often publicly contended that overly strict application of ination targeting sties employment growth in south africa, with the phillips curve often cited as seemingly authoritative reference. It gives me great pleasure to welcome you all to the biennial conference of the south african reserve bank. Headline inflation surprised the market by only increasing 5. A strong negative relationship between inflation and growth is suggested in figure 1. Advantages and disadvantages of inflation targeting 12 2. Another way of viewing this relationship is to note that, for the given sample period, the average of the ten best years of growth in south africa of 6. Features of inflation targeting as a type of monetary strategy 41 state a desired target range for inflation usually around 1. South africa had formally introduced a policy of inflation targeting it in february 2000.
In south africa the 1970s were a decade of high inflation compared with the 1960s. South africa is an uppermiddleincome economy one of only eight such countries in africa. Many of the countries studied proved that inflation targeting had made a positive difference to their economies. The south african reserve bank sarb moved to an official inflation. This study indicates that inflation targeting is an appropriate framework for monetary policy, particularly when there is a dire need for reducing high and volatile inflation. A twoyear phasein period followed, with the 2002 target set at 3% to 6% for the annual average cpix inflation rate. Fourth, the average reliance on seigniorage and the recent inflation performance in a number of highmiddleincome developing countries israel, korea, mexico, and south africa do not seem much different from the averages recorded by the seven inflationtargeting. Fourth, the average reliance on seigniorage and the recent inflation performance in a number of highmiddleincome developing countries israel, korea, mexico, and south africa do not seem much different from the averages recorded by the seven inflation targeting countries immediately before they adopted this approach. Inflation targeting in south africa darden business publishing. South africas annual inflation rate nudged up to 4,6% in february from januarys 4,5%, inching past the 4,5% midpoint of the south african reserve banks monetary policy target range. Speech by mr t t mboweni, governor of the south african reserve bank, at the bissarb reserve. Following this discussion the paper reflects on the current global crisis and the impact it has had on monetary policy and inflation targets among african countries. The initial phase of the explicit inflation targeting regime in south africa lasted.
Expansionary monetary policy coming to south africa 18 june. Inflation targeting framework south african reserve bank. Inflationtargeting is the right policy for south africa, the international monetary fund imf said on wednesday. It discusses the implications and relative merits of such a framework for south africa, and concludes that it would be feasible and desirable for south africa to adopt explicit inflation targeting. Basically south african consumers have very little control over the rate of inflation in south africa, and south africa has a underlying rate of inflation that regardless of all the other factors will always be there, due to lack of competition for certain products, large amounts of regulated prices and other inherent issues such as the 10%. There has been an ongoing debate on whether inflation targeting is appropriate for the. Data, policy advice and research on south africa including economy, education, employment, environment, health, tax, trade, gdp, unemployment rate, inflation and pisa. This places inflation right on the 4,5% midpoint of the south african reserve banks monetary policy target range. South africas inflation experience points to several lessons for existing and potential emerging market and transition economies with some form of inflation targeting. Egypt inflation rate 19582020 data 20212022 forecast. Inflation targeting in south africa is characterized by an announcement of a numerical target for the inflation rate that is intended to be achieved over a specific time period. Inflation targeting has been a successful monetary policy. In south africa, formal inflation targeting was adopted by south african.
However, south africa has missed its set inflation targets five times over the past ten years which brings about questions regarding the effectiveness of the inflation targeting as a monetary policy framework in south africa kahn, 2010. The nonlinear phillips curve and inflation forecast targetingsymmetric versus asymmetric monetary policy rules eric schaling 1 department of economics, rau, po box 524, 2006 auckland park, johannesburg, republic of south africa december 1998 abstract we extend the svensson 1997a inflation forecast targeting framework with a convex. Pdf in this study we focus on the south african experience with inflation targeting. Imf working papers describe research in progress by the authors and are published to. In any case, if the inflation rate is close to 8%, it still seems wise to follow a policy countering a general increase in prices, because it could easily move to levels above 8% and accelerate further. Expansionary monetary policy coming to south africa 18. The annual inflation rate in south africa fell to 4.
Inflation at 6%, hitting the ceiling of the sarb inflation. The initial target measure was the cpix, which was defined as the consumer price index for metropolitan and other urban areas, excluding the interest cost on mortgage bonds. Targeting inflation, a monetary policy strategy which has been successfully used by a number of industrialized countries, has thus become an increasingly attractive alternative that has been adopted by a growing number of emerging market countries, including chile, brazil, the czech republic, poland and south africa. With the global financial crisis becoming a global economic crisis, the south african economy is facing challenges both from external and domestic quarters in terms of lower aggregate demand.
On wednesday last week, statistics south africa statssa released the june consumer price index numbers. The key issue facing central banks as we approach the end of the. Inflation targeting is increasingly seen as the best practice for central bank policy in many economies around the world, including a growing number of developing countries. Merits of inflation targeting in south africa 16 2. Biennial conference of the bank fourteen years of inflation targeting in south africa and the challenge of a changing mandate, pretoria, 30 october 2014. The appropriateness of inflation targeting in south africa is examined. The relative merits and implications of inflation targeting. It was only in the 2000 budget that formal inflation targeting was introduced. Since 1980 there have been three distinct monetary policy regimes in south africa. In south africa, formal inflation targeting was adopted by south african reserve bank sarb in the february of 2000, with an objective of maintaining cpix1 inflation between the target band of 3 percent to 6 percent by 2002, using discretionary changes in repurchase repo rate as its main policy instrument. South african reserve banks policy rate adjustments. Inflation targeting in south africainflation targeting in south africa official target range of 3 to 6 percent of cpix formalised since february 2000 it has remained within the target range since september 2003 sarb has been remarkably successful in bringing inflation under control during the past four years.
Inflation targeting in emerging market countries frederic s. In this definition it is important to note that inflation targeting is a framework, not a rule. In 1990s, after the failure of monetary and nominal exchange rate targeting to reduce inflation rates, inflation targeting it is implemented successfully in some developed countries, which encouraged developing and transition countries fighting against the. Inflation targeting monetary policy, inflation volatility and. It was the lowest inflation rate since last december, as prices slowed mostly for transport 3. Target modified from 35 per cent in 2004 to 36 per cent. Inflation targeting in south africa had been debated for many years prior to its formal announcement in the february 23, 2000, budget speech. Oconnell1 january 4, 2010 in an inflation targeting it framework, the central bank commits to a publicly announced numerical range for inflation, subordinates other intermediate targets, and institutionalizes its commitment through a set of mechanisms that emphasize. Prior to adopting the inflationtargeting framework, the bank had adopted a number of frameworks. The monthly increase is the largest since june 2008 1,4%. Inflation and growth in south africa cambridge journal. The main contributors to the 4,5% rate were food and nonalcoholic beverages. Hitting the ceiling of the south african reserve bank sarb inflation target range, the cpi comes in at 6% this month, with a 1,3% monthly increase. In recent years, many central banks, the makers of monetary policy, have adopted a technique called inflation targeting to control the general rise in the price level.
In the following sections we will try to argue that. Pdf inflation targeting monetary policy and unemployment. This report on adopting inflation targeting describes the tradeoffs raised in. Egypts annual inflation rate slowed for the second straight month to 5. The economy of south africa is the second largest in africa, after nigeria. Monetary policy appropriateness in south africa the design and implementation of monetary policy in south africa has been based on the idea of a tradeoff between inflation and output growth. Appropriateness of inflation targeting in south africa. South africa inflation rate 19682020 data 20212022. Such a framework was implemented in south africa when the south african government adopted an inflation target of 3 to 6 percent for the year 2002, as announced by the minister of finance in his budget speech on. While there is a time and a place for inflation targeting and contractionary monetary policy increasing interest rates the world is evolving and so are. This is under debate within the fed, since inflation targeting is usually very successful in other countries because of its transparency and predictability to the.
The theme this year is fourteen years of inflation targeting in south. The effects of inflation targeting on economic growth in south africa. South africas central bank defends inflation targeting. Inflationtargeting the right policy for sa the mail. Tilburg university the nonlinear phillips curve and. To date, inflation targeting has not made inroads into african economies, with only ghana and south africa having formally adopted this policy regime. Between 1960 and 1998, these included exchangerate targeting, discretionary monetary policy, monetary. Is there a case for formal inflation targeting in subsaharan. Since 1996, at the end of over twelve years of international sanctions, south africas gross domestic product almost.
Monetary policies and inflation targeting in emerging. Imf managing director dominique strauskahn said the policy, however, had to be. Inflation at 6%, hitting the ceiling of the sarb inflation target range. While price stability was pursued, the time period over which this would be achieved was not specified. So in recent months there has been a lot of noise regarding the south african reserve bank sarb and its mandate and whether inflation targeting is still the best mandate for south africa. Inflation targeting in south africa continued inflation targeting in south africa continued cpix inflation in 2002 averaged 9,3% peaked at 11,3%. Inflation targeting provides a monetary policy framework within which policy actions are guided by expected future inflation relative to an announced inflation target green, 1996. There is no obvious theoretical consensus that inflation targeting could affect output growth. South africa has adopted flexible inflation targeting, wherein considerations for other macroeconomic variables are prioritized. Is there a case for formal inflation targeting in sub. As a regional manufacturing hub, it is the most industrialized and diversified economy on the continent. South africa formally adopted an inflation targeting monetary policy regime in february 2000.
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