The South African Reserve Bank (SARB) kept the interest rate unchanged at 8.25% at its Monetary Policy Committee meeting on March 27. A continued restrictive monetary policy to curb inflationary pressures means the cost of credit increases, and consumers have less income to save, thus negatively affecting their spending.
Companies' interest rate servicing costs remain high and they have a low appetite for credit, inhibiting their growth prospects and ability to produce more products and provide additional services. Overall, the nation’s investment potential for growth and development is suppressed.
With a mandate to keep inflation within the 3% to 6% band to ensure financial stability, the SARB adopts a monetarist perspective on inflation, which believes inflation stems from market demand because of growth in money supply or excessive availability of income.
While some economists and researchers support the austerity stance implemented by the SARB to contain inflation over the past year, others argue it is the increase in interest rates that has contributed to the country’s low growth, with Statistics South Africa reporting low growth figures of 0.1% in Q4 of 2023, which subsequently translates to high unemployment of 32.1%.
Inflation targeting, which is widely adopted by some central banks worldwide, was first introduced and adopted by New Zealand in 1990. The Reserve Bank of New Zealand’s introduction of a 2% target did not emanate from empirical study but from an anecdotal response by the country’s then minister of finance, Roger Douglas, in his desire to ideally bring the country’s inflation rate from a high 15% to between 0% and 1%. After the pronouncements at that public interview, the Reserve Bank of New Zealand felt pressure to back up the finance minister and set a target of 2%.
Canada and England followed suit, also setting targets of 2%, and the inflation-targeting gospel grew in popularity across the world to either manage the exchange rate or money supply. Brazil adopted inflation targeting in 1999, followed by South Africa (2000), Ghana (2007), the US (2012), Japan (2013), Russia (2014), and India (2016).
According to a Cbonds 2021 report, only 55 of 195 countries have adopted the framework either as a fixed percentage or band in the form of one-year or multi-year inflation targets.
Before the 1990s, no central bank had a set numeric inflation target.
South Africa adopted an inflation-targeting monetary policy framework, which entailed regular inflation forecasting by applying a macroeconomic model developed from a diverse range of financial and economic equations. The former governor of the SARB, Tito Mboweni, welcomed inflation targeting in South Africa. During his address at the biennial Congress on the Economic Society of South Africa in 1999, he stated the collaborative role inflation targeting would need to play in the country’s broader macroeconomic objectives.
Inflation targeting is based heavily on forecasting past occurrences to predict future price developments, with the risk of destabilising because of exogenous supply factors. For this, a range of instruments needs to be in effect because inflation targeting alone is ineffective.
The SARB has an institutional dependence on interest rate control and any other instrument it would deem fit to address the country’s structural issues, in coordination with macroeconomic policies, to reverse South Africa’s growth and unemployment crises
According to Mboweni, inflation targeting should align and be consistent with macroeconomic objectives and effectively support well-coordinated economic policies. This coordination of monetary and fiscal policy enables the achievement of the broader economic objectives of sustainable high economic growth and employment creation through the deployment by the SARB of any instrument to meet the overall objective.
Mboweni further stated increases in money supply are a precondition of general price increases, which affect the inflation rate. However, money supply is not the only determining factor of inflation, and interests are not the only instrument that can be deployed to maintain price stability. In the same way, the consumer price index is a preferred indicator and not a prescribed indicator to measure inflation, but there is no international consensus on its adoption. Any index or combination that encompasses all changes in the cost of living suffices, including indices that capture exogenous and unpredictable price movements.
In ensuring the public credibility of the SARB, Mboweni said its objective should not be to contain inflation targeting at all costs.
“A misconception that the central bank is not concerned about economic growth and unemployment must be removed. It is important the public does not get the impression the central bank is dogmatic about the containment of inflation and does not care about the other critical issues of importance to the economy,” he said.
A monetarist approach is undoubtedly more dogmatic than it is flexible, and it encompasses the current realities of our economic climate and ordinary South Africans, which the SARB serves.
Mboweni’s integrated approach to inflation targeting aligns with the structuralist perspective, which sees inflation as an expected result of the growth and development process, suggesting the government has no choice but to welcome inflation as the price for rapid growth and development. Therefore an austerity approach to inflation targeting poses risks of dampening the economic growth and development process.
When regulators believe domestic supply is determined by inflation, an increase in inflation will suppress market supply (as the cost of production rises), creating a supply shortage of goods/services in relation to the market demand. Market demand is thus overwhelmed by the increases in prices. Because market supply slowly adjusts to consumer or business demand pressures, the premature implementation of restrictive monetary policy imposes a further hindrance on the rate at which supply needs to adjust to meet demand, thus harming growth and development prospects.
India, one of the fastest growing emerging economies known in history, uses the wholesale price index for all commodities to measure inflation, which is not surprising considering its growing industrial prowess. Its monetary policy is designed and implemented to ensure price stability while considering the objective of economic growth, with an inflation target of 4% for sustainable economic growth. China controls inflation through subsidies and price control measures.
In a recent interview with CNBC, Reserve Bank governor Lesetja Kganyago said structural changes are needed for South Africa’s economy to grow again. The governor did not get into the specificities of the structural changes, as it would have been interesting to hear from the SARB perspective and the role it can play in collaboration with government in addressing them. What new instruments can be deployed to address the country’s perpetual threat of unemployment, poverty and inequality?
Former president Kgalema Motlanthe, in his address at the 90th anniversary of the Reserve Bank in 2011, said monetary policy alone cannot lead to sustained economic growth because structural changes and interventions are needed.
In 2011 the country needed to grow by 7% for 25 years to achieve its growth objectives. However, the structural issues of energy, logistic infrastructure (ports and transport), communications network infrastructure, high cost of doing business and labour market constraints and skills persist today.
The SARB has an institutional dependence on interest rate control and any other instrument it would deem fit to address the country’s structural issues, in coordination with macroeconomic policies, to reverse South Africa’s growth and unemployment crises.
Mathenjwa holds an MPhil economics in industrial policy, from the University of Johannesburg. She is president of the Young Global Economists Society and a Mandela Washington Fellow.
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