Experience of

Inflation Targeting
in South Africa
 Growing
Growing consensus...
consensus...

„ Pursuit of price stability: focusing on medium-

to long-run goal of monetary policy.
„ Focus on price stability resulted in greater
moves towards central bank independence.
„ Although there is agreement on goals, there is
variation on choice of operational or
intermediate targets that guide the
implementation of policy.
 South
South Africa’s
Africa’s pre -inflation targeting
pre-inflation targeting
policies
policies

1986 - 89 Money supply targets

1990 - 99 Money supply guidelines
within the framework of the
“eclectic approach”. No
explicit inflation target.
M3 the key intermediate
target. Hitting the M3 target
was more the exception
than the rule.
2000 - Inflation targeting with
indirect controls
Money
Money supply
supply targeting
targeting did
did not
not work
work well,
well, partly
partly because
because the
the
velocity
velocity of
of circulation
circulation of
of M3
M3 fluctuates
fluctuates considerably
considerably
Income
Income velocity
velocity of
of circulation
circulation of
of M3
M3
Ratio
 The
The eclectic
eclectic approach
approach

„ Included focus on a broad range of

intermediate targets
„ bank credit extension, overall liquidity in the
banking sector
„ yield curve and interest rates
„ exchange rate, bop and reserves
„ prices of financial assets
 Problems
Problems encountered
encountered

„ Objective of monetary policy was unclear,

seemed to change
„ No clear accountability
„ Informal inflation target 1-5 %
„ No specified time frame
„ High degree of real interest rate variability
 Inflation
Inflation targeting
targeting introduced
introduced

„ Traditionally, central banks used

intermediate targets (monetary aggregates or
the exchange rate) to achieve price stability.

„ Internationally, 1990s saw a move in a number

of countries to targeting inflation directly and
by February 2000 most of the important pre-
requirements for an inflation targeting
monetary policy framework had been met in
South Africa…..
 Modelling
Modelling in
in an
an inflation
inflation targeting
targeting
framework
framework

„ Inflation target becomes the primary objective

of monetary policy
„ Main emphasis of modelling shifted to inflation
forecasting
„ Move from a big model to smaller core model
 Greater
Greater emphasis
emphasis also
also placed
placed on:
on:

„ Improving analysis of the transmission

mechanism

„ Developing better forecasting models

 Setting
Setting of
of Policy
Policy Rate:
Rate:

„ The Bank’s policy intervention rate (the

repurchase rate) is set at a level consistent
with future inflation remaining within or close to
the inflation target interval.
CPIX
CPIX forecast
forecast

4,5
4.5
 Inflation
Inflation targeting
targeting in
in South
South Africa
Africa

„ Inflation target is set by government. The

Minister of Finance takes it to cabinet following
consultation between National Treasury and
the Reserve Bank.
„ Price index chosen is the headline CPI
excluding mortgage interest cost (CPIX).
„ No specific sanction or obligation if target is
missed. Governor reports quarterly to
Parliament, where any target misses would be
explained.
 Inflation
Inflation targeting
targeting in
in South
South Africa
Africa
(continued)
(continued)

„ Decisions made by Monetary Policy

Committee, meeting over two days every two
months.
„ Decision-making by consensus
„ Minutes not released but detailed statement
after each MPC meeting.
„ SARB also issues an inflation report (Monetary
Policy Review) twice a year.
„ Monetary Policy Forums held twice a year in 9
centers around the country.
 Inflation
Inflation targeting
targeting in
in South
South Africa
Africa
(continued)
(continued)

„ Initial target was for 3-6% for 2002. Later

targets for 2003 and 2004 set at 3-6% and 3-
5% respectively.
„ CPIX inflation was on an upward path when
the IT regime was introduced (at 7 %), peaked
at 8,2% in August 2000 and then fell below
6% in September and October 2001.
„ Late 2001: currency depreciated by about 37
per cent.
 Inflation
Inflation targeting
targeting in
in South
South Africa
Africa
(continued)
(continued)

„ CPIX inflation in 2002 averaged 9,3% (Peaked

at 11,3%). Repo rate raised by 400 basis points
in four steps.
„ Target modified from 3-5 per cent in 2004 to 3-6
per cent.
„ Key issue: pass-through effect of exchange rate
changes on prices.
„ Initially pass-through had been unexpectedly
low. When the depreciation accelerated, inflation
picked up quickly.
„ Currency recovered during 2002-3, helped
reverse the upward inflation trend.
 Inflation
Inflation targeting
targeting in
in South
South Africa
Africa
(continued)
(continued)

„ In November 2003 the target was changed

from a calendar year average to a continuous
one.

„ The CPIX inflation rate moved into the target

range in September 2003 and has remained
there since. This allowed for a reduction of
interest rates of 650 basis points since June
2003.
Inflation
Inflation and
and interest
interest rates
rates in
in South
South Africa
Africa

Prime overdraft rate

6%

3%
 Advantages
Advantages of
of inflation
inflation targeting
targeting

„ More easily understood

„ Enhances transparency
„ Improves co-ordination between fiscal and
monetary policy: budget targets have to be
consistent with a projected inflation path.
„ Increased co-ordination helps build credibility
of macroeconomic frameworks
„ Forward looking, avoids stop-go policies and
should achieve smoother cycles.
 Practical
Practical problems
problems

„ Open economy, sensitive to exchange rate

and oil price movements
Exchange
Exchange rate
rate and
and price
price levels:
levels: “Imported”
“Imported”
inflation
inflation in
in 2001
2001 -- 2002
2002

Exchange rate: Rand price of

foreign exchange

SA PPI:
Imported goods

Foreign production prices

 Only
Only partial
partial pass -through to
pass-through to consumer
consumer prices:
prices:
SA
SA production
production and
and consumer
consumer goods
goods price
price levels
levels

PPI: Domestically
Exchange rate: Rand price of
produced goods
foreign exchange

CPIX: Goods
SA PPI:
Imported goods

PPI: Imported goods

Foreign production prices

As
As elsewhere
elsewhere in
in the
the world,
world, energy
energyprices
pricescan
canupset
upsetprice
pricedevelopments in
developments in
South
SouthAfrica.
Africa.
Prices
Prices of
of oil
oil and
and petrol
petrol

Crude oil – US dollar

Crude
oil -
rand

Petrol -
rand
Export
Export price
price developments
developments may
may also
also affect
affect the
the exchange
exchange rate
rate and
and inflation
inflation process
process
Prices
Prices of
of South
South African
African non -gold commodity
non-gold commodity exports
exports

Rand
<

US
dollar
>
Exchange
Exchange rate
rate and
and SARB’s
SARB’s International
International Liquidity
Liquidity Position
Position
Forex
Forexintervention
interventionin
in1998;
1998;neutrality
neutrality in
in 2001.
2001. Currently
Currently aa structura
structurall reserve
reserve
strengthening
strengtheningstrategy
strategy

No forex
intervention

Forex
intervention
CPIX
CPIX is
is targeted,
targeted, not
not asset
asset prices
prices

Houses

Bonds

Shares

Money-
market
investments
All
All in
in all,
all, interest
interest rate
rate volatility
volatility has
has been
been
reduced
reduced under
under inflation
inflation targeting
targeting

Inflation
targeting
era
 Conclusion
Conclusion

„ Inflation targeting makes inflation (rather

than output or unemployment) the primary
goal of monetary policy;

„ Although not an intermediate goal of

monetary policy, we believe low and stable
inflation is supportive of sustainable
growth and employment creation;

„ By 2005 more than 20 countries were

official inflation targeters;
 Conclusion
Conclusion

„ Greater transparency
„ Broader decision making

„ Monetary policy decisions have become

focused on the longer-term target and
have brought less variability of interest
rates;

„ Inflation targeting has played a role in

strengthening the effect of forward-looking
expectations on inflation.
 ItIt can
can be
be concluded,
concluded, further..
further..

„ …that the introduction of inflation targeting has

benefited the implementation of monetary
policy in our country. The application of this
framework has strengthened the Reserve
Bank’s resolve to focus on Price Stability and
assisted in bringing inflation down to low
levels. It has also provided an anchor for
expectations of future inflation, which
influences price and wage setting, in a way we
did not foresee when the approach was first
introduced.
Thank you!
CPIX
CPIX and
and headline
headline inflation
inflation

CPIX

CPI