NEDLAC EXECUTIVE COMMITTEE DISCUSSES INFLATION TARGETING
At Nedlac's Executive Council meeting on 11 May senior
leadership of the four Nedlac partners of government, labour,
business, and community had an opportunity to discuss the issue of
inflation targeting. Governor of the Reserve Bank, Mr Tito Mboweni,
addressed the Council on the issue, explaining the South African
Reserve Bank's approach to inflation targeting.
The anchor of the Bank's monetary policy
The Bank has set a target band of 6 to 3 percent by 2002 on the
CPIX measure of inflation (headline consumer price index excluding
the effects of changes in the mortgage rate). The target was
decided upon by reaching consensus in the Monetary Policy
Committee, an internal Bank committee, based on input from the
Research Department of the Bank's forecasts. The Governor said that
comparing rates of inflation across countries, low inflation was
regarded as being between 1 and 2 percent and medium inflation 2 to
6 percent. This had been a factor in deciding on the target, but
they had also taken into account other local and global economic
and political developments such as fuel price movements, the
depreciation of the rand, the world economic outlook and political
developments in the region.
Policy co-ordination
The Governor said that the success of inflation targeting rested
on the improvement of policy coordination between the Bank, the
government and other stakeholders, including the Nedlac
constituencies. Monopoly pricing, high average wage increases, and
other similar factors could undermine inflation targeting. Nedlac
had a role to play in ensuring the success of the policy through
improving policy coordination.
The Rand
The Governor said there was often a fixation with the exchange
rate or the value of the Rand that ignored the secondary affects of
the changes in the value of the currency and concentrated on the
notion of a 'strong' currency being desirable. He said the
depreciation of the Rand had to be viewed in the light of the
performance of a number of other currencies, such as the euro and
the Australian dollar, which had also declined against the stronger
US Dollar. The Bank no longer concentrated on defending the
currency but allowed it to find its own level. As a result the net
open position of the Bank had declined significantly and the
objective of closing the forward cover book was in the process of
being realised.
Escape clauses
In response to a question from Business regarding the "escape
clauses", the Governor said that these would be used in the case of
extraordinary circumstances, such as significant external shocks,
but that the current situation did not warrant using them.
Regarding Community's question on the band, the Governor explained
that the Bank had set a range and not a point as a target to ensure
there was some room to manoeuvre.
Constituency responses
Business said that it agreed substantially with the Bank's
approach generally and specifically with regard to inflation
targeting. Labour agreed with the Governor's remarks on the role of
Nedlac in facilitating better policy coordination, but said they
still had concerns regarding the appropriateness of inflation
targeting as a tool and on the costs of achieving the target that
had been set. Community emphasised the need for public education to
ensure that all people could play a role in efforts to bring
inflation down.