suspend inflation targeting

Should Sarb Suspend Inflation Targeting?

Suspend Inflation Targeting

The South African Reserve Bank’s (Sarb) monetary policy committee (MPC) should acknowledge that exogenous (external) forces, particularly drought, are driving inflation. Thus, it should suspend inflation targeting temporarily say expert economists.

Lefika Securities economist, Colen Garrow said that South Africa is on its way to a recession.

Accordingly, the MPC should be doing its utmost to prevent this, even if this meant it should suspend inflation targeting temporarily, retaining the repo rate at 7%.

Invoke Flexibility

The best way for the MPC to do so, without losing credibility, is to invoke the flexibility it was granted in 2008, to admit that drought is the predominant force driving inflation said Garrow.

Flexibility recognises that drought, which has made food prices skyrocket, is an exogenous influence, and that interest rate hikes are having little impact on inflation.

“This flexibility allows other economic factors to be considered, not only inflation, the output gap (where gross domestic product is relative to its potential), the state of the labour market, and credit aggregates (and asset prices), in determining the outcome of monetary policy,” said Garrow

The MPC’s interest rate hiking agenda is based on the inflation outlook and how it, for the first time in 17 months, breached the top part of the target range.

In January, inflation soared to 6.2% and is expected to shoot up further. Sarb’s inflation target range is between 3% – 6%.

Economic Growth

While Sarb has been instructed to target inflation, it should also take into account how monetary policy impacts unemployment and economic growth.

More factors signal a downward revision of Sarb’s inflation outlook for 2016/17, as opposed to an upward one said chief SA Investec economist, Annabel Bishop.

Sarb should suspend inflation targeting temporarily for the sake of economic growth Bishop said.

“The time has now come for the MPC to stop tinkering with interest rates in the hope of influencing inflation when these are driven by interest rate-insensitive factors such as the drought, increases in electricity and water tariffs, and property rates, taxes and imported goods. Hiking interest rates will not cause these price increases to adjust,” she said in January.

In January manufacturing output unexpectedly declined by 2.5%, while mining production fell by an additional 4.5% from an upwardly revised 1.2% drop in December. The manufacturing and mining sector make up 20% of South Africa’s economy as a whole.

It remains to be seen whether Sarb will listen to experts and in fact suspend inflation targeting.