South African central bank governor Tito Mboweni said on Tuesday the inflation outlook for 2003 was worrying, and the official inflation target — although a good thing — may have been introduced too quickly.
”As far as the inflation target for the year 2002 is concerned, there is really nothing the Reserve Bank can do to influence the outcome – the time is gone,” he told Parliament.
”Going forward, the inflation outlook is a bit concerning. Inflation pressures are still present in the economy… Inflation expectations are still on the upside of the inflation target.”
The central bank governor said there had never been a ”buy-in” on the targets by the public, resulting in little interest from business, parastatals or labour in trying to keep prices in check.
”Because we don’t have a substantial buy-in, people act as if we don’t have an inflation target.”
Public entities were increasing tariffs far in excess of the three to six percent band, medical costs were rising rapidly, and wage demands remained above the target.
This was partly due to the manner in which the policy was introduced.
”We have done the right thing to bring in inflation targeting, but we were in a bit of a hurry.”
Mboweni — who said other countries, including those in Europe, had held extensive debate on targets before introducing them — recommended a national conference to bring all South Africans on board.
He stressed that he was not suggesting a change in policy, or that the CPIX measure used be changed.
”No doubt about it, inflation targeting is a very good policy,” said Mboweni.
It appeared that at the moment the only way to get the message across on the importance of the target was through interest rate movements.
The Reserve Bank had to show its commitment to fighting inflation.
”We can talk until the cows come home, but if the central bank does not act practically and decisively, people will not be convinced that we are serious about inflation targets.
”And, so far this year I think we have demonstrated that if need be we would act decisively,” he said.
The Reserve Bank announced the third interest rate increase of the year earlier this month, in response to rising inflation led partly by a rapid fall in the value of the rand.
The government has set a target of three to six percent for the CPIX inflation index in 2002 and 2003, tightening it to between three and five percent for 2004 and 2005.
The index rose by 9,2% in the year to May, the seventh consecutive month it has been outside the target. – Sapa, Reuters