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01 Jan 2002 00:00
South African Reserve Bank head Tito Mboweni said on Wednesday it would not struggle against inflation at all costs in what analysts saw as a sign another interest rate hike could be avoided later this month.
Using the unusual medium of a two-page advert in financial newspapers to explain the inflation targeting framework and the recent revision to the 2004 inflation target, Mboweni said authorities remained committed to lower inflation.
“It should, however, be emphasised that whereas the goal of inflation targeting is to achieve the target, the objective is not to hit it as quickly as possible or at all costs,” he said.
Finance Minister Trevor Manuel recently widened the three to five percent inflation target set last year for 2004 to the three to six percent range set for 2002 and 2003, saying he was worried about choking off economic growth.
Last week, Mboweni said flexible inflation targeting implied that the central bank should avoid severe corrective action to bring inflation in 2003 or any of the subsequent years to within the target range at significant cost to the real economy.
Analysts praised the central bank and said the fact that it had put itself in the category of flexible inflation targeters and not a strict targeter showed sensitivity to the cost that would have been necessary to bring down inflation very rapidly.
The bank said on Wednesday that if meeting inflation targets was its only concern it would have hiked even more aggressively and the targets would have been lower.
“I think what they are signalling now is that they are taking a more measured approach, that the commitment to low inflation remains, but just that timeframe within which they are trying to achieve this has been lengthened,” said Jac Laubscher, chief economist at Sanlam Investment Management.
“As for the November meeting, as far as I am concerned and that was my opinion in any case before the advertisement, I don’t think there will be any change in the repo rate.”
The Reserve Bank’s monetary policy committee meets on November 27 and 28.
The central bank has raised its key repo rate by four percentage points to 13,50% this year in a bid to quash soaring prices ignited mainly by the rand’s historic plunge of 37% against the dollar late in 2001.
South Africa introduced inflation targeting in 2000—setting a three to six target range for the 2002 and 2003—in a bid to shore up its financial credentials.
Manuel has acknowledged that the targets will be missed in both 2002 and 2003. The targeted CPIX inflation measure, excluding home loans, increased by an annual 11,8% in September, staying outside its target range for an 11th month.
“Under such circumstances, maintaining the target at 3-6 percent for 2004 does not mean that the authorities have reduced their commitment to lower inflation,” said Mboweni.
“Rather it is a recognition that there are long lags in monetary policy…and achieving a target too quickly may come at an unacceptably high price, particularly if the reason for the deviation from the disinflation path is not the result of Reserve Bank policy in the first place.”
He cited several central banks which he said chose policy horizons within which to influence inflation outcomes and did not try to get back to the target as quickly as possible when they found themselves outside the range.
“Missing or changing a target does not necessarily undermine the inflation target framework as a whole, as long as there is a sustained commitment to low inflation,” said Mboweni.
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