The SA Reserve Bank firmly stuck to its guns on the policy of inflation targeting on Tuesday, saying there was no prospect of a change in its approach.
Governor Tito Mboweni welcomed the current debate over the wisdom of the policy, but said there should be no misunderstanding about the bank’s resolve to meet its inflation targets.
”The central bank remains committed to the inflation target as set by the government,” he told the National Press Club in Pretoria.
”We are not changing anything, we are not panicking, we are determined to meet our mandate.”
The policy of inflation targeting has been questioned after last month saw the fourth interest hike this year in the bank’s quest to stem inflation.
He conceded there were doubts about this year’s target of between three and six percent being met, saying: ”It might be facing some difficulties.”
The inflation target for next year is also between three and six percent and that for 2004 between three and five percent.
Mboweni said it would be a fundamental mistake for the bank to be seen to be wavering in its resolve to meet these objectives. The result would be a rise in inflation expectations.
Using the escape clause — a mechanism to release the bank from its target obligations from time to time if necessary — was not an option.
This clause was meant for use in the case of serious economic shocks such as a major drought, Mboweni said.
”At the first sign of difficulty, you don’t run away and use the escape clause. When things are tough, you stay calm, collected, grit your teeth, suffer in silence and still focus on your objective.”
Mboweni also noted that a change in the way the CPIX measure was put together would have done little to ease the central bank’s task to stay within this year’s inflation target.
Some experts have suggested that external inflation factors, such as food and energy prices, be removed from the measure as they could not be influenced by changes in the interest rate.
Finance Minister Trevor Manuel last week said he had asked Statistics SA to have another look at current CPIX basket, and to analyse the main drivers of inflation.
Mboweni said CPIX excluding food prices had risen from 5,7% in December last year to 8,4% in August this year.
”So, good luck to those who want strip out food prices. Even when you strip out energy prices, the CPIX inflation would still be above the targeted range.”
Asked about the apparent conflict on the matter between him and Manuel, the governor said: ”The minister has not told me anything. All things going well, I’m having lunch with him at the bank today (Tuesday). Maybe he is going to inform me.”
Mboweni said the inflation outlook for next year had improved significantly.
The CPIX measure of inflation was expected to peak above 10% in the fourth quarter of this year and would ”slow down quite rapidly” next year.
”The bank’s projections indicate that CPIX inflation will decline below six percent… by the second half of 2003,” he said.
Mboweni would not say whether this would prevent another interest rate hike before the end of the year. Risks for inflation next year included a drop in the exchange rate of the rand and the effect tension around Iraq could have on international oil prices.
”If war breaks out in the Middle East, most of our assumptions will be thrown into disarray. About what we are going to do about it, we will cross that bridge when we come to it,” Mboweni said. – Sapa