South Africa’s Reserve Bank (SARB) governor, Tito Mboweni, expressed his frustration on inflation targeting on Tuesday, suggesting the policy may have been introduced too quickly.
He also told Parliament’s finance portfolio committee the inflation outlook for next year was ”quite concerning”.
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.”
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 CPIX — the instrument the SARB uses to target inflation — climbed to 9,2% in May, compared to the inflation target of between three and six percent for the end of the year.
Mboweni said that the outlook for inflation was worrying, with the target of three to six percent for end-2003 already a challenge.
”It is very clear that as far as the inflation target for the year 2002 is concerned, there is nothing that the Reserve Bank can do to influence the outcome.”
However, it was only missed when it was actually missed.
Going forward, the inflation outlook was a ”bit concerning” and inflationary pressures were still very much present.
These pressures were coming largely from food prices, money supply, and oil prices, and while the exchange rate had stabilised, recent events in Argentina and Brazil could change that scenario.
”So, going forward, I think we are not out of the woods yet in terms of the outlook for inflation… we have to remain vigilant, and focus on this target,” he said. – Sapa