South Africa’s monetary policy has earned some praise from one of the few central bankers around who has had to grapple with monetary policy in the world of both developed and emerging market economies.
Briton Ian Plenderleith, who wrestled with monetary policy at the Bank of England for 30 years and is now Deputy Governor of the South African Reserve Bank (SARB), on Thursday described the SARB’s decision to raise interest rates in progressive steps in 2002 as exemplary.
Plenderleith, who was speaking at a symposium on Monetary Policy and Uncertainty at Jackson Hole in the American state of Wyoming, noted the severe inflationary shock suffered by the country in 2001-02 precipitated by a largely inexplicable fall in the exchange rate in the latter part of 2001 combined with higher fuel costs and increases in domestic food prices.
Pointing out that higher interest rates would not help “to make the maize crop grow higher, he said the SARB’s response to raise interest rates in progressive steps in 2002 was exemplary and appeared to have worked well, with inflation now falling steadily back towards target range as the shock receded.
“But the consequences were to make the central bank’s task of embedding low inflation in the fabric of the economy much more challenging, because of the inevitable questions this experience raised as to whether, faced with such shocks, monetary policy really could achieve permanently low inflation.
“That it can, and is doing so, is now gaining wider acceptance, as reflected in continuing evidence of falling inflationary expectations. But it has
required, alongside carefully timed monetary tightening, a strong effort by the central bank to communicate its determination,” Plenderleith told a distinguished audience that included United States Federal Reserve chairperson Alan Greenspan. — I-Net Bridge