South African Finance Minister Trevor Manuel has reaffirmed the government’s commitment to its inflation targeting framework for monetary policy, saying price stability was “fundamentally important” in the country’s quest for economic development and freedom.
Addressing participants at a conference in Cape Town on Thursday evening, Manuel said the government had to “stay on course” with inflation targeting, despite having missed the target in previous years. The government introduced an inflation target of between 3-6% CPIX (headline consumer inflation less mortgage costs) in 2002 as an anchor in the conduct of monetary policy by the South African Reserve Bank (SARB).
“Our target measure of inflation, CPIX, rose from within the target range between August and October 2000 to a peak of over 11% between October and November 2002 — a significant increase after having touched a low of 5,8% a year earlier,” Manuel observed.
“Not an auspicious start by any measure. So does this mean that inflation targeting is not right for us? No, absolutely not. As in the past, we must stay on course, because price stability is fundamentally important in our quest for economic development and freedom.
“And inflation targeting provides us a monetary policy framework within which we can most readily plot a course toward this freedom.”
Manuel said that as policy makers, government had to conduct policy in a way that minimised the threat of inflation, as well as being able to provide emergency relief in the face of volatile prices, especially food prices.
This included “maintaining a sound fiscal framework to prevent the remotest possibility of so-called fiscal dominance” (where the government’s large budget deficit renders monetary policy less effective as a policy tool).
“From this path South Africa cannot and will not flinch,” he vowed. “Our continued to commitment to macroeconomic stability underpins everything we do.”
The Minister added that the economic outlook was beginning to brighten, with the IMF expecting global growth of over 4% after the recent slowdown in the world economy. The improvement would be underpinned by the acceleration in growth of the US economy in particular, but more had to be done to ensure this was not a “false dawn”.
It was imperative that structural reform continued in other developed economies, especially Europe, Manuel said, to boost growth potential and balance world growth.
” … The world is too reliant on the US as a source of global growth. Worrying external imbalances make such reliance less sustainable in the long-term. The gathering momentum and calmer domestic waters will underpin the continued expansion of our own economy in the years ahead.”
He concluded by noting that global net private capital inflows were expected to be US$110-billion in 2003, the highest level since the mid-1990s.
“We are well placed to ensure we can capture a substantial share of this to channel into economic growth and development.” – I-Net Bridge