South Africa can afford a higher inflation target than the 3% to 6% range currently set, and 5% to 7% would be ideal, Standard Bank group economist Dr Iraj Abedian said on Tuesday.
Addressing reporters in Johannesburg, Abedian said research conducted by the bank showed that any lowering of the upper limit of the range ”should be driven by tangible improvements in micro or sectoral efficiencies.
”If the target range cannot be adjusted upwards, at the least it should not be lowered.”
Abedian said macro-factors such as South Africa’s public debt to gross domestic product ratio, fiscal policy and political stability were all sound, and some of the factors were better than in countries traditionally well-regarded for prudence, such as Germany.
While there were micro-factors like efficiency that were not as good, Abedian said it was a mistake to try to steer local inflation towards the same low rates as South Africa’s major trading partners — mainly the European Union, the United States and Japan — as these were much more developed economies. It was damaging to try to get South Africa’s inflation rate to converge with theirs.
Abedian said ”no one in South Africa knows how to do business at low inflation rates”. The experience of the past 40 years was of higher inflation than at present, but managers and shareholders have not adjusted their expectations.
”They have to learn new tricks as they have in Australia and the United Kingdom. You can’t get nominal 20% and 30% returns any more”.
Abedian said a weak rand policy should not be used to ”come to the rescue” of mines and other exporters.
One of the difficulties of inflation targeting was a built-in upward bias in price indices.
For example, the ”quality bias” meant a car cost more today than 10 years ago, but was a more sophisticated product. The index did not account for the improved quality, merely the higher price.
Likewise, consumers might move to cheaper outlets such as flea markets and wholesale dealers, but the index was biased towards traditional retail outlets like supermarkets.
The effect of this upward bias was an over-statement of inflation in developed economies of between 1% and 1,5%, and possibly more in the developing world. This meant that inflation targets were almost inevitably lower — more stringent — than they need be.
Abedian said the ultimate aim of inflation targeting was not zero inflation, but price stability, which could encourage sustainable and higher economic growth. — Sapa