The South African Reserve Bank (SARB) is likely to maintain its current monetary policy framework of inflation targeting for at least the next 10 years, despite temptations to focus more on promoting economic growth, according to Bernie de Jager, senior consultant at the SARB’s research department.
De Jager was speaking at the annual conference for the Bureau of Economic Research in Somerset West on Thursday, where he was asked to provide his outlook on South African monetary policy for the next decade.
According to De Jager, successful examples of the effectiveness of inflation targeting from many countries around the world have shown that this was the correct framework for the SARB to adopt.
He sees no reason for South Africa to deviate from its current successful framework, which has brought inflation down into the target range of 3% to 6% CPIX (headline consumer inflation less mortgage rates).
“The SARB believes the best way to contribute to economic growth is through maintenance of price stability, especially now that they have been successful in bringing down inflation,” he said.
“If they deviate from the course, the credibility of monetary policy would be compromised, which would have a serious long-term impact on the effectiveness of the policy.”
He noted that although it can be argued that the SARB should give more attention to the promotion of economic growth now that it has reached targets, experience has also shown that changes in interest rates effected by central banks do not have an effective long-term impact on economic growth.
This is because cuts in interest rates can lead to long-term rises in inflation expectations and higher interest rates, which are detrimental to long-term growth.
“Long-term economic growth can only be achieved when productivity and productive capacity rise, which is achieved through technological progress, higher labour productivity and more productive capital,” he observed.
“Monetary policy should encourage domestic savings, investment and the inflow of foreign capital and should not add to the risks facing businesses or dampen technological innovation.”
De Jager concluded by saying the SARB “had very little reason to consider alternatives to inflation targeting and the authorities were likely to continue to apply it as the country’s monetary policy framework for the foreseeable future”. — I-Net Bridge