Inflation targeting likely to be reviewed
Inflation targeting is likely to be reviewed, because if South Africa’s policymakers only use interest rates as the tool to fight inflation, the country is in for a nasty generational learning experience as the policy will not be removing the cause of inflation, said Chris Hart, chief economist from Investment Solutions.
Hart was reacting to news reports that a summit of the African National Congress, the South African Community Party (SACP) and the Congress of South African Trade Unions was calling for “national reflection” on the appropriateness of
inflation targeting and its ranges.
Hart said he suspected inflation targeting will be reviewed and that he agreed with the head of the SACP, Gwede Mantashe, that interest rates alone will not solve the problem.
“The first point of departure is inflation is an obstacle to growth and not a consequence of growth.
If that is the point of departure then we have to come to the conclusion that to see sustainable and higher growth of 6% to 8%, like Asia has had, one needs to look at it [inflation targeting] and question whether it is not too high to be sustainable,” says Hart.
Inflation target was introduced in February 2000 to try and bring inflation down from the double digits it had been languishing under for 20 years, and it is set at between 3% and 6%.
“It is about more than just monetary policy. For example, industrial and fiscal policy have to also be working on that,” says Hart.
He said fiscal policy needed to push private savings “more aggressively” and that the low savings needs to be seen as a “crisis”.
He said this needed to become the core resource to fund the country’s capital expenditure programme as this should not be coming from external sources or debt.
Hart said that improved industrial policy would not only open the economy up to being more competitive so that collusion dissipates, but would also lower unemployment.
The summit, which took place in Midrand on May 9 and 10, took note of rising inflation driven largely by external factors. It noted that high and rising interest rates impacted negatively on poor communities and on job creation.
It was therefore agreed to hold a top-level alliance conference on economic policy.
The alliance expressed its deep concern at the devastating impact of rising food prices and recommended “urgent action”, including removing VAT on a range of basic items and the need for stronger legislation against price fixing.
It also called for subsidies to cushion the effect of price rises on the poor.
Hart says higher interest rates have actually done nothing for inflation, as it is still rising.
He noted that when interest rates were first hiked it was to rail against credit growth and while that is having some impact, it came at a high cost.
South Africa’s CPIX inflation rate has been above the 6% upper inflation target limit for 12 months running. â€’ I-Net Bridge