Gordhan: Inflation targeting to stay

South Africa will keep its policy of targeting inflation, which has helped to stabilise prices and encouraged economic growth, Finance Minister Pravin Gordhan said on Friday.

Gordhan reiterated in a separate interview that the overall 2009 GDP figure for Africa’s biggest economy, which fell into recession in the first quarter of the year, would be “clearly negative”.

Inflation targeting has been a source of friction between the African National Congress government and its allies in the communist party and trade union movements, who want the policy scrapped on the grounds that it has impoverished their members.

The central bank raised interest rates by 500 basis points in the two years to June 2008 to fight inflation, which has retreated since peaking above 13% last August but remains above the top end of the 3% to 6% target band.

“Inflation targeting provides a clear nominal anchor for monetary policy and requires the Reserve Bank to be transparent about its goals and actions,” Gordhan said in a written reply to a question in Parliament.

“Since inflation targeting was adopted in 2000, both the level and volatility of inflation has declined, while GDP growth has also been stronger and less volatile than under previous monetary policy regimes,” he said.

Since December the central bank has reduced interest rates again by 450 basis points to relieve pressure on the economy. South Africa is wallowing in recession due to depressed domestic and global demand which has hit the mining and manufacturing sectors.

Inflation stubbornly high
The bank, however, left rates at 7,5% at its most recent policy meeting last week, citing stubbornly high inflation, which was 8% year-on-year in May.

The targeted CPI consumer gauge is seen returning to the band only in the second quarter of next year.

“Permanently higher inflation carries a range of serious economic costs. It drives up interest rates, reduces competitiveness, and lowers actual and potential economic growth,” Gordhan said.

“It also reduces the living standards of groups with less ability to protect their incomes from rising prices, including the poor, workers, and those living off fixed incomes.”

Last week’s decision to leave rates unchanged further angered unions which have threatened strikes to force bigger and more rate cuts to drive the economy out of recession.

Central bank Governor Tito Mboweni said he had failed to convince the trade unions in a recent meeting that high inflation was bad for the working class and the poor.

The World Bank says South Africa’s economy will shrink by 1,5% this year, while the IMF sees a 0,3% contraction.
The Treasury is also expected to revise downwards its February forecast of 1,2% growth.

“The Treasury ... will give its forecast in October as part of the medium term budget policy statement, but clearly we’re looking at a negative figure,” Gordhan said in an interview with Talk Radio 702. - Reuters

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