Inflation Targeting South Africa

Inflation Targeting in South Africa had been adopted by the South African Reserve Bank at the commencement of this millennium to implement a better monetary policy. Although the bank tried to make the market price stable, but failed to do so within the given time limit because of high inflation. That’s why inflation targeting is espoused in South Africa to pull down the inflation rate.

Fundamental Reasons For Implementing Inflation Targeting:

It is pretty much obvious that determination of inflation targeting helps to decrease the rate of inflation. The reasons behind inflation targeting in South Africa is given below.

1. Previously, informal measurement of inflation targeting couldn’t give a clear idea about the monetary policies adopted by the Bank or Government. That’s why proper inflation targeting is very much needed.
2. Inflation targeting amends the monetary policy which, in turn, helps to reduce inflation and better the employment and economic growth.
3. By setting a prominent target for inflation the Government or Central Bank can improve on transparency. Further, it also helps to cement Government’s accountability because if the inflation crosses the forecasted target then the Government has to analyze the reasons.
4. Inflation targeting betters the conjunction between monetary policies and other different commercial policies which are needed for a consistent economic growth in South Africa.

Interpretation:

• Target Setting: In South Africa inflation targets are set by the Central Bank. Although the government determines the inflation target on the Central Bank’s advice but the parameters are fixed by the Bank only. This is the reason why inflation targets in South Africa are devoid of any political influence.
• Target Variable: Inflation target is generally determined by computing the Consumer Price Index. So it can be seen as the target variable of inflation targeting. This index has different versions depending on the different areas, i.e city, village, metropolitan city etc, in South Africa. Since information from the rural areas are not easy to collect that’s why prices of the rural areas are not taken for the determination of inflation target.
• Evaluation: In South Africa, three types of Consumer Price Indexes are used mainly. These are Overall Index, Core Consumer Price Index and the Headline Consumer Price Index. Calculation of the Headline Consumer Price Index depends upon the repurchase rate of the South African reserve Bank where as, the Overall Consumer Price Index offers an all around measurement process for the total CPI of all the areas. Core Inflation is determined by annulling the indirect taxes, some food products and mortgage bonds from the Overall Consumer Price Index.

Summary:

Inflation targeting in South Africa has set a framework to control the inflation rate and also to make the market price stable. It also offers transparency in market policy. So, the Reserve Bank can improve their economic predictions and decision making.