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Faced with sticky inflation but sluggish economic growth, the South African Reserve Bank (SARB) is considering changing its interest rate modelling tool.<\/p>\n
This is according to Genera Capital investment specialist Professor Adrian Saville who spoke to The Money Show\u2019s Bruce Whitfield.<\/p>\n
Saville said there is a considerable debate around the appropriateness of inflation targeting, i.e. using interest rate cuts and hikes to control inflation.<\/p>\n
On the one side of the debate is a principle called \u201cmonetary discipline\u201d.<\/p>\n
Proponents of this principle believe South Africa\u2019s inflation should be aggressively and assertively managed through a strict stance on interest rates. In other words, high interest rates keep inflation low.<\/p>\n
The SARB leans more towards this side of the debate, having introduced inflation targeting in February 2000. The reserve bank attempts to keep inflation within a target range of 3% to 6% using monetary policy tools like short-term interest rates.<\/p>\n
According to the SARB, \u201cThe core idea of inflation targeting is that monetary policy has only temporary effects on growth, but permanent effects on prices.\u201d<\/p>\n
The other side argues that this obsession with keeping inflation low comes at the cost of high interest rates that hurt the economy.<\/p>\n
Chief economist at Sanlam Investments Arthur Kamp told Daily Investor that the SARB did not cause South Africa\u2019s growth problem.<\/p>\n
Instead, the problem reflects failing infrastructure, too much government involvement in economic activity, policy uncertainty, and low business confidence.<\/p>\n
However, the country\u2019s sluggish growth and weak currency amidst high inflation places the SARB in a difficult position, as it needs to decide between curbing inflation or providing relief to an ailing economy.<\/p>\n
Saville said there is a happy medium \u2013 a \u201ctruth\u201d \u2013 to be found between the two sides of this debate.<\/p>\n
Meeting in the middle
\nSaville explained that inflation is \u201crunning in the rearview mirror\u201d rather than something that suddenly appears and disappears when the SARB implements some policy action.<\/p>\n
Inflation, and inflation expectations, are challenging to manage. One can see this in markets where inflation is currently close to double digits, such as Europe and North America.<\/p>\n
As inflation rises and the public struggles to see an end, inflation becomes a self-fulfilling prophecy as wage increase demands also reach double digits in preparation for higher inflation.<\/p>\n
In addition, the instruments at the reserve bank\u2019s disposal to manage inflation \u2013 interest rates \u2013 are blunt, inexact and have a long lag.<\/p>\n
This is why the public must have confidence in the robustness and firmness of its monetary policy authority.<\/p>\n
The SARB has been immaculate in this regard, said Saville.<\/p>\n
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<\/h3>\nIn its latest Monetary Policy Review, the SARB said its monetary policy decisions would continue to be data-dependent and sensitive to the balance of risks to the outlook\u201d.<\/p>\n
It also said the monetary policy committee (MPC) would \u201clook through temporary price shocks and focus on potential second-round effects and the risks of de-anchoring inflation expectations\u201d.<\/p>\n
Bloomberg\u00a0reported that changes to the SARB\u2019s model would include the following:<\/p>\n
Saville said that the ideal interest rate modelling tool would consider the impact of interest rates on both the nominal and real economy.<\/p>\n
The \u201creal economy\u201d refers to investments, economic growth and employment in the country. Regarding the impact of interest rates, the real economy often experiences \u201cspillover\u201d or \u201csecond-order\u201d effects rather than a direct impact.<\/p>\n
According to Saville, there is little evidence that interest rates influence investments in the country, which the new model should consider.<\/p>\n
The nominal side of the economy refers to prices and interest rates. Here, the SARB needs to consider the impact of inflation across the economy and on different income groups.<\/p>\n
He said no or low-income earners in South Africa often experience the highest inflation rates.<\/p>\n
Data from Discover and Visa\u2019s latest spending trends report have backed this up. It showed low-income earners spending 47% more on groceries now than in 2019.<\/p>\n
SARB governor Lesetja Kganyago has recently said they want to adopt a lower inflation target for South Africa.<\/p>\n
Currently, the SARB\u2019s target range is 3% to 6%, and it aims to anchor inflation around the mid-point of this range \u2013 4.5%.<\/p>\n
At the\u00a0Peterson Institute for International Economics\u00a0in Washington, Kganyago said a 3% inflation target \u201cwould help dampen exchange rate volatility and sovereign risk, reduce the potential for upward drift in the real exchange rate, and materially lower debt service costs\u201d.<\/p>\n
He said this lower target would benefit fiscal policy and stronger growth, adding that structural reforms and key deregulations of transport and electricity are critical in South Africa.<\/p>\n
\u201cBut so too is a shift in fiscal policy back to predictable, transparent rules.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
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