Daniel Mminele, Deputy Governor, on inflation targeting

In a recent speech on monetary policy, Daniel Mminele, discussed inflation targeting:

Section 224 (1) of the South African constitution, from which the Bank gets its mandate, describes the primary objective of the South African Reserve Bank as being “to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.” Therefore price stability is core to the mandate of the Bank. However, it is clear that price stability is not an end in itself, but in the interest of balanced and sustainable growth. It follows then that, as far as the constitutional mandate is concerned, both economic growth and by implication employment, need to be taken into account when making decisions on monetary policy. To give effect to these constitutional imperatives, the Bank has been mandated by government to maintain low inflation within an inflation targeting framework. This framework is a means to achieve the objective. It is not an end in itself.

We note the current debates around the appropriateness of our mandate and questions about how that mandate is executed.
The SARB has indicated its willingness to openly engage various stakeholders to both explain its approach and to explore with them any ideas they may bring forward. Governor Marcus has identified improved communication and stakeholder engagement as a priority, and has underlined this by creating dedicated capacity in her office for stakeholder engagement and outreach. ...

With respect to inflation and output variability, a recent study by Kahn (2008) compared the relevant inflation-targeting period (first quarter of 2000 until the second quarter of 2008) with the period from the first quarter of 1991 until the fourth quarter of 1999 and concluded that in the pre-targeting period, CPIX inflation averaged 9,7 per cent and this declined to 6,5 per cent in the inflation targeting period. The average growth rates in the two periods were 1,6 per cent and 4,3 per cent respectively (measured as a percentage change on the same quarter in the previous year). In South Africa, despite the challenges posed by supply-side and exchange rate shocks, the variability of both output and real interest rates has, therefore, declined during the inflation-targeting period. Fears that the implementation of inflation targeting has been inimical to growth in South Africa are therefore unfounded. This shows that inflation targeting has been consistent with (although not necessarily the cause of) higher average growth. At the very least it would appear that inflation targeting is not the enemy of growth! ...