Economist Kevin Lings says the South African Reserve Bank’s inflation targeting is still necessary although many ordinary South Africans find it irrelevant.
Inflation targeting is a framework in which the bank uses monetary policy tools, especially the control of short-term interest rates, to keep inflation in line with a given target. In this case, it is within 3.6%.
On Thursday, the bank announced the Monetary Policy Committee’s decision, which has pushed the repo rate to seven per cent and the prime lending rate to 10.5%.
Lings says escalating inflation has become a global phenomenon.
“The world is experiencing exceptionally high inflation right now. In just about every country, it is way outside the inflation target that they’ve had. But we do know that having the inflation target in place helps to anchor inflation expectations. In other words, people over the longer period assume that eventually inflation will be in the range of three-to-six per cent. That definitely helps to control inflation. I think, it’s still a relevant method to use, but obviously right now, it doesn’t look especially credible.”
Repo rate increases by 75-basis points
Reserve Bank Governor Lesetja Kganyago announced a 75-basis point rate hike effective from Friday.
This takes the repo rate to seven percent and the prime lending rate to 10.5%.
Economist Goolam Ballim says that the fact that two members of the Monetary Policy Committee (MPC) were more inclined to a 50- basis point rate hike, signals a division in the MPC.
The committee based its rates decision on continued high inflation in South Africa and a weakening economic outlook.
Ballim says that the bank’s stance shows that it is likely to continue hiking rates.
“The picture articulated by the Reserve Bank is slightly worse than its previous monetary policy messaging. It’s now told us that it expects lower economic growth, over the near to medium term and slightly higher inflation with respect to the headline CPI measure. Effectively, the Reserve Bank is behaving in an orthodox manner, in the sense that it wants to break the back of inflation expectations and therefore will continue to hike rates.”
Reserve Bank’s 75 basis points rate hike decision: Goolam Ballim