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n AfricaGrowth Agenda - A reverse gear in South Africa's monetary policy decisions : is it compatible with inflation targeting?

Volume 2012, Issue 10
  • ISSN : 1811-5187

Abstract

Modern monetary policy goals revolve around the maintenance of price level stability in an economy, a notion to which Svensson (2005) appends the indispensable management of private sector expectations. The ability to manage inflation expectations well has been seen as a cornerstone for the success of inflation targeting (IT). In addition, several factors add to the preference of IT over its predecessors. These include; instrument independence, increased transparency, accountability and credibility. In South Africa, the South African Reserve Bank (SARB) uses the Repo rate to administer the level of economic activity in the economy. When the economy is operating below potential output or the inflation rate is low, the Repo can be reduced to kindle the economy and vice versa (Taylor, 1993; Bernanke, 2004). This implies that changes in the Repo occur depending on the state of the economy and reversals are a possibility. A reversal occurs when a change in the Repo moves in an opposite direction to previous successive Repo rate movements in the same direction (Ellison, 2006). South Africa has seen a series of such reversals in the Repo rate in April 2001, January 2002, June 2003 and June 2006. However, this piece will focus on the January, 2002 reversal. The outline of the paper is as follows: section 2 offers an explanation of the SARB's rationale for the reversal while Section 3 attempts to discuss the consistency of the reversal with the SARB's policy regime. The concluding remarks are contained in Section 4.

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/content/afgrow/10/1/EJC125729
2012-10-01
2019-10-21

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