SABC News - Debate on whether SA monetary policy is working:Thursday 18 February 2016

Debate on whether SA monetary policy is working

Thursday 18 February 2016 18:09

Nompumelelo Siziba

CPI has risen to 6.2% in January compared to last year.

CPI has risen to 6.2% in January compared to last year. (SABC)

The question of whether monetary policy in the South African context is working is being asked yet again. The Reserve Bank has been mandated to do its best to ensure that inflation remains within a 3 to 6% target range.

The latest headline Consumer Price Inflation number for January rose by 6.2% compared to last year and it is set to rise.

Interest rates in a fully modern, integrated economy can be an effective lever in managing inflation and other targets like the unemployment rate, a target used by monetary authorities in the US.

They serve to price the cost of borrowing money. When interest rates rise, the intention is reduce demand for borrowed money and when they are cut, it is hoped that this will stimulate borrowing and ultimately investment into the economy.

However, South Africa has both a first world economy and a substantial informal one.

The Reserve Bank says it can take between 12 to 18 months for an interest rate movement to have an impact on the economy.

Last year, domestic rates rose by 50 basis points but since then, the rand has depreciated substantially, resulting in higher imported inflation.

The extent of the drought has meant a surge in food prices. Average inflation during 2015 stood at 4.6%, but it is expected to be nearly 7 % this year.

So, it begs the question whether monetary policy has been effective in recent times and then there is the 3 to 6% target band.

Many argue that because South Africa is a developing nation, higher inflation than that of developed nations is a normal reality.

This suggests that the current inflation target range could be impeding economic activity.

Market players expect the Reserve Bank to inject a further 50 basis point increase for the balance of 2016, having already levied a 50 basis hike in January.

With inflation raging way ahead of target, the reality could result in even higher rate hikes.

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