A lower inflation target will ensure lower inflation which will, in turn, ensure lower interest rates at no cost to the economy.
South African Reserve Bank Governor Lesetja Kganyago. Picture: Thobile Mathonsi / African News Agency
Kganyago said the second lesson was about the effectiveness of monetary policy and what works and what does not. “Something that did not work was the ‘transitory’ argument, the claim made in 2021 that high inflation would be temporary and there was no need for a monetary policy response.” Kganyago pointed out that forceful policy responses put the brakes on inflation and also helped to convince the public that central banks were committed to low inflation and that high inflation was an aberration, not the new normal.“The lessons are that it was wrong to say we could have low inflation for free, that we could just look through shocks, keep rates low and all would be fine.
He acknowledged that the country missed the target quite often, almost exclusively to the upside. “We have been above the 6% upper bound of the target nearly 40% of the time, compared to only 1% of outcomes below the 3% lower bound.” The Sarb realised that the economy had a structural growth problem. After the global financial crisis, South Africa’s growth slowdown was diagnosed as a weak demand problem. To deal with it, the Sarb tolerated higher inflation so that it could avoid rate increases and restore growth. It did not work as growth never came back and we just ended up with high inflation.
He said we often speak as if high inflation is a structural, inevitable thing and not a policy choice. “But the fact is, we could have a lower inflation target, like almost all our peers and with it lower inflation.
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