South Africa’s CPI Targeting Doesn’t Harm Growth, Marcus Says

Inflation targeting in South Africa has led to lower average price increases and doesn’t stifle growth, Reserve Bank Governor Gill Marcus said.

“While growth does have a positive weight in the MPC’s objective function, and consideration is given to the real economy in making monetary-policy decisions, we believe that monetary policy, whatever the framework, does not impact significantly on long term potential output growth,” Marcus said today in the capital, Pretoria.

The central bank kept its benchmark interest rate unchanged at 5.75 percent last month even as inflation exceeded the bank’s inflation target for five months. Africa’s second-largest economy will probably expand 1.4 percent this year, the slowest pace since a 2009 recession, the government said last week.

The government asked the Reserve Bank in 2000 to aim to keep inflation within a 3 percent to 6 percent range. The mandate should be implemented in a “flexible” manner and “temporary deviations” are allowed, Pravin Gordhan, the then finance minister, said in 2010.

Inflation targeting in South Africa has been a positive experience, leading to a slower average inflation than before, reduced volatility and lower nominal and real interest rates, Marcus said. While inflation has exceeded the target at times, these deviations were primarily because of exogenous shocks, and therefore “justifiable,” she said.

Core Inflation

Criticism from some groups toward inflation targeting is problematic and raising the target isn’t a solution, Marcus said.

“A higher inflation target would merely raise inflation expectations, and actual inflation would then likely increase,” Marcus said. “The end result would be higher nominal interest rates.”

Labor unions have called for inflation targeting to be scrapped because they say raising borrowing costs to control price growth increases the cost of living for the poor.

A decline in oil prices helped slow inflation to 5.9 percent in September. Core inflation, which excludes food, non-alcoholic beverages, gasoline and electricity costs, decelerated to 5.6 percent from 5.8 percent a month earlier.

The Reserve Bank has “found core inflation to be a good indicator of the underlying inflation pressures,” Marcus said.

Deputy Governor Lesetja Kganyago will succeed Marcus as head of the central bank after her five-year term expires on Nov. 8.

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