Inflation targeting is a highly contentious policy instrument, especially in a country like ours with a low economic growth rate and unmanageably high unemployment levels.
However, its proponents, chief among them in this country being Reserve Bank governor Lesetja Kganyago, argue that it is primarily a pro-poor instrument as it promotes price stability and ultimately leads to lower interest rates – hence reducing the cost of borrowing money.
Opponents, on the other hand, argue that this monetary policy actually makes the poor poorer by prioritising price stability over economic growth and job creation. Hence the call by Cosatu and others on the Left for the mandate of the Reserve Bank to be extended to include economic growth and employment creation. They have also demanded, over the years, for the government to be more flexible in its current inflation target of between 3% and 6%.
With the debate still raging, Kganyago and his Monetary Policy Committee (MPC) at the SA Reserve Bank have now set the cat among the pigeons by strongly suggesting that, moving forward, the target would be lowered to 3%, making it difficult for the bank to cut interest rates.
Their extraordinary statements, read by some as a policy over-reach on the side of the Central Bank, has caused finance minister Enoch Godongwana what can only be described as a harsh rebuke.
Godongwana said the MPC’s remarks has led to expectations that he’d soon announce the lowering of inflation targeting. “Minister Godongwana has no plans to do this,” he said in a statement issued by his office before adding that inflation-targeting policy making remained the exclusive preserve of the minister, the president and the cabinet.
Any adjustment to the framework, he added, will come about as a result of a comprehensive consultation process between cabinet, National Treasury, the Reserve Bank and other stakeholders and “not unilateral announcements that pre-empt legitimate policy deliberation”.
The minister’s strongly-worded response tensions in the approach preferred by his office as opposed to that preferred by Kganyago and his team.
While it is to be expected that, given the independent roles played by National Treasury and the Reserve Bank, differences in opinion would emerge now and again, it is imperative that these are handled in a mature manner.
The Reserve Bank should always be cautious not to be seen as usurping the role of the executive to set policy just as much as it jealously defends its right to independently pursue inflation targeting.
Given the tough economic environment SA finds itself in, due partly to the changed geopolitical climate following the re-election of Donald Trump as US president, it is crucial for Kganyago and Godongwana to sing from the same hymn book.
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