Last week, finance minister Enoch Godongwana dismissed the expectation that there will be an announcement on a move to 3 inflation target during his medium-term budget policy statement. This followed comments by Reserve Bank governor Lesetja Kganyagos monetary policy which had preference to target inflation at 3. Economist Duma Gqubule spoke to Sowetan about why monetary policy is important, and who sets it.
Sowetan: What exactly is monetary policy and who sets it?
Gqubule: Monetary policy refers to the tools used by a central bank in SAs case, the Reserve Bank to control interest rates and manage inflation, though unlike some other countries, SAs mandate focuses solely on inflation. In countries like the US, central banks follow a broader mandate that includes both inflation and employment, while others even consider climate and industrial policy. In SA, monetary policy is supposed to be set by the government through democratic processes involving parliament, the president, cabinet, and National Treasury not unilaterally by the Reserve Bank. The recent move by the Reserve Bank to implement a 3 inflation target without broader government approval is seen as an overreach and a violation of these democratic norms.
Sowetan: What is inflation targeting and what are the implications of it, especially for SA consumers?
Gqubule: Inflation targeting in SA means keeping inflation within a 3 to 6 range by adjusting interest rates when it goes outside that band. However, interest rates are only effective in curbing demand-driven inflation when people are spending too much which has not been the case in SA over the past 25 years. Instead, all inflationary spikes have been caused by supply-side shocks such as exchange rate fluctuations, oil and food prices, droughts, and global events like Covid-19.