Assessing inflation targeting in the South African economy

Abstract

This study looks at the South African Reserve Bank's 25-year-old inflation targeting model, its success in bringing price stability and business confidence, and the consequences of a suggested shift in a 3-6% price band to a 3%-point target. The study utilised a mono-qualitative, inductive document analysis based on grounded theory to analyse 12 appropriate academic and institutional documents Results show that inflation targeting was able to transition from a framework calculated through consumer price index to provide price stability and assists in anchoring inflation expectations. Initial inflation target misses during the first decade of inflation implementation (2000 - 2010) and initial uncertainty on the midpoint target impeded inflation credibility and increased business uncertainty. This study concludes that inflation targeting is essential to price stability, but its complete effectiveness is increasing business confidence and overall economic performance requires, open communication (preferably with clear target tolerances), and structural changes. The study recommends a 3%-point target with tolerance of +-1% which will lead to clarity in inflation expectations anchoring and global alignment.