LETTER: Isaah Mhlanga makes persuasive case for inflation target of 3%

Isaah Mhlanga clearly outlined the options open to the Reserve Bank in dealing with inflation in SA and underscored the importance of the Bank’s anti-inflation mandate (“Every central bank has its ‘may day’ — Reserve Bank too”, October 7).

The article also addressed whether the flexible inflation target range of 3%-6%, with its midpoint target of 4.5%, is still adequate or whether there should now rather be a fixed target of 3%, as urged by the Bank. It has made a persuasive case. This would nonetheless require higher interest rates for a longer period.

Technically, this is an important economic debate for SA now. However, determining the “right” level of interest rates is not just a subject that should engage economists. It is also a big decision within SA’s political economy as a whole and is not a unilateral matter. The present target range was originally set by the cabinet and any change would have to be endorsed by the cabinet.

Other stakeholders, such as Nedlac and the president’s economic advisory council, would presumably need to be consulted. The Reserve Bank has apparently already discussed it with the National Treasury.

Inflation targeting has served SA well over the past two decades, yet a review is healthy. But before SA decides on a different target regime there needs to be a rigorous interrogation of what policy trade-offs may be involved, what global research so far has said about flexible inflation targets versus fixed ones, and inevitably what political realities have to be managed.

Because inflation targeting is a key tool for the Bank to successfully influence price and wage expectations, any change must not only be credible but also command sufficient consensus about an altered framework.

Raymond Parsons
North-West University Business School

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