Inflation Targeting in South Africa

Abstract

Tito Mboweni was troubled. After a long debate, and not without controversy, South Africa had formally introduced a policy of inflation targeting (IT) on 23 February 2000, just 6 months after he had been appointed Governor of the South African Reserve Bank (SARB). He knew IT was the best path for South Africa, but now, in December 2001, re-reading the latest statistics brought him great concern. Since implementing the IT regime, the economic data had been very disappointing. Persistently high unemployment, with some estimates putting it as high as 40%, meant that South Africa did not have the luxury of waiting for new policies to bear fruit. Mboweni knew that to reduce unemployment the country needed sustainable growth, and that would come only through strong increases in productive capacity, but investment was lagging and it was clear that the seeds for sustainable growth were not being planted. With inflation forecasted to exceed the mandated target, Mboweni would have to tighten monetary policy, which would further restrict investment. Was it time to change course?