This briefing note considers three key questions about inflation targeting in South Africa, drawing on international experience as well as an assessment of the conceptual framework for monetary policy. First, does inflation in the low single digits promote development and growth? If not, raising interest rates at low rates of inflation may not be the optimal policy stance. Second, is inflation in South Africa a demand-side problem? If not, then raising interest rates may not be the most efficient and targeted policy tool to address the source of inflationary pressures (and may cultivate higher inflation in the future). Third, will reliance on a single monetary tool, the policy interest rate, successfully lower inflation and promote employment growth and development? If not, other tools should be sought.
Policy Brief prepared for TIPs by Stephanie Seguino, Professor, Department of Economics University of Vermont, USA, and SOAS, University of London.