The South African Reserve Bank (SARB) has largely delivered on its commitment to control inflation over the past 21 years.
This was the prevailing message delivered by SARB Governor Lesetja Kganyago during his inaugural honorary professorial lecture hosted by the Department of Economics at Stellenbosch University.
In his recent lecture entitled “21 Years of inflation targeting," Kganyago said: “This is a year of anniversaries for the South African Reserve Bank. The institution itself has reached 100 years. The rand has turned 60. We are commemorating 25 years of central bank independence, and also 21 years of inflation targeting."
He said although inflation-targeting is the youngest of these achievements, it may also be the biggest success.
“Over the past 21 years, we have delivered on our commitment to control inflation, despite many challenges. Lower inflation has benefitted the economy generally, and households of all income levels in particular. As lenders require less compensation for inflation, interest rates have come down.
“Furthermore, with expectations anchored inside the inflation target range, businesses no longer raise prices as soon as the exchange rate weakens. This credibility has helped us cut interest rates to record lows during the COVID-19 crisis – and we have been able to keep rates low during the recovery."
Kganyago outlined some key components of inflation-targeting that have helped secure its success.
“The first factor behind our inflation-targeting success has been realism. Warren Buffet once commented that 'when a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact'. Much the same is true of central banks. There are many things that people would like a central bank to do. But even a great central bank will fail at an unrealistic task. Inflation-targeting has asked a lot of the SARB and South Africans generally, but not more than any of us could deliver.
“The second secret of the success of inflation-targeting is that it is simple. We made a clean break from the era of opaque policy and confusion. As I have learnt from my years in policymaking: while many people like to indulge in complexity – favouring obscure jargon, dense documentation and complicated plans – the smartest actors prize simplicity and clarity. Inflation-targeting helped give us strategic focus.
“The third, and crucial, factor behind our inflation-targeting success has been accountability. Our goal is clear and public, and the evidence for evaluating our performance has been readily available in the form of inflation data independently produced by Statistics South Africa."
Kganyago also acknowledged the impact of a helpful global environment and good luck.
He added: “We have avoided hundred-point plans, hazy aspirations and no consequences for failure. We are forward-looking and ambitious for the country, which is why we are talking about a lower inflation target, set to bring us in line with our best-performing peers."
Kganyago expressed the hope that this experience and attitude showed by the SARB will help inform and inspire others – in the private sector, in the public sector, and in civil society – who want South Africa to succeed and who are willing to work hard for that.
“We don't have it easy, and sometimes the task seems overwhelming. But there are ways to succeed, and we need to remain ambitious so that South Africa can be a better country," he said.
