Targeting Inflation and Full Employment in South Africa

Abstract

The South African Reserve Bank (SARB) insists that keeping inflation within the 3–6 percent target range set by the government is its most important policy goal. When the expected future inflation rate rises above the target band, interest rates must be increased. Since the inflation rate breached its 6 percent target ceiling this year, SARB has raised the repo rate¹ by 250 basis points, to 11 percent, and the commercial banks’ prime lending rate rose to 15 percent. The governor indicated in the 2007 annual report that he is prepared to raise the repo rate further at subsequent meetings to drive inflation within its 3–6 percent target range, irrespective of South Africa having probably the world’s highest unemployment rate.

If a current account deficit persists, the exchange rate is going to be weak. A weak exchange rate means that the import component is going to be higher. That means inflation will be higher and interest rates will have to go higher.

—South African Reserve Bank Governor Tito Mboweni, Business Day, September 17, 2006