Before South Africa adopted inflation targeting – the SARB used several different monetary policy tools which include exchange rate targeting and money supply targeting
By Clement Mupfunya
Since 2000, the challenges of inflation became so severe that the Zimbabwe economy got gripped in a bout of hyperinflation which spurred a sharp weakening of local currency and trigged a de-anchoring of inflation expectations.
Initially, the government through Reserve Bank of Zimbabwe (RBZ) responded by imposing price controls in an attempt to rein inflation, this reaction by RBZ sparked widespread shortages of products and promoted parallel economy popularly known as black-market economy.
Zimbabwe’s annual consumer price inflation climbed further to 285% in August 2022, from 256, 9% in the prior month. It was the highest reading since February of 2021.
In the same way, local currency continues to plunge even after RBZ had bring into effect gold coins to stabilize the economy.
On a monthly basis, consumer prices rose 12, 4%, the least in five months following a 25, 6% jump in the previous month. Source Reserve Bank of Zimbabwe.
The central bank should introduce inflation targeting as a monetary policy tool to rein prolonged inflationary gaps.
Inflation targeting is a framework in which the central bank announces to the public the medium-term numerical target for inflation with a commitment by the monetary authorities to achieve that target.
Inflation targeting allows the central bank to use monetary policy tools, especially the control of short-term interest rates to keep inflation in line with a given target.
The core idea of inflation targeting implies that monetary policy has only temporary impacts on growth but permanent effects on prices.
Inflation targeting emerges out of two historical disappointments. Firstly, was the stagflation experience of the 1970s and 1980s when a wide range of central banks accepted higher inflation in the hope that this would boost economic growth but ended up with stagnant growth and higher inflation, as called stagflation.
Secondly, it was due to the failure of the monetarist approaches when central banks discovered that changes in money supply were only loosely related to the variables people really cared about such as inflation
New Zealand was the first country in the world to implement inflation targeting in 1990 and it has been highly successful. New Zealand was prone to high and volatile inflation before the inflation targeting regime was adopted. This country has emerged from this experience as a low-inflation country with the high rate of economic growth.
However, the New Zealand case indicates, that strict adherence to a narrow inflation target range can lead to fluctuations in policy instruments that may be greater than the unnecessary instances in which credibility can be damaged even when the underlying trends of inflation are contained.
The Canadian experience with inflation targeting adopted in 1991 suggests that an inflation targeting framework with a less rigid institutional structure can also be highly successful.
Inflation targeting has played an important role to keep inflation low and stable in Canada even though accountability is to the general public rather than specifically to the government through specified contracts, as in Germany and New Zealand a key component of Canada’s success with inflation targeting has been a strong and increasing commitment to transparency and the communication of monetary policy strategy to the public.
As part of this strategy, the bank of Canada has emphasized that inflation targeting can help dampen business cycle fluctuations because the floor of the target range is taken as seriously as the ceiling.
Before South Africa adopted inflation targeting policy, the South African Reserve Bank (SARB) used several different monetary policy tools which include exchange rate targeting and money supply targeting. The inflation targeting approach was more successful. It permitted a more realistic alignment between the SARB’s tools and objectives.
Furthermore, it also enhanced transparency and accountability by giving SARBs a clear and publicly visible objective.
Inflation targeting provided an elegant result to the flows of both these other frameworks.
In the case of South Africa, as for several other countries like Brazil and the united kingdom, the trigger for moving to inflation targeting was actually the failure of a third policy namely trying to manage exchange rates.
The unifying theme across these experiences was that inflation turned out to be more controllable and more relevant than other variables the central bank had tried to target.
Inflation targeting is continuous, this means policymakers should aim for inflation to be within the target at all times. The target is also flexible, which means that temporary deviations from the target are acceptable provided that inflation returns to the target range over a reasonable period of time.
Therefore, due to the experiences of other countries mentioned above, if the government through the reserve bank of Zimbabwe adopts inflation targeting monetary policy framework Zimbabwe’s economy can experience low levels of inflation and citizens can enjoy low prices in the commodity and services market and also stable economy hence reducing expectations in the business cycle which has negative effects to the economy.
A consensus is emerging, a best practice in the operation of an inflation-targeting regime. Transparency and flexibility, properly balanced in operational design appear to create a solid foundation for a monetary strategy in pursuit of price stability.
Inflation targeting has been successful in enabling countries to maintain low inflation rates something that they have not always been able to do in the past. In addition, inflation targeting does not require central banks to abandon their concerns about other economic growth.
Indeed, in countries that have adopted this policy, there is no evidence that inflation targeting has produced undesirable effects on the real economy in the long run.
Instead, it creates room for improving the climate for economic growth.
This article caution that inflation targeting is not a panacea, it does not imply that if a country adopts this monetary policy framework it will eliminate inflation from its systems without cost, and anti-inflation credibility is not achieved immediately upon the adoption of inflation targeting.
Indeed the reality is that the only way for the central bank to gain credibility is through the hard way, they have to earn it.
In a nut shell, inflation targeting is always a forward-looking policy; policymakers are not required to make up for missing the target in the process but they are expected to ensure that inflation is always heading back to the target.
Therefore, this article strongly believes that the central bank of Zimbabwe was to implement inflation targeting a dramatic downturn in inflation can be witnessed within the Zimbabwe economic crisis.
Economist Clemence Mupfunya is a correspondent for The Sunday Express. He writes in his personal capacity. Contact him at (27) 67 208 2236.
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