South Africa: Inflation Targeting - a Lesson From Economic History

analysis

The debate about what the Reserve Bank, long a target for South Africans with a grievance about the economy, should be doing has surfaced anew. And once more inflation targeting is under scrutiny.

Shouldn't the Reserve Bank, to quote the Public Protector, instead of fighting inflation rather try to "promote balanced and sustainable economic growth in the republic while ensuring that socio-economic well-being of the citizens is protected".

A look at our own history should illuminate what happens when the Reserve Bank gives in to political pressure and abdicates its role of protecting the currency.

It is 1986. A group of financial journalists are sitting around a table discussing how to borrow money at the prime rate or near it. One suggests that student loans are easy. Another is thinking of buying another house, to let, or moving to a more expensive house.

One of them is me, desperate not to see my salary eroded by inflation of nearly 20%. The reason? The real or inflation-adjusted interest rate is about minus 2% -- the prime interest rate at which banks allow their best customers to borrow minus inflation. That means if I borrow R100 over a year, at the prime...

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