Our paper presents a primer on assessing South Africa’s optimal inflation target and the implications of the economy’s structural characteristics for the conduct of monetary policy. The paper assesses what would need to be done to lower the inflation target without imposing a disproportionate cost on the economy.
The main finding is that there needs to be supportive fiscal policy aimed at reducing South Africa’s debt burden and government policies that reduce inflation pressures. This will, in turn, require a social compact between government, the central bank, state owned enterprises, relevant regulators, and labour unions to galvanise support for structural reforms that reduce government-related inflation and align public sector wage demands to productivity growth. Such a compact is unlikely without clear articulation of the benefits of a lower target and what is required to counterbalance the short-term costs of reducing inflation.
Find the paper here.
