Inflation Targeting Essay

1790 Words Nov 3rd, 2006 8 Pages
It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.
In order to understand what inflation targeting is
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(Wikimedia Foundation, 2006)
Since September 2003, however, the CPIX inflation rate has remained extremely consistent. The average annual rates of CPIX since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%, 2004 - 4.3%, 2005 - 4.3%. (Wikimedia Foundation, 2006) CPIX FORECAST

Success in keeping inflation at bay gave the government room to drastically bring down interest rates. in 2003 alone, interest rates were reduced by an astonishing 550 basis points. This cut in interest rates saw "consumer spending improve, the construction sector boom and the sale of new vehicles reach record levels." (Wikimedia Foundation, 2006) This resulted in much needed GDP growth. Since 1999, quarterly GDP growth has been consistently above 2% and the present business cycle upswing is the longest on record. Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. (Wikimedia Foundation, 2006)

Inflation and Interest Rates in S.A

Why did the authorities decide to change from an informal to a formal inflation targeting policy? Four decisions can be given for this. Firstly, the informal framework formerly adopted created uncertainty among the public as to the policies being implemented by the

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