Finance Minister Pravin Gordhan says The policy of inflation targeting should not be blamed for the high cost and limited availability of credit in SA.
The policy of inflation targeting should not be blamed for the high cost and limited availability of credit in SA, Finance Minister Pravin Gordhan said last week.
Credit availability was rather due to the assessment of risk and lending conditions of banks and development finance institutions.
Mr Gordhan noted that the prime rate together with the policy rate had declined along with inflation over the past decade and was not the reason for the high cost of credit. Rather than altering the inflation targeting framework to lower the cost of capital for small firms and entrepreneurs, banks and development finance institutions should review their lending conditions, he said.
The minister was arguing against a suggestion by Congress of the People MP Kenneth Sinclair, in a parliamentary question, that inflationary targeting had hampered economic growth.
Mr Gordhan said the policy of inflation targeting was designed to support economic growth. Lower inflation helped to protect the poor from price shocks and to improve the purchasing power of households’ income. It also reduced interest rates, which in turn lowered the cost of investment for firms and borrowing for government. “By lowering inflation and interest rates in the long run, and smoothing the cycles of economic growth in the short term, inflation targeting helps to boost long-run growth rates.”
He said inflation targeting had helped to provide a stable macroeconomic framework. Since its introduction, inflation and interest rates were lower and interest rates less volatile. This was largely due to the increased transparency and accountability of monetary policy, which helped to contain inflation expectations.
“In the decade after inflation targeting was introduced, the real repo rate fell to an average of 3% between 2000 and 2009, compared to rates of 5,7% between 1990 and 1999. In 2011, the real repo rate has averaged 0,7% and is just -0,5% at present. At the same time, households’ real income grew at 3,7%, nearly double the average rate of 2,1% in the 1990s, while the rate of expansion of gross fixed capital formation surged from only 1,4% in the 1990s to an average of 8,9% in the 2000s,” Mr Gordhan said.
Lower rates tended to support short-term borrowing and investment, which increased the pace at which prices increased, whereas higher interest rates tended to produce the opposite effect.
The inflation targeting band of 3% to 6% was also designed to support SA’s competitiveness, the minister said. The upper band was set to ensure that SA’s inflation rate did not exceed that of its emerging market rivals because if domestic prices rose faster than these countries, SA’s competitiveness would decline.
Source: Business Day
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