INFLATION TARGETING AND COMMUNICATION STRATEGIES IN SOUTH AFRICA Rashad Cassim South African Reserve Bank Research Department
Pre-IT Monetary Policy Regime SARB sets its policy interest rate (repurchase rate) for routinely lending funds to banks with a cash shortfall Banks set their interest rates broadly aligned with the SARB s policy rate Floating rate nature of debt in the economy, which exposes borrowers to interest rate fluctuations. Objective of monetary policy was unclear, seemed to change No clear accountability No specified time frame High degree of interest rate variability Strong heavy handed response to exchange rate depreciation
IT Practices in South Africa 2000 Introduction of an IT Regime Inflation target is set by government after consultation with the South African Reserve Bank Price index chosen (2000 to 2008) was the consumer price index excluding mortgage interest cost (CPIX) Target: 3-6% inflation Range, not a point target No specific sanction if target is missed, but communication imperatives and escape clause to deal with results of large exogenous shocks If impact of large shock on inflation has to be neutralized immediately, it would require extreme interest rate movements
Monetary Policy Committee Governor 3 Deputy Governors 2 Advisors Head of Research No voting but consensus building
Monetary Policy Process 6 Meetings a Year Every Meeting Followed by a Press Conference Broadcast live on TV/Radio/Web Podcast Open to Press but analysts can phone in to ask questions Sometimes faced with a variety of questions from basic to extremely sophisticated
The Press Conference: First Opportunity to Communicate Strategy Detailed monetary policy statement ( on average 10 pages) Statement on the state of the global economy and markets Discussion of the monetary policy stance Contents of the statement receives intense scrutiny from markets and analysts
Outcomes of the Press Conference a) Governor reads out the press statement (20 minutes) b) Question and Answer Session Governor reveals whether there was disagreement on the policy decision ( very important information for markets?) Response of specific MPC members to questions- also important in crafting messages and giving markets a sense of the thinking and orientation of individual members of the committee Distinguish between communication by committee or communication by individual members
Key Messages in the Monetary Policy Statement Forecast of Headline and Core Inflation- distinction important purely to convey what lies behind underlying inflation Forecasts of Growth Analysis of forecast and the MPC s judgment of whether upside and downside bias exists in the forecast. Balance of Risks MPC s discussion of inflation expectations
Research and Policy Outputs Monetary Policy Review ( MPR) released twice a year Like the BOEs inflation Targeting Report- forward looking analysis. The MPR is the main forward-looking publication on macroeconomic prospects but still needs fine tuning. Provides the background to the forward looking judgments of the Monetary Policy Committee.
MPR MPR provides fan charts -presents graphically the central forecast of inflation and confidence interval bands to indicate the degree of uncertainty around the forecast Advantage of using fan charts is their ability to give a visual picture of: the central forecast (such as the mode of the probability density function of forecasts) the degree of certainty of the central forecast (the width of the fan, with confidence intervals marked by bands of different colour density, showing the spread of the distribution) and the relative probability of downside and upside deviations from the central forecast
Monetary Policy Forums In addition to MPC Press Conference two national press conferences held at the SARB at the launch of the MPR publication Press, academics, industry leaders, market analyst ( 300 attend) Followed by regional forums in all South African Provinces
Role of Speeches Speeches (by MPC members) between MPC meetings provide an important vehicle to clarify, expand, reinforce or dispel perceptions in the markets Particularly important when markets are surprised by the MPC decision. Recent Examples
Other Important Forums 4 Economic Roundtables a year with predominantly private sector economists provides an opportunity for a two way discussion Extensive outreach initiative with unions, political parties, business interests Presentations to Parliament Bilateral discussions with Government Departments
More Recent Communication Concerns How transparent can you be? Is forward guidance appropriate for a country like South Africa? What does Data Dependence Mean? Is a semi-transparent model that informs the forecast counter productive?
QB March 2011 Historical View of Repurchase Rate
Recent challenges Does hike in interest rate represent a hiking cycle? How does communication assist with this? What leads to surprises? Is it a failure of poor communication?
Forecasting and Communication Market Surprised by the Decision of MPC to hike interest rates by 50 basis point at most recent meeting. Main surprise was the impact of a different exchange rate assumption on the inflation forecast. Limited information of model may be a source of confusion. Constant interest rate assumption?
Flexible Targeting in Practice Specific Communication Challenges: Over the last two years we breached the target over a few quarters but kept interest rates unchanged. Markets pre-occupied with what the committee considers a sustained deviation from the target means- to result in a policy tightening. At the most recent monetary committee meeting we once again breached the target but for a longer period.- raised very specific communication challenges.
Monetary Policy Transmission Mechanism Trying to influence the long end of the yield curve? Short term interest rate? Transmission mechanism and the forecast. Inflation Expectations vs Traditional Channels
Conclusion: IT and Communication Evidence to suggest that IT quite important in anchoring inflation expectations. Less dramatic response to either exchange rate depreciation or exogenous price pressures. Inflation has generally been within the target although, the bias has been towards the upper end of the target. Inflation targeting provides an important framework for a communications strategy. Invest considerable amount of time in an effective communication policy. Distinguish clearly between markets and the rest, particularly agents in the economic who drive inflation expectations.