25 April 2008
	New target needed Dion George, MP, DA deputy spokesman on finance

The article on monetary policy (Cover Story April 18) was most interesting, and clearly set out the plight of the SA Reserve Bank. Together with national treasury, it has agreed to target CPIX inflation at between 3% and 6%. The basic premise of inflation targeting is to create certainty. It intends to manage inflationary expectations and thereby guide economic behaviour, such as setting prices and wages. In response to my question in parliament, regarding the appropriateness of using CPIX to set the inflation target, finance minister Trevor Manuel replied: "We believe it is appropriate to target a broad measure of consumer inflation that includes food and petrol, but excludes mortgage interest costs" (CPIX). Government has thus committed itself to the pursuit of a CPIX inflation target. Reserve Bank governor Tito Mboweni recently hiked interest rates, despite real concern over the impact this will have on sustainable economic growth. The bank has thus demonstrated its determination to pursue the set target. It will be difficult for government to retreat from this position. At a meeting of the portfolio committee on finance, Mboweni said the target range could not be increased because this would create uncertainty. For inflation targeting to manage expectations and therefore behaviour, it needs to be believable. Participants in the economy need to believe that the target will be rigorously pursued and that it is actually achievable. Government and the bank have demonstrated they are determined to pursue the target. Unfortunately, many participants in the economy do not believe that the target range can be met and do not consider it to be a guide for their economic behaviour. Unions are not convinced their wage demands should be constrained within the target range and prices of key elements within CPIX are well beyond the influence of a local inflation target. Eskom, a public enterprise, is certainly not constrained by the inflation target. Inflation is bad for poor people in particular and must be controlled, but there needs to be broader consensus on how.