daniel mminele : inflation targeting in the wake of the crisis and the south african experience address by mr daniel mminele, deputy governor of the south african reserve bank, at the luncheon of the southern african - german chamber of commerce and industry, johannesburg, 25 july 2012. * 1. * * introduction good afternoon and thank you to the southern african – german chamber of commerce and industry for the invitation. i thought it may be an appropriate time to take stock of monetary policy in general and more specifically in south africa since the sub - prime crisis. the years between the mid - 1980s until the outbreak of the sub - prime crisis are often referred to as the “ great moderation ”. 1 this period of reduced macroeconomic volatility came to an abrupt end in 2007, following which uncertainty, instability, extraordinary volatility and strain in financial markets became the norm. increasing trade and financial inter - linkages with the global environment meant transference of this volatility and uncertainty to the south african economy, with consequences for monetary policy. south africa ’ s monetary policy has been influenced by developments in the us and europe, however, it is also true that our experience has been vastly different to that of central banks abroad. i say this because at no time did we employ unconventional monetary policies, nor did we implement capital controls or intervene in the foreign exchange market. we were one of the few emerging market central banks not to have tightened monetary policy during this period. the crisis in europe shows no signs of abating and the threat of the us fiscal cliff looms large. judging by the most recent developments, things seem to be getting worse. speculation about the likelihood of a third round of quantitative easing by the us federal reserve and a third long - term refinancing operation by the european central bank, is gaining impetus. globally, the stance of m onetary policy is accommodative and one would be hard pressed to find anyone betting on a change in the state of affairs anytime soon. i will discuss how inflation targeting has fared through the crisis and then share some thoughts with you on south africa ’ s experience and recent developments on the monetary policy front. 2. the appropriateness of inflation targeting? new zealand was the pioneer of inflation targeting 2 and adopted the framework just over two decades ago. the idea of explicitly targeting inflation proved to be an attractive proposition for central banks and thus became much more widely embraced, with approximately 39 central banks 3 said to have inflation

intervention. 3. the south african experience the south african experience with the implementation of inflation targeting has been a positive one. work done by my mpc colleague brian kahn and others has shown that south africa has benefited from a flexible approach to inflation targeting and managed to weather the storms that came along with challenges of multiple supply side shocks of an extended duration, and exchange rate shocks. this was done by looking through short - term impacts and focusing on second rounds effects, thus resulting in inflation being allowed to be outside the target for longer, but not overreacting with policy, while keeping a close watch on inflation expectations. rethinking macroeconomic policy, olivier blanchard, giovanni dell ’ ariccia and paolo mauro, imf staff position note, february 12 2010 bis central bankers ’ speeches in august 2008, south africa ’ s headline inflation rate peaked at 13. 7 per cent, at which time the repo rate had been increased to 12 per cent. this occurred in a period when global inflation had started edging lower and policy rates in advanced economies were being reduced. towards the end of 2008, when it became quite clear that the us sub - prime crisis was to have a much more devastating impact on the local economy than had initially been expected, the monetary policy committee started to reduce the repo rate. at this time, inflation pressures had started to abate and by the end of 2010, the repo rate had been reduced to 5. 5 per cent, by which time inflation had again started to rise. nonetheless, the repo rate was kept at this low level in response to the crisis, taking into consideration that the nature of the rise in inflation over this period was largely cost - push, and did not appear to be feeding into more general price pressures in the economy. the cpi inflation rate has since come back within the 3 – 6 per cent target range, and looks likely to decelerate in the months ahead, given evidence of softer food prices and moderating demand. the bank expects inflation to decelerate to 4. 9 per cent in the second quarter of 2013 and remain stable around 5 per cent to the end of 2014. like other countries, south africa is drawing lessons from the financial crisis and the changing role of central banks. our mandate has been clarified to more explicitly include a financial stability responsibility, and we are working on clarifying the role of financial stability in monetary policy formulation and implementation, having elevated the status of the financial stability committee in the bank