bank, at the 5th sa tomorrow investor conference, new york, 9 november 2017. see especially p. 5 : “ bringing inflation to the midpoint and ultimately anchoring expectations there, instead of at 6 %, is one of the sarb ’ s most important medium - term strategic goals. ” flagship forecasting model, the quarterly projection model, which included an explicit 4. 5 % objective and projected a path for the policy rate that would deliver on that goal. the new strategy worked. over the next few years, we achieved lower inflation, and we also secured broad stakeholder understanding of our revised objective. between 2017 and 2019, we recorded many more mentions of our 4. 5 % objective, for instance from experts and journalists, in analyst reports and news articles. 18 no longer did anyone have to write scholarly papers to estimate our implicit target19 ; we communicated exactly what it was. and inflation slowed. in 2016, annual inflation was 6. 3 %. that fell to 5. 3 % in 2017, 4. 6 % in 2018 and 4. 1 % in 2019. by the time covid - 19 hit, the latest monthly inflation print we had in hand was 4. 5 %, exactly. 20 inflation expectations also declined significantly, from near the top of the target range to around the middle. for instance, at the start of 2017, two - year ahead survey expectations were at 6 %. 21 at the beginning of 2020, that measure was down to 4. 8 %, and by the end of the year it was 4. 5 %. we were clear that we wanted inflation at 4. 5 % − and we delivered. this experience demonstrated some lessons that remain important today. these are lessons about the costs of lower inflation, about structural factors like high administered prices, and about the role of monetary policy in shaping trend inflation. i ’ ll start with the influence of monetary policy over inflation. if you go and ask people what causes inflation, you often get answers about food or oil prices, and other such supply - side factors. yet all countries face these shocks. nonetheless, different countries have different inflation rates over time, sometimes very different rates. it is easy to understand moves in inflation caused by something like the petrol price. but over longer periods, such as 10 years, these factors mainly create volatility, https : / / www. resbank. co. za / en / home / publications / publication - detail - pages / speeches / speeches - by

is difficult to test counterfactuals. we cannot go back in time and conduct an experiment where we kept on aiming for the top of our target range rather than the middle. we do, however, have a study where two economists constructed a counterfactual model. 25 their work compares actual outcomes with how the economy was likely to proceed without the 4. 5 % change. the results make for interesting reading. perhaps the most striking is, they find no reduction in aggregate demand during the move to 4. 5 %. growth in gross domestic product ( gdp ) is in line with the counterfactual. unemployment is generally unaffected. credit extension is higher. their conclusion is that there was little or no cost to getting inflation to 4. 5 %. and the explanation they provide is that the sarb ’ s commitment to 4. 5 % was heard and understood. inflation was not forced down by a recession ; it was managed lower by clear and credible communication. this conclusion lines up with another study, by sarb economists, of sacrifice ratios in south africa. 26 a sacrifice ratio is the cost of reducing inflation, measured as the amount of gdp growth lost for each percentage point of lower inflation. for the period where we moved inflation to 4. 5 %, this study finds a negative sacrifice ratio, which means there was no cost. the authors also find that disinflation costs have generally been low in south africa. this is, once again, contrary to the popular intuition that lower inflation is achieved by slower growth and higher unemployment. and once again, the key seems to be the sarb ’ s credibility and communication. if the public understands and believes the central bank ’ s objectives, disinflation can be achieved with little or no pain. ladies and gentlemen, let me conclude with a summary of the lessons learnt, which should be informing our current conversations. e pirozhkova and n viegi, ‘ change of the sarb ’ s preferred inflation target in 2017 : the conditional forecast story ’, sarb occasional bulletin of economic notes no. 2401, april 2024. https : / / www. resbank. co. za / content / dam / sarb / publications / occasional - bulletin - of - economicnotes / 2024 / change - of - the - sarbs - preferred - inflation - target - in - 2017 - the - conditional - forecast - story - april2024 - 01. pdf c loewald, k ma