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Mpc Analysis Jan 2012

898 words - 4 pages

On the 19th of January 2012, the Monetary Policy Committee (MPC) announced that the repo rate was to remain unchanged at 5.5% which in turn resulted in the prime rate remaining unchanged at 9%. This decision was the seventh consecutive decision to keep rates unchanged which is consistent with the Reserve Bank’s policy of maintaining low market volatility. Since the previous MPC meeting growth prospects have weakened and the outlook for inflation has deteriorated. Jill Marcus focussed a great deal of her speech on the drastic uncertainty that currently exists in world markets as well as the fine balance that needs to be maintained between accurate inflation targeting and growth prospects in ...view middle of the document...

In many ways a successful inflation targeting system can be a self-fulfilling prophesy. As Businesses expect inflation to increase by roughly 5-6% year on year, they in turn increase their prices by this margin, therefore resulting in the target being acquired.
As the inflation rate is currently sitting outside of the inflation band target of 3-6% at 6.1% (and is expected to remain outside the target band for the entire of 2012), the credibility of the SARB is treading a fine line. Going forward, the MPC needs to ensure that the inflation rate does not increase significantly further above the 6% limit as public confidence in the SARB and the inflation targeting policy will begin to deteriorate. Many parties were calling for a rate-cut at the recent meeting in order to boost growth, however this would have been inappropriate in my view as this could have had a negative effect on the inflation target and pushed it even further outside of the target band.
Exclusive focus on the inflation target by the MPC could lead to undesirable results and effects on the economy. At certain times a balanced approach may need to be taken by the committee. Ever since the financial crisis of 2008, the recession experienced by all markets throughout the world has created a greater need to try and increase growth in the South African economy. Although the inflation target is the overriding focus of the committee, the MPC also realises that decisions which ignore exceptional circumstances could lead to instability in the real economy. If a severe shock affects the economy, extreme measures to reach the inflation target could prove to be very costly. In such cases discretion is applied by the MPC, while...

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