Review of Monetary Policy in in South Africa since 1994

This paper reviews the design and performance of monetary policy in South Africa (SA) during 1994-2004. Quantitative indexes of transparency reveal a strong rise in the transparency and accountability of monetary policy between 1994 and 2004. Inflation and interest rate expectations data and forward interest rate data are used to demonstrate the increased credibility and reasonable predictability of monetary policy since adopting inflation targeting in 2000. The SA Reserve Bank’s view on monetary policy transmission channels is discussed, and its recent forecasting performance is evaluated. We find that monetary policy decisions taken in response to external and domestic shocks under inflation targeting have significantly improved relative to the preceding framework, though data quality has been a constraint. Further, inflation targeting has not disadvantaged potential investment in terms of the level of tax-adjusted real interest rates. Finally, the important role for complementary policies to support monetary policy is motivated. _____________________________ * A preliminary version of this paper was prepared for a joint CSAE-Stellenbosch University conference: South African Economic Policy Under Democracy: a 10 Year Review (27/28 October, 2005). We have greatly benefited from extensive comments by Bernie de Jager, Brian Kahn, Ian Plenderleith and Johan Prinsloo (South African Reserve Bank); Peter Sinclair (Bank of England); Michael Nowak and Vivek Arora (IMF); Kevin Fletcher (National Treasury); Ben Smit (Bureau for Economic Research); Stan du Plessis (Stellenbosch University); Gavin Keeton (Anglo American); Peter Worthington (Credit Suisse First Boston); Marisa Fassler (JP Morgan Chase Bank); Dennis Dykes (Nedbank); Michael Power (Investec); and Martin Grandes (OECD). We are grateful for advice on data from Greg Farrell (SARB), Marisa Fassler (JP Morgan Chase Bank), Rudolf Gouws (Rand Merchant Bank), George Kershoff (BER) and Ingrid Woolard (SALDRU, UCT). We are grateful for comments received at the conference from Brian Kantor (Investec), Gordon Smith (Citigroup) and Jac Loubscher (Sanlam). We acknowledge funding from the Department for International Development (U.K.), grant number R8311. The U.K. Department for International Development (DFID) supports policies, programmes and projects to promote international development. DFID provided funds for this study as part of that objective but the views and opinions expressed are those of the authors alone. Our website is: http://www.csae.ox.ac.uk/, and link to “The South African Macroeconomic Research Programme”.