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Johannesburg - South Africa's inflation-targeting
framework is likely to be fine-tuned by the new government, said chief economist from Brait, Colen Garrow, on Friday.
He told I-Net Bridge in an interview that this outcome would likely be to appease the unions, which are calling for the scrapping of inflation targeting, but would also keep the proponents of the framework happy.
"President Jacob Zuma is a peacemaker, so I don't think they will scrap it, but he will give something to the Congress of South African Trade Unions. They will keep it, but then give them something in return," said Garrow.
"I don't think this is such a bad thing," he added.
"If it happens they will take interest rates down even lower," he said.
Garrow says that the target should be widened to 3-7%, or else it becomes a "straitjacket".
He explains that this view is justified while the dynamics of economic infrastructure spending - which by definition is inflationary - and a migration of large numbers of consumers into higher lifestyle categories are working through the system. He says this migration numbers 2.3 million between 2005-7.
"I feel they should widen the band to 3-7% while we have these dynamics," said Garrow.
Alternatively, he says, the authorities should look at some of the exclusions that could apply, and rather target consumer inflation excluding administered prices or fuel price hikes. Garrow notes that the decision to grant Eskom a 31.3% price increase just prior to the decision on Thursday to keep the repo rate on hold was telling.
"If this does not happen, we will not get GDP growth going. Our rates are way too high - the repo needs to be 1.5% lower - we need it at 6%," said Garrow.
Garrow notes that the ANC had some "good things to say" about growth and employment in its election manifesto. "These are joined at the hip with inflation. I think that's where we are going," he said.
Garrow said that while there are shortfalls in an inflation-targeting framework, he doesn't feel it should be scrapped, as unions have recently called for.
"It has its uses, such as setting a benchmark for all prices," he concluded.
- I-Net Bridge