Do Synchronised Boom and Non-boom Episodes in Credit Growth, Commodity and Equity Prices Impact the Response of the Repo Rate to Positive Inflation Shocks?

Nombulelo Gumata () and Eliphas Ndou
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Nombulelo Gumata: South African Reserve Bank

Chapter Chapter 8 in Achieving Price, Financial and Macro-Economic Stability in South Africa, 2021, pp 111-119 from Springer

Abstract: Abstract Do synchronised boom episodes in credit growth, commodity price growth and equity price growth impact the response of the repo rate to positive inflation shocks? Yes, they do. Evidence shows that the synchronised boom episodes lead to larger repo rate changes than what the counterfactual responses suggest. The positive amplification magnitudes indicate that synchronised booms lead to aggressive tightening in the repo rate due to positive inflation shocks than the level that would prevail in their absence. Synchronised (i) credit growth and equity price growth boom episodes and (ii) mortgage credit growth and equity price growth boom episodes propagate the inflationary pressures and result in aggressive repo rate tightening to curb the overheating effects. However, synchronised non-boom episodes in (i) equity price growth, (ii) credit growth, and (iii) credit growth to the corporate sector, exert downward pressure on the magnitude and pace of the repo rate tightening towards curbing inflationary pressures. A comparison between the propagation effects of commodity price growth boom episodes and aggregate credit growth non-boom episodes versus commodity price growth boom and aggregate credit growth boom episodes shows that the repo rate is aggressively tightened due to boom episodes. This shows that credit growth boom episodes have a bigger influence on the magnitude and pace of the repo rate tightening to positive inflation shocks. Thus, synchronised boom and non-boom episodes in credit growth, equity and commodity prices matter for inflation shocks and the rate at which the repo rate responds to inflationary pressures.

Date: 2021
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DOI: 10.1007/978-3-030-66340-7_8

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