Change of the SARBs preferred inflation target in 2017 the conditional forecast story

Ekaterina Pirozhkova and Nicola Viegi

No 11051, Occasional Bulletin of Economic Notes from South African Reserve Bank

Abstract: This note analyses the effects of the South African Reserve Banks Monetary Policy Committee communicating a change in its preferred inflation target in July 2017. Prior to 2017Q3, the MPC indicated its inflation targeting range to be 36%. From 2017Q3 onward, the MPC shifted to emphasising the midpoint of the range, 4.5%, as its preferred inflation target. We estimate the implications of this shift by means of a Bayesian vector autoregression-based counterfactual exercise. Our results show that this change in the preferred inflation target allowed a reduction in prices and inflation expectations without negative effects on real output and employment. This was achieved via the reduction in the South AfricanUnited States long-term interest rate spread (i.e. by a reduction in risk) and by a subsequent positive effect on asset prices.

Date: 2024-04-24
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