South Africa: Selected Issues

IMF Staff Country Reports, January 30, 2020

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South Africa: Selected Issues

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Bibliographic details

• Published: January 30, 2020
• Series: IMF Staff Country Reports
• DOI: https://doi.org/10.5089/9781513528519.002

Overview

• Publication date: January 30, 2020
• Focus: the growth-inflation trade-off of monetary policy in South Africa.
• Core question: whether anchoring inflation expectations at a lower level imposes a growth trade-off in the current environment of low growth and persistent inflation expectations.

Key findings

• There is limited growth trade-off of monetary policy efforts to anchor inflation expectations at a lower level at present.
• Monetary policy lends limited support to growth that is dampened by structural issues.
• During the 2010s, domestic demand growth responded little to monetary policy action.
• The environment of weak growth, low interest rates, and relatively moderate inflation (expectations) could have muted monetary policy transmission.
• Inflation expectations continue to respond to monetary policy action albeit to a lesser extent.
• Monetary policy transmission through demand has weakened:
  • demand growth does not systematically respond to monetary policy action, and
  • core inflation does not systematically respond to monetary policy action.
• The exchange rate and credibility channels appear to remain operational.

Policy recommendations and implications

• The South African Reserve Bank should continue its efforts of anchoring inflation and inflation expectations at a lower level because the growth trade-off appears limited at present.
• Ultimately, constraints to economic growth need to be removed to restore stronger policy transmission and support growth.

Transmission channels and dynamics

• Weakened channels:
  • Demand channel: muted—domestic demand growth showed little responsiveness to monetary policy during the 2010s.
  • Core inflation channel: muted—core inflation does not systematically respond to monetary policy action.
• Operational channels:
  • Exchange rate channel: appears to remain operational.
  • Credibility channel: appears to remain operational.
• Contextual factors:
  • Weak growth environment
  • Low interest rates
  • Relatively moderate inflation and inflation expectations

Subjects and keywords (as listed)

• Subjects: Currencies, Depreciation, Foreign exchange, Inflation, Money, National accounts, Prices, Private investment, Production, Total factor productivity
• Keywords: administered price inflation, Africa, CR, Currencies, demand growth, Depreciation, Global, growth-inflation tradeoff, Inflation, inflation expectation, ISCR, monetary policy, monetary policy action, Private investment, rand, rand volatility, Total factor productivity

Content in this bundle

• South Africa: Selected Issues; IMF Country Report No. 20/34; January 9, 2020
  • South Africa: Selected Issues; IMF Country Report No. 20/34; January 9, 2020 (Markdown version)
  • South Africa: Selected Issues; IMF Country Report No. 20/34; January 9, 2020 (PDF)