Monetary Policy – Inflationary Hikes
Finance Minister Trevor Manuel of South Africa’s Reserve Bank, has announced that there will be an upward inflationary shift for 2004 to 3-6%. Originally, the planned rate was expected to stay within a 3-5% bracket, however, the Reserve states that it would be forced to stay within strict boundaries, tightening monetary policy. Although inflation is expected to be higher than usual, the Fed is thinking realistically and not setting goals that would seem otherwise unattainable. It seems as though the policy is contractionary, yet Manuel assures the economy that the key goal is to ensure growth down the road, a truly long-term commitment. His belief is that by the fourth quarter of the target year, 2004, inflation rates should be capped back down into the 3-5% bracket. So, long-term thinking suggests this to be of expansionary measures.
The whole program is based around attaining price stability, inherently. Up until the year 2004, inflation rates appear to be in the upper single digits, approximately 9.6% for this year, and about a 2.5% drop up until the last quarter of 2004 when the 5.5% rate is expected to level out of the wavering economy. At this point, it will be more likely that economic growth will be more significant. Economists say that with such a large rate progressively decreasing from year to year, consumer confidence should turn out to be at a higher level than currently. In the meantime, economists add that growth of the Real GDP should waver between about 3% and 6%. In all likelihood, the current economic growth status should remain about the same due to the fact that inflation rates are high to begin with. The fact of the matter is that, various advisors have frowned down upon this increased prediction and Manuel has been criticized for his loosely fit notion. Attacks on him and the other members of the fed include him “going too soft on inflation”. Below is the desired effect of the inflationary measures in the form of an AS/AD graph.
*** R3 most nearly represents the short term effect
of the increase in inflation. Over time
Manuel hope to reach R2, when the
ball gets rolling again.***
