Monetary Policy, Inflation, and Distributional Impact: South Africa’s Case

Abstract

The South African Reserve Bank has continued to fulfill its constitutional mandate to protect the value of the local currency by keeping inflation low and steady. This paper provides evidence that monetary policy tightening aimed at maintaining low and stable inflation could at the same time reduce consumption inequality over a 12-18 month horizon, commonly understood as the transmission lag of monetary policy action to the real economy, and similar to the distance between survey waves used in the analysis. In response to "exogenous" monetary policy tightening, the real consumption of individuals at lower ends of the consumption distribution declines relatively modestly, or even increases. With greater reliance on government transfers, thus smaller reliance on labor income, and relatively larger food consumption, these individuals appear to benefit mainly from lower inflation. By contrast, the real consumption of individuals at higher ends of the consumption distribution is more likely to decline due to lower labor income, weaker asset price performance, and higher debt service cost.

Short-run dynamics and long-run effects of monetary policy on residential property prices in South Africa

“…The use of short-term interest rates in maintaining inflation rate within the 3% to 6% target affects residential property prices through different monetary policy transmission mechanisms such as the savings and investment channel, exchange rate channel, inflation expectation channel and the wealth channel (Berg et al, 2013;Gumata et al, 2013;Miyajima, 2021;Sethi et al, 2019;Smal et al, 2001;Van Hai and Trang, 2015). Through the savings and investment channel, increase in interest rates increases costs for borrowers with flexible interest rate debt such as the interest rate on residential property loans (Atkin and Cava, IJHMA 17,7 2017).…”

“…In 2000, South Africa became the 13th country to adopt an inflation-targeting monetary policy framework (Kumo, 2015). The SARB targets an inflation band between 3% and 6% for consumer inflation (Miyajima, 2021). The development of the monetary policies significantly influenced residential property prices.…”

Monetary policy and wage inequality in South Africa

“…tightening monetary policy increases wealth inequality measured by the Gini index but reduces the gap between the 90th and the 10th percentile of wealth distribution. Miyajima (2021) shows that the SARB Monetary Policy Committee's commitment to maintaining low and stable inflation affects the allocation of real consumption positively, given that those on the lower end of the consumption distribution benefit more from low inflation and are 'less negatively affected by lower labour income, weaker asset price performance and higher debt service cost' (Miyajima 2021:16). A few other works focus on the impact of inflation on the poor (Kahn 1984;Oosthuizen 2007).…”