Policy Paper 25

This paper evaluates the main challenges facing South African monetary policy. We focus on three main issues: the external environment, the growth potential of the economy and its fiscal balance. The external environment will remain uncertain and volatile and South Africa monetary policy should increase the number of tools available to deal with external volatility. Low growth puts pressure on monetary policy, but monetary policy can help in promoting growth only if there are corresponding reforms in South Africa’s labour market, investment climate and growth strategy. Finally, the fiscal balance represents the most immediate risk to the country’s macroeconomic stability but monetary policy can provide the necessary support to the economy in a context of a credible commitment to fiscal stabilisation and longterm economic reforms. Inflation targeting provides the necessary flexibility and can accommodate new instruments and monetary practices.