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Thursday, February 4, 2016

Letter in Cape Times: 3rd February 2016: Aim for Zero Inflation

Letter in yesterday's Cape Times:

Title: Aim for Zero Inflation

Recent letters and articles by economists in the Cape Times and in the business section explain that the only lever that the Reserve Bank has to control inflation is interest rates.

Another lever is controlling banks' reserve margins. Banks are allowed to lend a multiple of the actual funds they have in cash or on deposit or in other investments. Increasing the banks' reserve margins forces banks to slow down their lending and, importantly, does not affect borrowers, especially business borrowers who need money so that they can expand, employ people, etc.

Furthermore, in the South African environment, it is the government which is creating most of the inflation with its very high price increases. Think electricity, water, rates, petrol, diesel, transport, sewerage, waste, taxes, red tape, etc, which all push up inflation, yet aren't caused by the consumer. These inflation pressures are caused by the government wanting to do everything itself, rather than by a government creating an enabling environment for business to do business. The Reserve Bank can maintain its independence by criticising government spending!

And yet another lever is for the Reserve Bank not to print money for the government to spend on things such as over-inflated budgets, corruption and unnecessary expenditure. If the Reserve Bank stopped printing money then inflation would slow down, and we might even have deflation, supposedly a "bad" thing, but actually a good thing as our money in the bank and our earnings become more and more valuable, rather than less and less valuable.

Two more tiny points: One is that the Reserve Bank controls the definition of inflation and every now and then it changes what is in "the inflation basket". The Reserve Bank should ignore the effect of government-induced inflation! And, secondly, the Reserve Bank sets the upper limit on what it deems to be "prudent inflation". At the moment the upper limit is 6 percent. Nowhere have I read that the Reserve Bank sees inflation as a "bad" thing and wants to reduce inflation, or that the upper limit should be increased to 8 percent. In fact, the Reserve Bank has a range of "good" inflation, ie between 2 and 6 percent.

The Reserve Bank should state that it wants to reduce inflation to zero percent. Then things won't increase in price any more and our costs will actually start going down!

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