Hawks And Doves of Inflation

I was once asked in an interview to explain inflation and also state how it will affect an old woman living in the rural areas. I answered that inflation is the rise in price of goods and an old woman in the rural areas will be affected when she needs more money to buy her essentials. Technically I was correct; however, I did not get the job (lol story for another day).

In layman’s term inflation is a general increase in prices and fall in the purchasing value of money. Every central bank’s main purpose is to control price stability, therefore a Monetary Policy Committee is appointed, mainly consisting of six people, to decide on the repo rate using all the information available. Inflation is targeted between 3-6% in South Africa
Recently the South African MPC members were divided on the decision to leave the repo rate unchanged or to decrease it. This is what we call hawks and doves, where three of the members were stricter on inflation and the other members were less worried about it.

Given the current situation in South Africa where the unemployment rate is 27.7%. It is rather understandable why doves would be less concerned about inflation and rather concentrate on other things outside the monetary framework such as unemployment, since there’s a trade-off between inflation and unemployment.

However the mandate of the central bank is price stability, therefore the hawks wanting to sustain their credibility by targeting a constant price level, does make sense to leave the repo rate unchanged.

So why should you care about the MPC’s decision?
Well it takes 24 months for any repo rate decision to have an impact, therefore if you care about your future self then you would want to know if you will be able to afford certain things in 2 years time. So from today on, please pay attention the central bank’s governor “boring” speeches, because they do impact your life whether you know it or not.

1 Response

  1. Martin says:

    Can you share data around the 24 month impact of an interest rate decision? would like to understand more around the process and order of things affected. I believe that it affects currency instantly (also I’m not an economist).

    When we had lower rates we had high unemployment, how does lowering the rates reduce this?

    Thanks 🙂

Leave a Reply

%d bloggers like this: