Isolating a measure of inflation expectations for the South African financial market using forward interest rates

The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and offers an additional method, which is market based. The methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.South Africa, Inflation expectations, Monetary policy transmission mechanism, Implied forward rates, Term structure of interest rates

Isolating a Measure of Inflation Expectations for the South African Financial Market Using Forward Interest Rates

The inflation expectations channel of the transmission mechanism has generally become recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and others a market-based alternative with advantages over existing measures. It is widely recognised that the yield curve contains some information about the future inflation expected by the markets. The availability of inflation-indexed bonds in South Africa for the past few years has provided an opportunity to use more recently developed techniques for isolating a measure of inflation expectations using the difference between nominal and real forward interest rates (inflation compensation). In this paper, the methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied in order to determine a series of implied nominal and real forward interest rates. The difference between the nominal and real forward rates on a particular day are then determined, and this is used as a measure of the inflation expectations of the markets. This measure of inflation expectations should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.

The sensitivity of South African inflation expectations to surprises

Price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack, Sack and Swanson (2005a) is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa’s results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged inflation expectations to be relatively insensitive to macroeconomic surprises, and offers support for the inflation targeting framework as a means to help anchor inflation expectations.South Africa, Inflation targeting, Macroeconomic surprises, Sensitivity of inflation expectations

The Sensitivity of South African Inflation Expectations to Surprises

The maintenance of price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack, Sack and Swanson (2005a) is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa’s results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged private sector inflation expectations to be relatively insensitive to macroeconomic surprises, and it offers further support to the argument that the inflation targeting framework facilitates the anchoring of inflation expectations.

Loud and clear? Can we hear when the SARB speaks?

Inflation targeting is a forward-looking framework for monetary policy that has brought unprecedented transparency to the process of monetary policy. This paper aims to assess the degree to which the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has, since the introduction of inflation targeting, successfully communicated to the public its policy analysis, and, in particular, the expected future policy changes. This paper follows international literature (Rosa and Verga (2007), Ehrmann and Fratszcher (2005)) in constructing a numerical index that is used to reflect the information content of the SARB’s communications, specifically the monetary policy statements that accompanied each of the MPC meetings since 2000. Relating this index to subsequent policy decisions reveals the informativeness of the index and, by implication, the informativeness of the underlying monetary policy statements. This method allows us to judge, systematically, the degree to which the MPC has communicated successfully, and the evolution of that success over the past nine years. We find evidence that the MPC has succeeded in signalling their likely future policy decision with consistency over this period.South Africa, Inflation targeting, Central bank communication, Effective monetary policy, forward-looking policy framework

Talking to the inattentive public: How the media translates the Reserve Bank’s communications

Central bank communication is widely recognised as crucial to the implementation of monetary policy. This communication should enhance a central bank’s management of the inflation expectations of the financial markets as well as the general public — the latter being a part of the central bank’s audience that has received relatively little research attention. In this paper, the role of the media in transmitting the SARB’s communication to the general public is explored, with the aim of improving our understanding of its impact on the expectations channel of the monetary policy transmission mechanism. A deliberate evaluation of this channel could aid the design of future strategies to communicate with the general public.South Africa, central bank communication, consistency, monetary policy transmission mechanism, transparent monetary policy.

Talking to the inattentive Public: How the media translates the Reserve Bank’s communications

Central bank communication is widely recognised as crucial to the implementation of monetary policy. This communication should enhance a central bank’s management of the inflation expectations of the financial markets as well as the general public – the latter being a part of the central bank’s audience that has received relatively little research attention. In this paper, the role of the media in transmitting the SARB’s communication to the general public is explored, with the aim of improving our understanding of its impact on the expectations channel of the monetary policy transmission mechanism. A deliberate evaluation of this channel could aid the design of future strategies to communicate with the general public.South Africa, central bank communication, consistency, monetary policy transmission mechanism, transparent monetary policy

Macroeconomic surprises and stock returns in South Africa

PURPOSE – The objective of this paper is to explore the sensitivity of industry-specific stock returns to monetary policy and macroeconomic news. The paper looks at a range of industry-specific South African stock market indices and evaluates the sensitivity of these indices to various unanticipated macroeconomic shocks. DESIGN/METHODOLOGY/APPROACH – The authors begin with an event study, which examines the immediate impact of macroeconomic shocks on the stock market indices, and then use a Bayesian vector autoregressive (BVAR) analysis, which provides insight into the dynamic effects of the shocks on the stock market indices, by allowing them to treat the shocks as exogenous through appropriate setting of priors defining the mean and variance of the parameters in the VAR. FINDINGS – The results from the event study indicate that with the exception of the gold mining index, where the CPI surprise plays a significant role, monetary surprise is the only variable that consistently negatively affects the stock returns significantly, both at the aggregate and sectoral levels. The BVAR model based on monthly data, however, indicates that, in addition to the monetary policy surprises, the CPI and PPI surprises also affect aggregate stock returns significantly. However, the effects of the CPI and PPI surprises are quite small in magnitude and are mainly experienced at shorter horizons immediately after the shock. ORIGINALITY/VALUE – To the best of the authors' knowledge, this is the first study conducted on South Africa which analyses the impact of a wide range of unanticipated macroeconomic shocks on stock returns. This paper improves on earlier efforts by using measures of monetary policy, as well as other macroeconomic news, which more cleanly isolates the unanticipated elements of the monetary policy variable and other macroeconomic indicators, in studying the impact of these surprises on stock returns in South Africa.http://www.emeraldinsight.com/hb201

Forecasting the South African inflation rate : on asymmetric loss and forecast rationality

Using forecasts of the inflation rate in South Africa, we study the rationality of forecasts and the shape of forecasters’ loss functions. When we study micro-level data of individual forecasts, we find mixed evidence of an asymmetric loss function, suggesting that inflation forecasters are heterogeneous with respect to the shape of their loss functions. We also find strong evidence that inflation forecasts are in line with forecast rationality. When we pool the data and study sectoral inflation forecasts of financial analysts, trade unions and the business sector, we find evidence for asymmetry in the loss function and against forecast rationality. Upon comparing the micro-level results with those for pooled and sectoral data, we conclude that forecast rationality should be assessed based on micro-level data, and that freer access to this data would allow a more rigorous analysis and discussion of the information content of the surveys.German Science Foundation (Deutsche Forschungsgemeinschaft).(Project “Macroeconomic Forecasting in Great Crises”).http://www.elsevier.com/locate/ecosys2017-03-31hb2016Economic

Inflation forecasts and forecaster herding : evidence from South African survey data

We use South African survey data to study whether inflation forecasts are unbiased. Depending on a fore- caster’s information set, we evaluate whether forecasts are biased due to forecaster herding. Forecaster herding is strong when a forecaster’s information set contains no information on the contemporaneous forecasts of others. When we randomly allocate forecasters into a group of early forecasters who can only observe the past forecasts of others and late forecasters who can also observe the contemporaneous forecasters of their predecessors, evidence of forecaster herding weakens. Evidence of forecaster (anti-) herding is strong and significant in times of high (low) inflation volatility.German Science Foundation (DFG) (FR 2677/4-1) (project Macroeconomic Forecasting in Great Crises).http://www.elsevier.com/locate/socec2017-06-30hb2016Economic