The time horizon over which inflation targets is set can affect credibility. A time horizon that is too short can lead to very stringent policy measures and uncessary instability in domestic demand and output. If the target is set over a too long period however, the public may interpret this as a lack of seriousness about combating inflation on the part of monetary authorities and the target may not have any impact on inflationary expectations.
In South Africa it was decided with the introduction of inflation targeting in February 2000 to specify the target in terms of the annual average rate of increase in the CPIX for the calendar year, two years ahead.
Accordingly the target was set as an average annual rate of increase of between 3 and 6 per cent in the CPIX for 2002, whereafter it was to be reviewed annually. In November 2003, however, it was decided to terminate the annual average specification of the target because it complicated the implementation of the inflation-targeting framework and could lead to inconsistencies in monetary policy which could result in excessive interest rate volatility and ineffective management of inflation expectations.
The annual average was replaced by a continuous target of 3 to 6 per cent for the period beyond 2006. This remains the current target for the Bank and by extension, the country.