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

Stellenbosch Working Paper Series No. WP09/2009
 
Publication date: 2009
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

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.

 
JEL Classification:

E43, E44, E52, E58

Keywords:

South Africa, Inflation expectations, Monetary policy transmission mechanism, Implied forward rates, Term structure of interest rates

Download: PDF (371 KB)

BER Weekly

6 Jun 2025 SA GDP barely expands in Q1, while BCI and PMI suggest that Q2 remained weak
It was a busy week for local data releases, much of which painted a bleak picture of SA’s economy. Not only was first-quarter GDP growth dismal, but 2024 growth was also revised lower to just 0.5%. , The RMB/BER Business Confidence Index (BCI) showed sentiment remained shaky in the second quarter...

Read the full issue