Introduction
Inflation targeting is a technique used by central banks to control the general price level. Central banks set a target and try to achieve that target under “inflation targeting regimes”. Because inflation and interest rates move in opposite directions, central bank actions tend to be transparent under inflation targeting regimes. Inflation targeting equally provides a nominal anchor to the economy, which can be used to keep prices low. In some ways, it can serve as an anchor for stability as currency pegs reduce countries’ ability to respond to shocks to terms of trade (the value of a country’s exports relative to that of its imports) or changes in real interest rates. When countries adopt freely floating exchange rates, they usually adopt other anchors such as money supply to control inflation to support their economies. If central banks can control money supply, monetary aggregates (broad money, etc.) could be a useful target for monetary policy. However, it has not been successful in the past because demand for money can become unstable. As such, countries with a flexible exchange rate tend to target inflation directly due to the transmission from interest rates to inflation.
Conclusion
Rising inflation suggests that the central bank may need to reconsider their monetary policy target. In 2023, inflation averaged 7% in Cameroon, which heightens concern about the ability of monetary policy to support the economy and allow households and investors to plan effectively. Targeting a stable exchange rate reduces the impact of imported inflation and could be seen as one of the objectives under an inflation targeting regime.
In order for the central bank to target inflation, the CFA Franc must be allowed to float. However, it may be premature to exit the peg at present as the Euro guarantees macroeconomic stability and prevents wild swings in the CFA. However, the central bank can adjust its tools to ensure that prices rise gradually while advocating for fiscal policy makers to encourage bank lending to SMEs. This will improve the interest rate channel and optimize monetary policy transmission mechanisms.
