|
Statement of the Monetary Policy Committee
by Mr TT Mboweni, Governor of the South African Reserve
Bank, 14 October 2004
Introduction
Inflation has receded to historically low levels and
has consistently remained within the CPIX inflation
target of between 3 and 6 per cent in the past twelve
months. This favourable outcome is mainly the result
of disciplined monetary and fiscal policies pursued
by the authorities. The low rates of increase in the
general price level of South Africa have been recorded
in an economic environment characterised by an expansion
in real gross domestic product, which has now lasted
for nearly 6 years, notwithstanding the recent period
of slower growth in the world economy. Achieving low
inflation has allowed interest rates to be reduced and
has provided an additional platform for economic growth.
Increases in the volume of exports were at first mainly
responsible for the steady growth in domestic production.
More recently, growth in real gross domestic expenditure
picked up considerably and reached a level at a seasonally
adjusted and annualised rate of 13 per cent in the second
quarter of 2004.
The inflation outcome
The twelve-month rate of increase in the consumer price
index for metropolitan and other urban areas excluding
the interest cost of mortgage bonds (the CPIX) decreased
from a peak of 11,3 per cent in October and November
2002 to 5,4 per cent in September 2003. CPIX inflation
then remained within the inflation target range and
declined further to 3,7 per cent in August 2004. If
energy prices are omitted, year-on-year CPIX inflation
amounted to 3,5 per cent in August 2004.
The deceleration in inflation can mainly be attributed
to slower rates of increase in the prices of consumer
goods. The year-on-year rate of increase in the prices
of consumer goods decreased from 13,0 per cent in October
2002 to 3,8 per cent in September 2003 and 2,0 per cent
in December. It then fluctuated between 2 and 4 per
cent in the ensuing period largely depending on adjustments
in the prices of petrol and diesel. In August 2004 the
year-on-year rate of increase in these prices amounted
to 2,1 per cent.
In contrast to the prices of consumer goods, the prices
of consumer services remained stubbornly high owing
especially to continued high increases in administered
prices. The twelve-month rate of increase in the prices
of consumer services included in the CPIX at first increased
from 7,4 per cent in October 2002 to 8,6 per cent in
September 2003. It then declined marginally to 8,1 per
cent in February 2004, before moving down more markedly
to 6,6 per cent in August.
The significant effect that the recovery in the exchange
rate of the rand has had on the improvement in domestic
inflation is clearly illustrated by developments in
the prices of producer goods. The prices of imported
goods, which had increased at a year-on-year rate of
17,2 per cent in September 2002, started to decline
from April 2003. Since then these prices have declined
continuously for a period of seventeen months. In August
the index value of the prices of imported goods was
approximately 10 per cent lower than at its peak in
October 2003.
The decline in the prices of imported goods has materially
influenced the adjustments in the prices of domestically
produced goods. Although the prices of goods produced
in South Africa continued to increase, the rate of increase
slowed down considerably and amounted to a year-on-year
level of 2,3 per cent in August 2004. As a result, the
year-on-year rate of increase in the all-goods production
index was 1,1 per cent in this month.
The inflation outlook
The low rate of increase in production prices augers
well for inflation going forward. Thus the inflation
outlook over the longer term is promising. The Bank's
forecasts show that CPIX inflation should stay within
the boundaries of the inflation target range over the
next two years, moving moderately higher over the coming
year, but thereafter easing somewhat.
A number of factors are probably responsible for this
favourable inflation outlook. One of the developments
that has led to lower recorded inflation has been the
decline in inflation expectations. According to the
Survey of Inflation Expectations by the Bureau for Economic
Research at the University of Stellenbosch commissioned
by the South African Reserve Bank, expected CPIX inflation
has declined to within the inflation target range for
the three years from 2004 to 2006. This is the first
time since the inception of the survey in the third
quarter of 2002 that CPIX inflation expectations for
all three forecast years have fallen within the target
range. This is a welcome development indeed.
A number of other factors support a low inflation outcome.
These include the fiscal prudence applied by government,
an improved outlook for food prices (despite the serious
drought in some parts of the Western Cape), commitment
by the public authorities to contain administered price
increases and low inflation, on average, in the rest
of the world.
As already indicated, the recovery in the external
value of the rand since the beginning of 2002 has been
a significant factor supporting the positive inflation
outcome. The external value of the rand has been relatively
steady in 2004. The volatility in the exchange rate
of the rand has moderated and the rand has become generally
more stable in the foreign exchange markets over this
period.
Going forward it is difficult to predict movements
in exchange rates. To a large extent the external value
of the rand will depend on balance of payments developments.
The deficit on the current account of South Africa's
balance of payments widened in the first half of 2004
to a seasonally adjusted and annualised value of R31,8
billion, or 2,5 per cent of gross domestic product.
Preliminary trade figures for July and August indicate
that a further deficit on the current account will probably
be recorded in the third quarter of 2004.
The deficit on the current account was comfortably
financed by large financial inflows. The net financial
inflow into the country (including unrecorded transactions)
amounted to approximately R40 billion in the first six
months of 2004. These inflows consisted mainly of government
long-term loans, increases in the short-term liabilities
of banks, portfolio capital and trade finance provided
by non-residents. The large net financial inflows enabled
the Bank to increase the official foreign exchange holdings
of the country from US$8,0 billion on 31 December 2003
to US$12,4 billion at the end of September 2004.
The rates of increase in consumption expenditure and
capital formation have also led to an acceleration in
the growth of gross domestic product and have probably
narrowed the gap between potential and actual domestic
production.
The favourable projected inflation outcome could also
be at risk due to developments in the international
oil market. The monthly average Brent crude price of
oil has increased from a lower turning point of US$18,60
per barrel in December 2001 to US$29,88 per barrel in
December 2003 and US$42,81 per barrel in September 2004.
At present Brent crude oil is trading around US$50 per
barrel. This increase in international oil prices occurred
despite an increase in the production of oil by OPEC
countries. Geopolitical developments and a number of
disruptions to oil production have led to perceived
tight supply conditions, while demand has remained strong
as a result of the world economic recovery, particularly
high economic growth in China, and stock building.
Over the longer term continued high increases in nominal
unit labour cost could put pressure on price increases.
Having averaged 5,0 per cent in 2003, the rate of increase
in labour cost per unit of production in the formal
non-agricultural sectors of the economy rose to a year-on-year
rate of 6,3 per cent in the first quarter of 2004 and
7,8 per cent in the second quarter. These increases
in unit labour cost were recorded in spite of the fact
that the rate of increase in nominal remuneration per
worker in the formal non-agricultural sectors of the
economy slowed down. However, labour productivity growth
decreased in the first quarter of 2004, and in the second
quarter of this year labour productivity declined in
absolute terms.
In addition, the growth of the monetary aggregates
suggests that some inflation pressures could arise over
the long term. Growth in the broadly defined money supply
(M3), which had been relatively firm in the first six
months of 2004 when measured on a year-on-year basis,
rose from 11,8 per cent in June to 13,3 per cent in
August. The more narrowly defined monetary aggregates
increased at even considerably higher rates in July
and August 2004. Moreover, the increases in the money
supply aggregates were moderated to some extent by disintermediation,
i.e. the extension of loans between organisations in
the non-bank private sector.
The twelve-month growth rate in credit extension to
the private sector, excluding investments and bills
discounted, rose from a low of 8,9 per cent in June
2004 to 11,5 per cent in August. In evaluating these
growth rates it is important to take into account that
they were influenced by the disintermediation practices
just referred to, as well as by a shift from domestic
to foreign financing of international trade. It was
mainly enterprises that undertook these transactions,
while households increasingly made use of bank credit
extension. This is clearly reflected in the growth of
asset-backed loans of banks, which are mainly made to
households. In August 2004 these kind of loans were
18,8 per cent above their level in the same month of
the preceding year.
Cognisance may usefully be taken also of the likely
impact of external developments: in particular, the
timing and manner of the processes of adjustment to
existing international imbalances.
Monetary policy stance
The Monetary Policy Committee has concluded that leaving
the repo rate unchanged at 7,5 per cent per annum at
this meeting would be consistent with CPIX inflation
remaining within the target range in the forecast period.
However, the Committee will continue to monitor the
various factors which impact on inflation and will accordingly
make any decisions based on the inflation outlook going
forward.
TT Mboweni
GOVERNOR
Contact person:
Themba Hlengani
Tel: (012) 313-4420
E-mail: Themba.Hlengani@resbank.co.za
Issued by: South African Reserve Bank
14 October 2004
Source: South African Reserve Bank (http://www.resbank.co.za)
|
