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Statement of the Monetary Policy Committee,
by Mr TT Mboweni, Governor of the South African Reserve
Bank, 9 December 2004
Introduction
Revised national accounts statistics released by Statistics
South Africa show that growth in real gross domestic
product continued to gather momentum during the course
of 2004 and reached a seasonally adjusted and annualised
rate of 5½ per cent in the third quarter
of the year. This good performance of domestic production
was supported by relatively buoyant global economic
conditions, an improvement in South Africa's terms of
trade, rising export volumes and strong domestic demand.
Even more significant is that the acceleration in economic
growth was accompanied by an increase of roughly 196
000 jobs in the formal non-agricultural sectors in the
twelve months up to June 2004 and without any meaningful
pressure on domestic prices. In fact, CPIX inflation
has remained within the inflation target range of between
3 and 6 per cent for the past 14 months.
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) moved
into the target range in September 2003. This was accomplished
largely owing to persistent monetary and fiscal discipline
applied by the authorities, the benefits that are accruing
as a result of microeconomic reforms, the appreciation
in the external value of the rand, and moderate increases
in food prices. CPIX inflation receded further from
5, 4 per cent in September to 4.0 per cent in December
2003. Mainly as a consequence of a rise in petrol and
diesel prices, twelve-month CPIX inflation increased
to 5, 0 per cent in June 2004, before declining to 3,
and 7 per cent in September. Increases in transport
running costs were responsible for a somewhat higher
CPIX inflation figure of 4, 2 per cent in October 2004.
If petrol and diesel prices are excluded from the CPIX
index, the rate of increase over twelve months in the
prices of other consumer goods and services declined
from 5, 7 per cent in September 2003 to 3, and 5 per
cent in October 2004.
As could be expected with the appreciation in the external
value of the rand, disinflation in the prices of consumer
goods made the largest contribution to the improved
inflation outcome in South Africa. Despite the effect
of changes in international oil prices, the twelve-month
rate of increase in the prices of consumer goods was
below the lower limit of 3 per cent of the inflation
target in 8 of the 14 months up to October 2004. Increases
in petrol and diesel prices mainly brought about higher
increases in the other months. The prices of certain
consumer goods such as those of furniture and equipment,
clothing and footwear and vehicles actually declined
over the twelve months up to October 2004. However,
the prices of alcoholic beverages, tobacco and transport
running costs continued to rise at rates considerably
above the upper limit of the inflation target of 6 per
cent.
The twelve-month rate of increase in the prices of
consumer services consistently remained above the upper
limit of the inflation target. These prices are not
directly affected by changes in the external value of
the rand and normally take longer to adjust to changed
circumstances. The rate of increase in these prices
nevertheless also slowed down significantly in 2004.
Measured over a period of twelve months, the rate of
increase in the prices of consumer services included
in the CPIX declined from a peak of 8, 6 per cent in
September 2003 to 6, and 3 per cent in October 2004.
The effect of the stronger rand on the prices of goods
is clearly illustrated by developments in the prices
of imported goods included in producer prices. The prices
of these goods measured over a period of one year started
to decrease from April 2003 and continued declining
up to October 2004. These cheaper imports enabled domestic
producers to moderate price increases. As a result,
the rate of increase in the prices of domestically produced
goods amounted to only 2, 7 per cent for the year ended
October 2004.
The inflation outlook
The inflation outlook generally remains positive, but
there are certain developments that will have to be
monitored closely by the Monetary Policy Committee to
ensure that inflation remains within the target range.
Of particular significance for the continuance of inflation
within the target range are the lower inflation expectations.
Inflation expectations are very prominent in the inflation
process. The recent lower inflation expectations recorded
by the Bureau for Economic Research of the University
of Stellenbosch, which fell within the inflation target
range for the second consecutive quarter, clearly illustrate
the improved credibility of monetary policy. These levels
of expectations are also an important signal that inflation
could remain at low levels.
As already noted, the strength of the rand has been
an important factor contributing to bringing inflation
down in South Africa and countering the effects of the
increase in international oil prices on domestic costs.
Although the deficit on the current account of the balance
of payments has increased considerably during the course
of 2004, this shortfall has been comfortably financed
by an inflow of funds from the rest of the world. This
clearly reflects the confidence of non-residents in
the performance of our economy. At the same time domestic
expenditure on goods and services has continued to rise
rapidly. All the main expenditure aggregates contributed
to this growth, but the rates of increase in expenditure
on durable consumer goods and fixed capital formation
were high. Both these expenditure components have a
high import content.
The growth in the world economy has contributed to
the increase in the volume of South African exports
as well as the improvement in the terms of trade, which
have to some extent offset the rise in imports. The
International Monetary Fund expects global economic
growth to be around 5 per cent in 2004, followed by
a slower but still relatively high rate of 4 per cent
in 2005. This should support the growth in South African
exports and alleviate pressures on the balance of payments
that could arise from the additional imports which may
be engendered by further increases in domestic demand.
According to projections by the International Monetary
Fund, global inflation could decline marginally from
3, 8 per cent in 2004 to 3, and 6 per cent in 2005.
Countries where inflation has started to rise during
2004, such as the United States of America and the newly
industrialised countries in Asia, have already taken
corrective steps to prevent any further acceleration.
Moreover, the recent substantial increase in international
oil prices seems to have levelled off in November. The
price of Brent crude oil that averaged US$49 per barrel
in October 2004 and at one stage during the month reached
US$52 per barrel, declined to an average of US$43, 45
per barrel in November. However, the oil market is still
very nervous, as clearly illustrated by daily fluctuations
in prices. The low rates of increase in other international
prices should nevertheless contribute to the containment
of domestic inflation.
After recovering in 2002 and 2003, the rand has performed
more steadily for much of 2004, with reduced volatility
helped by the progress which the Bank has made in strengthening
the official foreign exchange reserves. Towards the
end of this year, the rand has strengthened further.
These latest developments reflect a generalised weakening
in the US Dollar; hence other currencies, including
those of some of South Africa's main trading partners,
have experienced similar movements.
The weakening in the dollar appears to be part of a
process of adjustment in international imbalances. How
far this adjustment will run in the months ahead is
unclear. The monetary policy stance in South Africa
will continue to focus on maintaining inflation within
the target range, and to that end, will need to weigh,
amongst other things, the sustainability of recent movements
in the rand, the impact such movements may have on the
medium-term outlook for inflation, and the desirability
of a competitive and stable exchange rate for the rand.
Other factors that could assist the monetary authority
in maintaining inflation within the inflation target
range include the commitment by the public authorities
to low administered price increases and a generally
favourable outlook for food prices despite the drought
in certain parts of the country. In addition, the Medium
Term Budget Policy Statement shows a continued determination
by the government to maintain fiscal prudence.
The economy will nonetheless have to be managed carefully
to maintain price stability. It is in particular very
important that capacity constraints be prevented as
far as possible. The recent narrowing and perhaps even
future disappearance of the gap between potential and
actual output could lead to inflationary pressures.
The economy is still operating below full capacity,
but there are some signs that capacity constraints are
starting to appear. Shortages in the domestic production
of cement, other building materials and human resources
required by the construction sector are examples in
this regard. The utilisation of manufacturing production
capacity has also increased. Fortunately, domestic fixed
capital formation is rising rapidly and decisions have
been made by the relevant authorities to upscale the
skills development endeavour in the country.
Other developments indicating that it may become more
difficult to maintain low inflation, include:
1. The decline in the growth of labour productivity
from a year-on-year rate of 3, 3 per cent in the first
quarter of 2004 to 0, 5 per cent in the second quarter.
This decrease was due to an increase in formal non-agricultural
employment without a concomitant rise in production,
as well as a rise in the number of workdays lost as
a result of strikes and other forms of industrial action.
With the nominal remuneration per worker rising at 7,
6 per cent in the year to the second quarter of 2004,
it is important that labour productivity rises. These
developments caused the year-on-year rate of increase
in nominal unit labour cost to rise further from 5,
4 per cent in the first quarter of 2004 to 7, and 1
per cent in the second quarter.
2. The recent strong growth in the broadly defined
money supply (M3) from a year-on-year rate of 11, 8
per cent in June 2004 to 14, 9 per cent in October.
The increase in M3 deposits over these four months was
concentrated in the short and medium-term deposits of
the corporate sector and largely reflected the reduced
opportunity cost of holding such deposits and the robust
growth in domestic expenditure and production. As a
result, the rate of increase in the narrower monetary
aggregates exceeded the increase in M3. Such growth
in monetary aggregates, if maintained, is usually a
signal that the rate of inflation could increase over
time.
3. The acceleration in the twelve-month growth rate
in total loans and advances of banks to the private
sector from 8.9 per cent in June 2004 to 15.1 per cent
in October. Asset-backed credit was mainly responsible
for this increase, but in September and October overdrafts,
credit cards and general advances started to rise significantly.
The increase in the total loans and advances of banks
was more or less evenly distributed between the household
and corporate sectors over the past four months. Although
the outstanding debt of households and the corporate
sector is still low, the pace of acceleration in bank
credit extension needs to be carefully monitored.
Notwithstanding these signals that inflation could
perhaps build up over time, our projections show that
with an unchanged monetary policy stance, CPIX inflation
will probably not breach the upper 6 per cent of the
inflation target during the forecast period up to the
end of 2006. The further strengthening of the rand over
the past two months and the decline in international
oil prices in November resulted in a somewhat lower
projected inflation path than that published in the
Monetary Policy Review in November 2004. Inflation should
rise somewhat during the course of 2005, but the upper
turning point in the third quarter of that year is now
expected to be somewhat lower than that forecast previously.
In 2006, CPIX inflation is expected to be comfortably
within the target range.
Monetary policy stance
Taking the above developments into consideration, the
Monetary Policy Committee has decided to maintain the
current monetary policy stance and to keep the repo
rate unchanged at 7, 50 per cent per annum. As always
the Committee will remain vigilant and will stand ready
to adjust the repo rate if the inflation outlook changes.
Contact person: Cathy Powers
Tel: (012) 313 4420
e-mail: Cathy.Powers@resbank.co.za
Issued by: South African Reserve Bank
9 December 2004
Source: South African Reserve Bank (http://www.reservebank.co.za)
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