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Statement of the Monetary Policy Committee, issued by Mr T T
Mboweni, Governor of the South African Reserve Bank, 2 February 2006 Introduction
The inflation outlook remains promising despite the risks posed by
an uncertain global environment. World growth is expected to remain buoyant in
most regions, although international oil price developments continue to weigh
on global growth and inflation prospects. At the same time, world growth has underpinned
international commodity prices which, along with positive non-resident investor
sentiment, have contributed to the recent strength in the rand. This has been
despite monetary policy tightening in a number of countries, in particular the
United States of America and the euro area. Domestically, there are few
signs of a slowdown in domestic demand. Output growth in the manufacturing and
mining sectors have shown some signs of moderation in the final quarter of 2005,
although overall growth is expected to remain relatively strong. Domestic demand
conditions and oil price uncertainties pose the biggest risk to the inflation
outlook. Recent inflation developments Inflation as measured
by the consumer price index for metropolitan and other urban areas excluding the
interest cost on mortgage bonds (CPIX) declined to 3,7 per cent in November, but
increased to 4,0 per cent in December. Although domestic petrol prices were decreased
by a total of R0,61 in these two months, these prices nevertheless increased on
a year-on-year basis by 17,7 per cent and 16,0 per cent respectively. If petrol
prices were excluded from this index, CPIX inflation would have measured 3,0 per
cent and 3,4 per cent in November and December respectively. For the year as a
whole, CPIX inflation averaged 3,9 per cent in 2005 compared to 4,3 per cent in
2004. Services price inflation has declined consistently since June 2005,
and measured 5,0 per cent and 4,7 per cent in November and December respectively,
compared to 5,2 per cent in October. Administered price inflation has also continued
to decline, falling to 7,5 per cent and 7,0 per cent in November and December
respectively. If petrol prices were excluded, administered prices would have increased
at a year-on-year rate of 4,3 per cent in each of the three months to December
2005, more or less in line with overall CPIX inflation. Clothing and footwear
continue to put downward pressure on inflation, and prices in these two categories
declined at year-on-year rates of around 4 per cent in the last 4 months of 2005.
By contrast, food prices rose at an annual rate of 4,0 per cent in December, compared
to the average for the year of 2,1 per cent. The December increase in food prices
was mainly attributable to meat prices which rose at a year-on-year rate of 6,9
per cent, compared to 1,1 per cent the previous month. Production price
inflation has exhibited a more discernible rising trend, with year-on-year producer
price inflation measuring 4,5 per cent and 5,1 per cent in November and December
respectively. Imported goods inflation measured 5,7 per cent and 6,5 per cent
in these two months while domestically produced goods increased by 4,0 per cent
and 4,6 per cent respectively. Producer price inflation for 2005 as a whole averaged
3,1 per cent compared to 0,6 per cent the previous year. The outlook
for inflation Since the last MPC meeting, the inflation forecast of
the South African Reserve Bank has changed somewhat, with the inflation trajectory
now expected to follow a more moderately rising trend compared to that discussed
at the previous meeting. According to the central forecast, CPIX inflation is
expected to peak at around 4,9 per cent in the first quarter of 2007 where after
it is expected to decline slowly to reach around 4,7 per cent at the end of the
forecast period. As usual the MPC considered the factors that brought about
this outlook as well as the related risks. The robust domestic demand is an important
factor which could negatively affect the inflation outcome. To date, however,
there have not been any significant inflationary consequences, although this could
change if demand growth were to accelerate unchecked. Indications are that
household consumption expenditure growth has remained strong. According to the
latest FNB/BER survey, consumer confidence reached a record high in the fourth
quarter of 2005. New vehicle sales reached an all-time high in December, and increased
by 25,7 per cent over the year as a whole. Retail sales have also continued to
grow robustly, and recent trading and earnings updates from retailers, as well
as credit extension data, suggest that sales growth in November and December of
2005 probably matched or exceeded the 7,7 per cent year-on-year growth recorded
in October. The strong domestic demand has been underpinned by the growth
in credit extension. Total loans and advances to the private sector grew at year-on-year
rates of around 20 per cent during October and November 2005, and rose to 21,4
per cent in December. This growth in total loans and advances has been driven
mainly by an increase in asset-backed credit. Mortgage advances extended to the
household sector remain particularly strong. Asset price developments and
their related wealth effects have probably also contributed to the consumption
boom. The housing market remains buoyant, although the rate of increase in house
prices has moderated somewhat. In December 2005, the ABSA house price index increased
on a month-on-month basis by 0,7 per cent. Moreover the recent stellar performance
of the JSE Securities Exchange could also impact on consumer demand. During the
past few months, share prices have continued to reach new highs. Since reaching
a low point for 2005 in April, the all-share index has increased by approximately
60 per cent. The brisk domestic demand has had an impact on the current
account deficit which increased to 4,7 per cent of GDP in the third quarter of
2005. A sizeable trade surplus was recorded in December following a sharp
decline in imports. This has contributed to a significant narrowing of the trade
deficit from R19,6 billion in the third quarter to R1,4 billion in the fourth
quarter of 2005. This is likely to result in a narrowing of the current account
deficit in that quarter. Continued strong domestic demand is expected to
maintain pressure on the current account. However the current account deficit
continues to be more than adequately financed by capital inflows which in turn
are being attracted by improved economic growth prospects in South Africa. The
overall balance of payments has remained in surplus, and the level of official
gross gold and foreign exchange reserves increased to US$22,2 billion at the end
of January 2006. The coincident business cycle indicator declined slightly
in October 2005, although indications are that the economy is still growing at
a healthy but perhaps more moderate pace. The physical volume of mining production
declined in October and November, while manufacturing output declined in October,
mainly as a result of supply issues in the petroleum industry related to the change
to lead-free fuel. Although refinery shut-downs continued into November, manufacturing
output recovered somewhat in that month, recording a year-on-year growth of 2,1
per cent. The latest Investec Purchasing Managers Index (PMI) also indicates that
there might be a general slackening in manufacturing sector growth. The various
business confidence indices indicate that confidence generally remains at high
levels. Two exogenous factors, namely oil and food price developments,
are potential risks to the inflation outlook. At the time of the last MPC meeting
the price of Brent crude oil was around US$55 per barrel, but since the beginning
of 2006 international oil prices have risen again to levels of around US$65 per
barrel. Apart from continued strong demand for oil, upward pressure on prices
has emanated from supply threats related to geo-political concerns. The higher
prices have already resulted in a domestic petrol price increase of R0,14 per
litre in February, which more than offset the R0,06 per litre decrease in January.
Developments in food price inflation are also a potential concern. As noted
earlier, food price inflation has accelerated but is still relatively low. Food
price inflation is expected to be higher in 2006 partly as a result of the low
base in 2005. Furthermore, the higher food price inflation evident in production
prices, along with higher maize prices also point to a possible acceleration in
retail food price inflation going forward. There are a number of factors
which have contributed to the positive inflation outlook. These include continued
fiscal discipline, low world inflation and well-anchored inflation expectations.
Inflation expectations as indicated in the long-term break-even inflation rates,
measured as the yield differential between conventional bonds and inflation-linked
bonds, point to some improvement in inflation expectations since the last meeting.
Nominal wage growth recorded a year-on-year increase of 7,9 per cent in
the third quarter of 2005. However positive productivity growth ensured that unit
labour cost increases have remained consistent with the inflation target. Unit
labour cost in the formal non-agricultural sectors recorded annual increases of
3,5 per cent and 4,2 per cent in the second and third quarters of 2005 respectively.
Unit labour cost in manufacturing grew at an annual rate of 0,2 per cent in the
third quarter. These moderate trends in wage increases are consistent with the
latest Andrew Levy Employment Publications report which shows that average wage
settlements declined from 6,9 per cent in 2004 to 6,3 per cent in 2005. Since
the last meeting of the MPC, the nominal effective exchange rate of the rand has
appreciated by approximately 1,7 per cent. During this period, the rand has fluctuated
between R6,75 to the US dollar in November 2005 and R5,95 in January, and is currently
trading at levels around R6,10. The strengthening of the rand was in part a reflection
of US dollar depreciation. In addition, the rand was supported by high commodity
prices, expectations of further foreign direct investment inflows, positive South
African economic data as well as strong demand from non-residents for South African
equities. Monetary Policy Stance There are significant risk
factors to the inflation outlook that the Monetary Policy Committee is mindful
of. Nevertheless, the Monetary Policy Committee has decided for now to leave the
repo rate unchanged at 7 per cent per annum. The MPC will continue to exercise
vigilance in order to ensure that CPIX inflation stays within the inflation target
range. TT Mboweni
GOVERNOR Contact person:
Cathy Powers
Tel:
(012) 313 4420
E-mail: Cathy.Powers@resbank.co.za
Issued: South African Reserve Bank
2 February 2006 Source:
South African Reserve Bank (http://www.reservebank.co.za)
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