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Statement of the Monetary Policy Committee (MPC) by South African
Reserve Bank Governor, Mr T T Mboweni, 12 April 2007 Since the previous
meeting of the Monetary Policy Committee (MPC) in February 2007, the inflation
outlook has deteriorated somewhat, despite the most recent inflation outcomes.
The less favourable outlook has been brought about primarily by petrol and food
price increases. Domestic demand pressures and credit extension have remained
strong with only tentative signs of moderation in response to the tighter monetary
policy stance. At the same time, the South African economy has been growing
at a robust pace and employment growth has also been encouraging. Domestic growth
prospects remain positive despite the temporary sell-off in the international
markets in late February. The appetite for emerging market assets has rebounded
Recent developments in inflation Year-on-year inflation as
measured by the consumer price index for metropolitan and other urban areas excluding
the interest cost on mortgage bonds (CPIX) increased at a year-on-year rate of
5,3 percent in January 2007, following a rate of increase of 5,0 percent in the
previous three months. In February, year-on-year CPIX inflation declined to 4,9
percent. Food and energy remained the main drivers of inflation. If these categories
were excluded, CPIX inflation would have measured 3,9 percent and 4,0 percent
in January and February respectively. Food prices increased at a year-on-year
rate of 7,7 percent in February this year, following an 8,1 percent increase in
January. Meat price inflation, which was the largest contributor to overall CPIX
inflation, declined from 16,0 percent in January to 13,9 percent in February.
The elevated spot prices of maize and wheat resulted in grain product prices accelerating
at a rate of 8,7 percent in February, compared to 7,1 percent in January. Petrol
price changes over the past few months have been a reflection of the volatility
in international oil prices and the exchange rate. In February 2007, year-on-year
petrol price inflation measured 1,8 percent compared to 8,2 percent the previous
month. This is nevertheless significantly lower than the increases in excess of
20 percent that were experienced in the middle of last year. In contrast, the
prices of a number of goods continued to decline in February. Clothing prices
declined by 7,8 percent, footwear prices by 11,0 percent and those of furniture
by 2,8 percent. In January and February 2007, goods price inflation measured
5,7 percent and 5,0 percent respectively, compared to services price inflation
of 4,6 percent and 4,8 percent in the same months. Administered prices increased
by 6,4 percent and 4,1 percent in January and February respectively while administered
prices excluding petrol increased at a year-on-year rate of 5,7 in those months,
compared to 3,1 percent in June 2006. Production price inflation continued
to increase at high rates, across a broad range of categories, although below
the peak of 10,0 percent seen in October and November 2006. Measured year-on-year,
production price inflation declined to 9,5 percent in February, compared to 9,8
percent in January. Imported goods inflation measured 9,7 percent in February
compared to domestically produced goods inflation of 9,4 percent. The
outlook for inflation The most recent central forecast of the Bank's
forecasting model indicates deterioration in the inflation outlook, mainly as
a result of adverse developments in the international oil markets and administered
prices. The forecast, which takes account of the petrol price increases of March
and April, projects that CPIX inflation will increase to slightly below the upper
level of the inflation target in the second quarter of 2007. Thereafter, apart
from a technical decline in the third quarter, CPIX inflation is expected to remain
at rates of around 5,9 percent until the second quarter of 2008 and then follow
a downward trajectory to reach five percent by the final quarter of that year.
The latest survey of inflation expectations conducted on behalf of the
Bank by the Bureau for Economic Research (BER) at the University of Stellenbosch
indicates that CPIX inflation expectations in respect of both 2007 and 2008 have
declined compared to the previous survey. This may indicate that inflation expectations
are not always backward looking, and have remained entrenched within the inflation
target range. Inflation expectations declined from 5,4 percent to 5,2 percent
for 2007, and from 5,4 percent to 5,1 percent for 2008, while CPIX inflation is
expected to average 5,1 percent in 2009. All categories of respondents lowered
their expectations for 2007, while business executives and trade union officials
lowered their expectations for 2008. As usual, the MPC analysed the factors
impacting on inflation and assessed the risks to the forecast. In some instances,
these risks were perceived to have increased, whereas in other cases there has
been no major change to our previous assessment. In particular, the risks posed
by oil and food prices appear to have increased. International oil price
developments have been dominated by heightened geopolitical tensions, supply disruptions
and declining inventory levels. The price of North Sea Brent crude oil increased
to around 70 dollar per barrel in recent weeks, compared to a level of around
56 dollar per barrel at the time of the February MPC meeting. As a result, the
domestic petrol price increased by R0,24 per litre in March, and R0,68 per litre
in April. A decomposition of the April price increase shows that of the R0,68
increase in April, about R0,09 was attributable to exchange rate changes, R0,10
to fuel taxes announced in the February budget, and the remainder to changes in
the international price of oil. International oil prices are expected to remain
vulnerable to geopolitical developments and therefore continue to pose a significant
risk to the outlook. The spot prices of white and yellow maize have increased
significantly over the past two years as a result of domestic drought conditions
and increases in international prices. Grain product prices, which have a weight
of 4,8 percent in CPIX, are expected to increase further as they have not yet
fully reflected these increases. The higher maize prices have also affected meat
prices through their impact on cattle and chicken feed prices. However, meat price
inflation could be moderated somewhat as more cattle are brought to market during
periods of drought. This effect, while possibly significant, is expected to be
relatively short-lived. Despite the tighter monetary stance since June
last year, household consumption expenditure growth, which measured almost eight
percent in the fourth quarter of 2006, continues to pose a risk to inflation.
In January of this year, retail sales increased at a year-on-year rate of 9,4
percent compared to 6,7 percent in December 2006. There is, however, some evidence
of moderation in the growth of interest sensitive durable goods consumption. In
particular, a softening trend in motor vehicle sales has been observed in recent
months. The seasonally adjusted number of new vehicles sold in the first quarter
of 2007 declined by 2,9 percent compared to the fourth quarter of 2006. Consumer
confidence remains at a high level. According to the latest First National Bank
(FNB) / Bureau for Economic Research (BER) Consumer Confidence Index (CCI), the
CCI increased significantly during the first quarter of 2007, to reach the highest
level ever recorded in the 25 year existence of the index. Factors underpinning
the strong demand include the further increases in asset prices. The housing market
remains buoyant and the Johannesburg Stock Exchange (JCC) Securities Exchange
has reached new highs despite the short-lived downturn in March. Credit
extension by banks to the private sector has continued at uncomfortably high levels.
Twelve month growth in banks' loans and advances extended to the private sector
has grown at a rate of around 27 percent since November 2006, and increased to
27,7 percent in February this year. Asset backed credit growth however showed
a modest decline in February to 25,5 percent. Instalment sale and leasing finance
growth declined from 15,8 percent in December to 14 percent in February, reflecting
the moderation in demand for motor vehicles. Growth in total loans and advances
to households has been on a somewhat declining trend compared to the strong upward
trend in credit extension to the corporate sector. Nevertheless, the ratio of
household debt to disposable income increased further in the fourth quarter of
2006 to almost 74 percent and the cost of servicing the debt has been steadily
increasing. The South African economy has grown at a rate of 5 percent
in each of the past three years, a level which we estimate to be slightly above
potential. Indications are that growth rates around this level are likely to be
sustained during 2007. Capacity utilisation in the manufacturing sector increased
further in the fourth quarter to a new level of 86,6. The Investec Purchasing
Managers Index (PMI) reflects continued buoyant conditions in the manufacturing
sector, and despite a marginal decline in the RMB Business Confidence Indicator,
business confidence remains high and broad-based. Underpinning this positive
outlook is a strong trend in the growth of investment expenditure. Gross fixed
capital formation increased at an annualised rate of 16,6 percent in the fourth
quarter of 2006, and 12,8 percent for the year. As a ratio to Gross Domestic Product
(GDP), gross fixed capital formation has increased from around 15 percent in the
early part of the decade to over 19 percent in the final quarter of 2006. While
this bodes well for current and future growth, the concurrent decline in the savings
ratio has seen the current account deficit of the balance of payments widening
to 6,4 percent of GDP in 2006, and 7,8 percent of GDP in the final quarter of
the year. The good growth prospects for the economy continued to ensure
that the current account deficit has been adequately financed. Since the beginning
of this year, net non-resident purchases of bonds and equities have totalled R20,3
billion. The Bank has also been able to continue with its gradual build-up of
international reserves. Official gross gold and other foreign exchange reserves
stood at 26,5 billion dollars at the end of March 2007 and the international liquidity
position amounted to 24,0 billion dollar. Since the February meeting of
the MPC, the exchange rate has been relatively stable, apart from the reaction
to the transitory sell-off in international financial markets in late February.
The exchange rate reached a level of R7,55 to the United State (US) dollar in
response to the heightened risk in the markets, but by late March the rand had
returned to levels below R7,30. The rand is currently trading at around R7,15
to the US dollar, compared to R7,20 at the previous meeting. The trade-weighted
rand exchange rate is also relatively stable compared to February. Other factors
impacting on the exchange rate during this period included movements in the US
dollar against other currencies and commodity price fluctuations. The outlook
for global growth appears to be positive, despite the recent market volatility.
The re-rating of risk, particularly in emerging markets, resulted in significant
adjustments in exchange rates and stock market valuations globally. Most markets
have since recovered to a large extent, including those in South Africa. Strong
growth in most regions is expected to be sustained, although there is the risk
of a slowdown in the United States. The continued resilience of the world economy
also bodes well for commodity prices. Global inflation is expected to remain under
control despite the firmer oil prices, and the international interest rate cycle
appears to have peaked. However, monetary policies are unlikely to become generally
more accommodating in the short term in the face of the positive growth outlook.
Monetary policy stance The Monetary Policy Committee has
decided that despite the slight deterioration in the inflation outlook, an unchanged
monetary policy stance continues to be appropriate for now. The repo rate will
therefore remain at nine percent per annum. Enquiries: Thandi
Moya
Cell: (012) 313 3027 Issued by: South African Reserve Bank
12
April 2007 Source: South African Reserve Bank (http://www.reservebank.co.za)
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