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+{"doc_id": "09234cd45b31c21ccbcbe8e8ab711d56", "text": "Monetary Policy Review\nJune 2013\nSouth African Reserve Bank\nMonetary Policy Review\nJune 2013\nMonetary Policy Review June 2013\n© South African Reserve Bank\nAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by \nany means, electronic, mechanical, photocopying, recording or otherwise, without fully acknowledging the Monetary Policy \nReview of the South African Reserve Bank as the source. The contents of this publication are intended for general information \nonly and are not intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of \ninformation, the South African Reserve Bank shall not be liable to any person for inaccurate information or opinions contained \nin this publication.\nEnquiries relating to this Review should be addressed to:\n\t\nHead: Research Department\n\t\nResearch Department\n\t\nSouth African Reserve Bank\n\t\nP O Box 427\n\t\nPretoria 0001\n\t\nTel. 27 12 313-3668\nhttp://www.reservebank.co.za\t\n\t\n\t\n\t\n\t\n\t\n ISSN: 1609-3194\nMonetary Policy Review June 2013\nPreface\nThe primary mandate of the South African Reserve Bank (the Bank) is to achieve and maintain \nprice stability in the interest of balanced and sustainable economic growth. Low inflation helps \nto protect the purchasing power and living standards of all South Africans, and provides a \nfavourable environment for growth and employment creation. In addition, the Bank has a \ncomplementary mandate to oversee and maintain financial stability.\nPrice stability is quantified by the setting of an inflation target range by government after \nconsultation with the Bank. The commitment is to pursue a continuous target of 3 to 6 per cent \nfor headline CPI inflation. The Bank conducts monetary policy within a flexible inflation-targeting \nframework that allows for inflation to be temporarily outside the target range as a result of supply \nshocks. The Bank’s Monetary Policy Committee (MPC) takes into account a viable medium-term \ntime horizon for inflation to return to within the target range, and considers the lags between \npolicy adjustments and economic effects. This provides for interest rate smoothing over the \ncycle, and makes economic growth more sustained and consistent.\nThe Monetary Policy Review (MPR) is published twice a year, and is aimed at broadening the \nunderstanding of the objectives and conduct of monetary policy. The MPR reviews domestic \nand international developments that have impacted on inflation, and that motivate the monetary \npolicy stance. The MPR also provides an assessment of the outlook for and the factors \ndetermining inflation, and the Bank’s forecast of the future path of inflation and economic \ngrowth. The MPR is presented by senior officials of the Bank at Monetary Policy Forums (MPFs) \nin various centres across South Africa to develop a better understanding of monetary policy \nthrough interaction with stakeholders.\nMonetary Policy Review June 2013\nContents\nMonetary Policy Review\nIntroduction .............................................................................................................................\t\n1\nRecent developments in inflation................................................................................................\t\n2\n\t\nThe evolution of inflation indicators .....................................................................................\t\n2\n\t\n\t\nTargeted inflation..........................................................................................................\t\n2\n\t\n\t\nFood prices..................................................................................................................\t\n4\n\t\n\t\nPetrol prices.................................................................................................................\t\n5\n\t\n\t\nCore inflation................................................................................................................\t\n6\n\t\n\t\nAdministered prices.....................................................................................................\t\n7\n\t\n\t\nProducer prices...........................................................................................................\t\n8\nInternational economic policy developments..............................................................................\t 14\n\t\nInternational economic developments.................................................................................\t 14\n\t\n\t\nMultispeed global growth.............................................................................................\t 14\n\t\n\t\nGrowth in advanced economies..................................................................................\t 15\n\t\n\t\nEmerging and developing economies..........................................................................\t 17\n\t\n\t\nCommodity prices and global inflation.........................................................................\t 17\n\t\n\t\nFiscal trends.................................................................................................................\t 18\n\t\nOil price developments........................................................................................................\t 18\n\t\nInternational monetary policy developments........................................................................\t 19\n\t\n\t\nPolicy in advanced economies.....................................................................................\t 20\n\t\n\t\nPolicy in emerging-market economies.........................................................................\t 22\nDomestic economic developments and growth outlook.............................................................\t 22\n\t\nExchange rate developments .............................................................................................\t 22\n\t\nLabour markets ..................................................................................................................\t 26\n\t\nReal-estate and equity prices..............................................................................................\t 29\n\t\nFiscal policy ........................................................................................................................\t 31\n\t\nMonetary conditions ...........................................................................................................\t 32\n\t\nDemand, output and expected growth................................................................................\t 33\nMonetary policy..........................................................................................................................\t 40\n\t\n\t\nGlobal factors...............................................................................................................\t 41\n\t\n\t\nDomestic factors..........................................................................................................\t 42\n\t\n\t\nInflation forecasts.........................................................................................................\t 43\n\t\n\t\nRisks to the outlook.....................................................................................................\t 44\nExpectations and the Bank’s inflation forecast............................................................................\t 48\n\t\nIndicators of inflation expectations.......................................................................................\t 48\n\t\nThe South African Reserve Bank inflation forecast..............................................................\t 50\nAssessment and conclusion.......................................................................................................\t 51\nStatements issued by Gill Marcus, Governor of the South African Reserve Bank\nStatement of the Monetary Policy Committee\n22 November 2012.....................................................................................................................\t 52\nStatement of the Monetary Policy Committee\n24 January 2013.........................................................................................................................\t 57\nStatement of the Monetary Policy Committee\n20 March 2013............................................................................................................................\t 61\nStatement of the Monetary Policy Committee\n23 May 2013...............................................................................................................................\t 65\nAbbreviations and glossary.......................................................................................................\t 69\nBoxes \n1\t\nChanges to the consumer price index ..........................................................................\t\n10\n2 \t\nMonetary policy and various measures of inflation.........................................................\t\n12\n3\t\nAn accuracy analysis of real gross domestic product growth forecasts.........................\t\n37\n4\t\nThe role of the repurchase rate and the prime rate in the transmission of \n\t\nmonetary policy................................................................................................................. \t\n45\nFigures \n1 \t\nConsumer price inflation: Targeted inflation .....................................................................\t\n3\n2 \t\nTargeted inflation and food inflation..................................................................................\t\n4\n3 \t\nSelected commodity prices..............................................................................................\t\n5\nMonetary Policy Review June 2013\n4 \t\nSouth African petrol price.................................................................................................\t\n6\n5 \t\nThe effect of food, petrol, energy and volatile prices on headline inflation ........................\t\n7\n6 \t\nFood prices in the PPI and CPI.........................................................................................\t\n9\nB1.1\t\nElectricity and petrol prices..............................................................................................\t 11\nB1.2\t\nInflation forecast with changes to CPI...............................................................................\t 11\nB2.1\t\nHeadline inflation and exclusion-based core measures....................................................\t 12\nB2.2\t\nComparison of main inflation measures............................................................................\t 13\nB2.3\t\nComparison of long-run measures of inflation..................................................................\t 13\nB2.4\t\nGap analysis.....................................................................................................................\t 14\n7 \t\nEvolution of real GDP forecasts for 2013 for the G-7 and euro area..................................\t 15\n8 \t\nSelected OECD indicators of global economic activity.....................................................\t 17\n9 \t\nPrice of Brent crude oil.....................................................................................................\t 19\n10 \t\nExchange rate performance against the US dollar............................................................\t 23\n11 \t\nBilateral exchange rates of the rand..................................................................................\t 23\n12 \t\nSovereign risk spreads.....................................................................................................\t 24\n13 \t\nNon-resident net purchases of domestic securities and risk aversion..............................\t 24\n14 \t\nExchange rate of the rand and commodity prices............................................................\t 25\n15 \t\nReal effective exchange rates...........................................................................................\t 26\n16 \t\nRemuneration per worker, labour productivity and unit labour cost in the \nformal non-agricultural sector...........................................................................................\t 27\n17 \t\nAverage annual inflation and wage settlements................................................................\t 27\n18 \t\nNon-agricultural economic activity and employment........................................................\t 29\n19 \t\nHouse prices....................................................................................................................\t 29\n20 \t\nInternational share price indices.......................................................................................\t 30\n21 \t\nDomestic share price indices...........................................................................................\t 30\n22 \t\nReal growth rates of selected aggregates........................................................................\t 32\n23 \t\nBanks’ loans and advances to the private sector by type.................................................\t 33\n24 \t\nReal GDP growth forecast................................................................................................\t 35\n25 \t\nComposite business cycle indicators................................................................................\t 35\nB3.1\t\nData revisions to gross domestic product........................................................................\t 37\nB3.2\t\nAverage forecast error of gross domestic product............................................................\t 38\nB3.3\t\nRoot mean square error of gross domestic product.........................................................\t 38\nB3.4\t\nProbabilities for gross domestic product forecasts...........................................................\t 39\n26 \t\nThe repurchase rate and other short-term interest rates...................................................\t 40\n27 \t\nPolicy analysis..................................................................................................................\t 41\nB4.1\t\nLending rates in the banking sector..................................................................................\t 45\nB4.2\t\nRelative margins to banks’ weighted average lending rate................................................\t 46\nB4.3\t\nThe level of weighted lending rates in the latest downward cycle in interest rates.............\t 47\nB4.4\t\nMargins of weighted bank lending rates relative to the repurchase rate............................\t 47\n28 \t\nBER surveys of headline CPI inflation expectations..........................................................\t 48\n29 \t\nBreak-even inflation rates.................................................................................................\t 49\n30 \t\nTargeted inflation forecast................................................................................................\t 50\nTables \nTable 1\t\nTargeted inflation: Goods and services inflation..........................................................\t\n3\nTable 2\t\nContributions to targeted inflation...............................................................................\t\n4\nTable 3\t\nContributions to administered prices..........................................................................\t\n7\nTable 4\t\nMeasures of producer price inflation...........................................................................\t\n8\nTable 5\t\nThe effect of food and petroleum product prices on headline \nproducer price inflation...............................................................................................\t\n9\nTable B1.1\tComparison of change in CPI weights........................................................................\t 10\nTable 6\t\nIMF projections of world growth and inflation for 2013 and 2014................................\t 16\nTable 7\t\nGlobal manufacturing PMI: Overall..............................................................................\t 16\nTable 8\t\nFiscal balances and government debt........................................................................\t 18\nTable 9\t\nCentral bank total assets............................................................................................\t 20\nTable 10\t\nSelected central bank interest rates............................................................................\t 21\nTable 11\t\nAverage percentages of wage settlement by major sector in 2012.............................\t 28\nTable 12\t\nEmployment in formal non-agricultural industries.......................................................\t 28\nTable 13\t\nPublic finance data.....................................................................................................\t 31\nTable 14\t\nGrowth in real GDP and expenditure components.....................................................\t 34\nTable 15\t\nDomestic economic sentiment indicators...................................................................\t 36\nTable B3.1\tForecasting error comparison.....................................................................................\t 39\nTable 16\t\nThe Bank’s real GDP growth and targeted inflation forecasts.....................................\t 43\nTable 17\t\nReuters survey of CPI inflation forecasts: April 2013...................................................\t 49\n1\nMonetary Policy Review June 2013\nIntroduction \nThe previous MPR was published in October 2012 at a time of significant economic turmoil \nand heightened uncertainty about future economic developments. Given very low interest \nrates, the United States Federal Reserve (the Fed), the European Central Bank (ECB) and the \nBank of Japan (BOJ) stepped up their use of unconventional monetary policy measures to \naddress deteriorating conditions and financial market tensions. Growth in the fourth quarter of \n2012 was widely expected to disappoint in most advanced economies and did, with the euro \narea remaining in recession and momentum falling in systemically important emerging-market \neconomies. Consequences of this decelerating growth and recession have been a further \nmoderation in price pressures and a subdued outlook for global inflation.\nAn interim fiscal cliff arrangement in the United States (US) and subsiding sovereign debt risks \nin Europe contributed to some improvement in global financial market sentiment as 2012 ended \nand 2013 began. A sluggish start in 2013 gradually gained momentum, with some key economies \ngrowing faster than expected and financial markets strengthening. A nascent recovery in the \nUS solidified as private demand slowly strengthened, job creation picked up, and credit and \nhousing markets healed. Yet events in the euro area (particularly Cyprus) and the unresolved \nfiscal gridlock in the US continue to sap confidence and undermine growth prospects. \nThe June 2013 MPR marks a point of considerable improvement in financial conditions and \nsomewhat better economic outcomes in some countries, but in a global environment of \nsustained uncertainty and continued economic fragility. The better outcomes early in the year \nhad only marginal effects on global growth forecasts for 2013. The sizeable mismatch between \nfinancial market and real economy outcomes has raised new concerns about the efficacy of \nsupport to global liquidity.\nSome of the improvement in global conditions filtered through to South Africa early in the year \nbut export demand and commodity prices remained weak. In subsequent months a range \nof prominent domestic factors have deteriorated, negatively impacting on the local economic \nlandscape. Widespread labour market instability has undermined confidence, investment and \noutput. Weak export demand, lower terms of trade and sustained domestic spending have \nfurther led to a widening current-account deficit on the balance of payments, and contributed \nto credit ratings downgrades. These domestic economic developments became the dominant \ndrivers of the depreciating trend in the exchange value of the rand, in turn helping to support \ndomestic inflation running against the global trend. \nDespite a decent rebound in growth in the fourth quarter of 2012 from the poor outcome of the \nthird quarter, growth in the first quarter of 2013 has turned out worse than expected. Investment \nhad weakened by year-end and has slowed further in the new year. Constrained by slow growth \nin disposable income, rising inflation and subdued employment creation, household spending \nhas remained modest. \nDomestic short-term supply-side indicators suggest modest economic growth in 2013 remaining \nfragile and below potential. Real gross domestic product (GDP) growth amounted to 0,9 per cent \nin the first quarter of 2013. The Bank’s growth forecast for 2013, which was revised marginally \nupwards at the March 2013 MPC meeting, was again lowered in May. The Bank’s forecast for \ngrowth at the May meeting was 2,4 per cent with downside risks. With the latest data releases, \nthis may need to be revised down at the next meeting of the MPC.\nDespite stronger inflation momentum over the short term, inflation expectations remain anchored \naround the upper end of the inflation target range. Headline inflation levelled off at 5,9 per cent \nfrom February 2013 through to April, with core inflation also remaining below 6 per cent. The \nBank’s inflation outlook for 2013 has improved slightly since the March 2013 MPC meeting. \nThe monetary policy stance remains accommodative, taking into account a sustained negative \noutput gap and inflation driven primarily by global factors, especially exchange rate movements. \nMonetary Policy Review June 2013\n2\nA stronger global economic recovery is immensely desirable, despite its potential to push \nup global prices. Stronger global growth would assist in reducing South Africa’s external \nand domestic vulnerabilities – the current-account and fiscal deficits, and performance of \nexport sectors. A sustainable global recovery, however, requires currency realignments and \nstructural policy interventions in many economies, in addition to monetary accommodation in \nadvanced economies that is more effective in generating stronger real growth and job creation. \nContractionary fiscal policies will continue in debt-stressed economies, especially in peripheral \nEurope. Better fiscal outcomes and more aggressive currency rebalancing would provide \nmuch-needed signs of improved global prospects. \nThe MPR analyses the latest developments in and the factors affecting inflation. It reviews recent \nmonetary policy developments, discusses the outlook for inflation, and presents the growth and \ninflation forecasts of the Bank. In addition, topical issues are discussed in boxes. The first box \nreviews the changes to the consumer price index and its expected impact, while the second \nbox discusses the analytical value of various measures of inflation. The third box evaluates the \naccuracy of the Bank’s economic growth forecasts, while the fourth box clarifies the role of the \nrepurchase and the prime rates in the transmission of monetary policy. \nRecent developments in inflation\nThis section reviews recent trends in the main inflation indices and looks at the main factors \nimpacting on inflation in South Africa. \nThe evolution of inflation indicators \nThe upward trend in headline consumer price inflation – the targeted inflation rate – gained \nmomentum from 5,4 per cent in January 2013 and then levelled off at 5,9 per cent from \nFebruary through to April 2013. The moderation in food prices to March 2013 was more than \noffset by upward pressure on inflation emanating from, among other factors, the impact \nof higher petrol prices. Core inflation also trended upwards, though remaining contained \nbelow 6 per cent. Underlying inflationary pressures remained subdued in the absence of \ndemand pressures and given a significant output gap, but the depreciation of the rand has \nalready affected petrol prices and poses a risk in terms of second-round inflationary effects. \nTargeted inflation\nThe headline consumer price index (CPI) – the measure targeted by the Bank – accelerated \nfrom a low of 4,9 per cent in July 2012 to 5,7 per cent in December. In January 2013 inflation \nsurprised on the downside at 5,4 per cent with the release of a reweighted, rebased and revised \nbasket of goods and services. (See Box 1 for a review of the changes to the consumer price \nindex.) In subsequent months, and with ongoing rand weakness, the rate of inflation increased \nto 5,9 per cent in February and remained at this level through to April 2013 (Figure 1). April 2013 \nmarked 12 months of CPI inflation remaining within the target band.\n3\nMonetary Policy Review June 2013\nPercentage change over 12 months\n0\n2\n4\n6\n8\n10\n12\n14\nFigure 1 \nConsumer price inflation: Targeted inflation*\n* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban \n areas thereafter\nSource: Statistics South Africa\n2003\n2006\n2004\n2005\n2007\n2008\n2009\n2010\n2011\n2012 2013\nA decrease in goods price inflation was the main driver of the 0,3 percentage point decline in \noverall inflation from December 2012 to January 2013 (Table 1). Goods price inflation declined to \n4,8 per cent in January 2013, driven by softer durable goods prices, a decrease in non-durable \ngoods price inflation and the change in the weights of CPI components. Goods price inflation \nthen accelerated to 5,1 per cent in April 2013, as non-durable goods price increases continued to \nexceed the upper band of the inflation target range. Services price inflation, which had remained \nstable and within the target range at, or just below, 6,0 per cent to January 2013, increased to \n6,7 per cent in February 2013, with a significant increase in medical insurance costs. Services \ninflation remained stable at a high 6,6 per cent in April 2013, and upward pressure from services \non overall inflation continues as it now commands a larger weight than goods inflation.\nTable 1\t\nTargeted inflation: Goods and services inflation\nPercentage change over 12 months and percentage points*\n2012\n2013\nWeights* Sep\nOct\nNov\nDec\nWeights* Jan\nFeb\nMar\nApr\nTargeted inflation...........................\n100,00\n5,5\n5,6\n5,6\n5,7\n100,00\n5,4\n5,9\n5,9\n5,9\nGoods inflation............................... \t\n54,20\n5,2\n5,3\n5,3\n5,2\n49,86\n4,8\n5,0\n5,2 \n5,1 \n\t Durable goods...........................\n14,79\n-0,1\n-0,2\n-0,2\n-0,2\n8,02\n-0,7\n-0,8\n-0,7\n-0,5\n\t Semi-durable goods ..................\n6,73\n2,1\n3,3\n2,7\n2,3\n6,32\n2,5\n2,6\n3,1\n3,2\n\t Non-durable goods....................\n32,68\n7,4\n7,6\n7,6\n7,6\n35,52\n7,3\n7,3\n7,5\n7,2\nServices inflation............................\n45,80\n5,9\n5,9\n5,9\n6,0\n50,14\n5,9\n6,7\n6,6\n6,6\nSource: Statistics South Africa\nThe dominant price categories contributing to targeted inflation are food and non-alcoholic \nbeverages (NAB), housing and utilities, and transport (Table 2). The contribution of miscellaneous \ngoods and services increased by 0,4 percentage points to become the second-largest \ncontributor to overall inflation for February 2013. This was driven by increased inflation in the \ninsurance category,1 which increased by 3,3 percentage points from January 2013 to 8,3 per \ncent in February. Rising and then slightly lower petrol prices caused the contribution of the \ntransport category to increase from 0,8 percentage points in January 2013 to 1,2 percentage \npoints in March and the subsequent decline to 1,0 percentage points in April.\n1.\t Medical insurance \ncosts are surveyed \nin February of each \nyear. These costs \naccelerated from a \n12-month rate of \n9,4 per cent in January \n2013 to 10,5 per cent \nin February.\nMonetary Policy Review June 2013\n4\nTable 2\t\nContributions to targeted inflation\nPercentage change over 12 months* and percentage points\n2012\n2013\nWeights Sep\nOct\nNov\nDec\nWeights Jan\nFeb\nMar\nApr\nTargeted inflation*............................\n100,00\n5,5\n5,6\n5,6\n5,7\n100,00\n5,4\n5,9\n5,9\n5,9\nOf which:\nFood and non-alcoholic beverages...\n15,68\n0,9\n1,0\n1,1\n1,1\n15,41\n1,0\n0,9\n0,9\n0,9\nFood.............................................\n14,27\n0,9\n1,0\n1,1\n1,0\n14,20\n0,9\n0,9\n0,9\n0,9\nHousing and utilities.......................... \n22,56\n1,4\n1,4\n1,4\n1,4\n24,52\n1,5\n1,4\n1,4\n1,4\nTransport...........................................\n18,80\n1,1\n1,1\n0,9\n1,0\n16,43\n0,8\n0,9\n1,2\n1,0\nMiscellaneous goods and services....\n13,56\n0,7\n0,7\n0,8\n0,8\n14,72\n0,7\n1,1\n1,1\n1,1\nOther................................................\n29,40\n1,4\n1,4\n1,4\n1,4\n28,92\n1,4\n1,6\n1,3\n1,5\nSources:\tStatistics South Africa and own calculations\nFood prices\nAs shown in Table 2, food price inflation has moderated in recent months, declining by \n1,6 percentage points from a peak of 7,5 per cent in November 2012 to 5,9 per cent in \nMarch 2013. It then increased to 6,3 in April and remains a key contributor to the CPI. A \nsignificant slowdown in meat price inflation to February 2013, and a moderation in bread and \ncereals price inflation to March weighed against accelerations in vegetable price inflation and \nhigh milk, cheese and eggs price inflation (Figure 2). The negative year-on-year rates of \ninternational food price inflation until March 2013 have eased pressures on domestic food \nprices. The Food and Agriculture Organization (FAO) Food Price Index2 of international food \ncommodities remained at an elevated level, recording a year-on-year increase of 1,1 per cent \nin April 2013.\nPercentage change over 12 months\nFigure 2 \nTargeted inflation* and food inflation\nAll food items\nVegetables\nBread and cereals\nMilk, cheese and eggs\nMeat\nTargeted inflation measure\n-10\n0\n10\n20\n30\n40\n* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban \n areas thereafter\nSource: Statistics South Africa\n2003\n2004\n2005\n2012 2013\n2006\n2007\n2008\n2009\n2010\n2011\n2.\t The FAO Food \nPrice Index is a \nmeasure of the \ninternational prices \nof a basket of food \ncommodities. \n5\nMonetary Policy Review June 2013\nDomestic prices of maize and wheat tracked global grain prices lower, though still at elevated \nlevels as shown in Figure 3. The spot price of white maize followed US export parity prices lower \nas it declined by 18,9 per cent from a recent high of R2  509 in November 2012 to early \nFebruary 2013. It then increased to R2 401 in March before again declining to R2 183 on 23 May. \nWheat prices levelled off at a high level from July 2012, before declining by 6,4 per cent from \n28 November 2012 to R3 515 per ton on 23 May 2013.3 Going forward, the more favourable \nglobal food price developments could be offset in part by the depreciation of the currency.\nRand per ton\nRand per ton\nFigure 3 \nSelected commodity prices\n0\n1 000\n2 000\n3 000\n4 000\n5 000\n0\n1 000\n2 000\n3 000\n4 000\n5 000\n6 000\nWhite maize SAFEX spot price\nWheat SAFEX spot price\n2008\n2009\n2010\n2011\n2012\n2013\n2008\n2009\n2010\n2011\n2012\n2013\nNote: The top grey line is the import parity price and the bottom grey line is the export parity \n price. These prices are the theoretical upper and lower bound prices for commodities.\nSource: Grain South Africa\nPetrol prices\nPetrol price inflation moderated from 17,6 per cent in September 2012 to a low of 11,6 per cent in \nJanuary 2013. The subsequent increase to 16,4 per cent in March was followed by a moderation \nto 10,4 per cent in April. This volatility was largely driven by movements in international product \nprices through their effect on the basic fuel price as shown in Figure 4. The basic fuel price \nper litre has fluctuated between R6,65 and R7,85 since October 2012. The price of 95 octane \nunleaded petrol per litre in Gauteng Province decreased from R12,20 in October 2012 to \nR11,86 in January 2013 before increasing to R13,08 in March. \n3.\t On 2 May 2013 the \ngovernment approved \nan increase in the wheat \ntariff protection level to \nUS$294 per ton free on \nboard. This is effectively \nan increase in the price \nfloor for wheat in South \nAfrica, which guarantees \nlocal producers a \nminimum price of \napproximately R3 300 \nper ton compared to \nthe long-term average \nof R2 951 per ton. \nShould the three-week \nmoving average of the \ninternational reference \nprice fall below this \nlevel, a duty would be \nimposed on imported \nwheat. \nMonetary Policy Review June 2013\n6\n-200\n-160\n-120\n-80\n-40\n0\n40\n80\n120\nCents per litre\nCents per litre\nFigure 4 \nSouth African petrol price\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nExchange rate\nOver (-)/Under (+) recovery\nMovement in international product prices\nPrice change\nBasic fuel price\nOther levies\nFuel levy\nMargin\nRoad Accident Fund\nGauteng price of 95 octane unleaded petrol\n0\n200\n400\n600\n800\n1 000\n1 200\n1 400\nSource: Department of Energy \nContributions to the \nchange in the petrol price\nLevel\nThe lower, though still elevated, international oil price led to a decline in the basic fuel price \nin April 2013. However, this was more than offset by the impact of the rand depreciation, the \n15 cents per litre increase in the fuel levy to 212,5 cents per litre, the 8 cents per litre increase \nin the Road Accident Fund levy to 96 cents per litre, and the 13,16 cents per litre increase \nin other levies, inclusive of the pipeline levy set by the National Energy Regulator of South \nAfrica (NERSA). Consequently, in April 2013, the price of 95 octane unleaded petrol in Gauteng \nProvince reached an all-time high of R13,20 per litre. This was followed by a 73 cent reduction \nin May, on account of the lower price of crude oil and a somewhat stronger exchange rate. At \nR12,47 per litre, the price of 95 octane unleaded petrol was 2 per cent higher than a year ago. \nCore inflation\nUnderlying inflation as measured by CPI excluding food, NAB, petrol and energy prices \naccelerated gradually from 4,5 per cent in July 2012 to 5,3 per cent in February 2013 and \n5,2 per cent in April (Figure 5). \nSince the previous MPR, the tight dispersion between the exclusion-based measures widened \nsomewhat before narrowing again. The upward effect of petrol prices is evident from the \ndifferences between the measure excluding food and NAB and measures excluding petrol. \nIn addition, medical insurance costs contributed to the uptick in February 2013. Core inflation \nremained relatively well contained, reflecting moderate demand pressures. (See Box 2 for a \ndiscussion of various measures of inflation.)\n7\nMonetary Policy Review June 2013\nPercentage change over 12 months\n2009\n2010\n2011\n2012\n2013\n* NAB: Non-alcoholic beverages\nSources: Statistics South Africa and own calculations\nFigure 5 \nThe effect of food, petrol, energy and volatile prices on \n \nheadline inflation\nCPI excluding food and NAB* prices\nCPI excluding food, NAB and petrol prices\nHeadline CPI\nCPI excluding petrol prices\nCPI excluding food, NAB, petrol and energy prices\nTrimmed mean\n0\n2\n4\n6\n8\n10\nAdministered prices\nAdministered prices (with an increased weight in the CPI of 18,48 percentage points), and \nregulated prices in particular (with a weight of 13,70 percentage points), are major drivers of the \nupward trend in core inflation measures. The administered price index (API) has remained high \nand above the upper limit of the inflation target range since the previous MPR. The 12-month \nchange in API moderated from 9,8 per cent in September 2012 to 8,5 per cent in January 2013, \nbefore increasing to 8,9 per cent in April. The effect of the revised CPI weights can be seen in \nTable 3 as the contributions of both electricity and petrol increased by 0,4 percentage points \nfrom December 2012 to January 2013, despite a decline in the year-on-year rate of change in \nthe petrol price and no change in the inflation rate of electricity over the period. \nTable 3\t\n Contributions to administered prices\nPercentage change over 12 months* and percentage points\nWeights\n2012\nWeights\n2013\nCPI\nSep\nOct\nNov\nDec\nCPI\nJan\nFeb\nMar\nApr\nCPI for administered prices*.......\n14,66\n9,8\n9,5\n8,7\n8,8\n18,48\n8,5\n8,9\n10,6\n8,9\nRegulated component\nWater.......................................\n1,10\n1,0\n1,0\n1,0\n1,0\n1,55\n1,0\n1,0\n1,0\n0,9\nElectricity.................................\n1,68\n1,8\n1,8\n1,8\n1,8\n4,13\n2,2\n2,2\n2,2\n2,1\nPetrol.......................................\n3,93\n4,1\n3,7\n3,0\n3,0\n5,68\n3,4\n3,6\n5,0\n3,3\nOther regulated \nadministered prices..................\n2,91\n0,1\n0,1\n0,2\n0,3\n2,34\n0,0\n0,0\n0,2\n0,2\nUnregulated component\nAssessment rates....................\n2,07\n1,0\n1,0\n1,0\n1,0\n1,30\n0,5\n0,5\n0,5\n0,5\nPrimary and secondary \nschool fees...............................\n1,28\n0,8\n0,8\n0,8\n0,8\n1,72\n0,8\n0,8\n0,9\n0,9\nUniversity fees..........................\n0,90\n0,6\n0,6\n0,6\n0,6\n1,23\n0,6\n0,6\n0,6\n0,6\nOther unregulated \nadministered prices..................\n0,79\n0,6\n0,6\n0,6\n0,6\n0,53\n0,2\n0,2\n0,2\n0,1\nSource:  Statistics South Africa\nMonetary Policy Review June 2013\n8\nProducer prices\nAlthough differently constituted and not comparable to the previous data, the new producer \nprice index (PPI) continues to measure the price changes of goods in South Africa at the factory \ngate. The first data, compiled in terms of Statistics South Africa’s (Stats SA) newly introduced \nPPIs (at 2012 prices), were released in February 2013 for prices in the month of January 2013. In \nthe new release designated headline PPI is now the PPI for final manufactured goods, whereas \npreviously it was the PPI for domestic output.\nThe five new producer price indices and their year-on-year percentage changes are presented \nin Table 4. With the exception of agriculture, forestry and fishing, the price inflation of products \nproduced in other sectors were either close to, or above, 6 per cent. However, headline PPI \ninflation (PPI for final manufactured goods) has remained contained since January 2013, \naccelerating from 5,4 per cent in February to 5,7 per cent in March. Food products, beverages \nand tobacco products price inflation of 5,9 per cent in March (with a weight of 33,47 per cent), \nand coke, petroleum, chemical, rubber and plastic products price inflation of 9,2 per cent (with \na weight of 17,22 per cent) respectively contributed 2,0 and 1,6 percentage points to the annual \npercentage change in headline PPI inflation in March.\nTable 4\t\nMeasures of producer price inflation\nPercentage change over 12 months\n2013\nJanuary\nFebruary\nMarch\nFinal manufactured goods.............................................................\n5,8\n5,4\n5,7\nIntermediate manufactured goods...................................................\n5,8\n6,0\n7,7\nElectricity and water........................................................................\n12,3\n13,0\n11,4\nMining.............................................................................................\n7,2\n6,6\n8,6\nAgriculture, forestry and fishing.......................................................\n3,0\n1,2\n0,4\nSource: Statistics South Africa\nIntermediate manufactured goods price inflation accelerated to 7,7 per cent in March 2013. \nThe already high annual electricity and water price inflation moderated to 11,4 per cent in \nMarch, mainly driven by electricity price inflation of 12,0 per cent. Annual mining price inflation \ndecelerated from January to February 2013 before accelerating to 8,6 per cent in March. In \nagriculture, forestry and fishing the deceleration was largely on account of easing pressures on \nfruit and vegetable prices, and a notable decline in live animal prices.\nStats SA also introduced analytical PPI series, which are exclusion-based core measures. Two \nof these measures, PPI for final manufactured goods excluding petroleum products and the \nPPI for final manufactured goods excluding food, are shown in Table 5. The significant gap of \n0,5 percentage points in March 2013 between headline PPI and that excluding petroleum \nproducts suggests that petroleum product prices are exerting upward pressure on producer \nprices. The narrow gap between headline PPI and that excluding food suggests little upward \npressure from food prices.\n9\nMonetary Policy Review June 2013\nTable 5\t\nThe effect of food and petroleum product prices on headline \nproducer price inflation\nPercentage change over 12 months\n2013\nJanuary\nFebruary\nMarch\nFinal manufactured goods...............................................................\n5,8\n5,4\n5,7\nExcluding:\n\t Petroleum products.......................................................................\n5,3\n5,0\n5,2\n\t Food.............................................................................................\n5,8\n5,3\n5,7\nSource: Statistics South Africa\nFood price inflation in headline PPI moderated from a peak of 11,1 per cent in November 2012 \nto 6,3 per cent in March 2013 as shown in Figure 6. This was due to a deceleration in price \nincreases in almost all the product categories surveyed. Annual price changes of food products \nas measured in headline PPI continued to move in tandem with that of food as measured in \nheadline CPI.\nPercentage change over 12 months\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n* PPI for final manufactured goods: Food products consist of the food at manufacturing component of \n the PPI for domestic output until December 2012 and the PPI for final manufactured goods, food \n products category, from January 2013.\nSource: Statistics South Africa\nFigure 6 \nFood prices in the PPI* and CPI\nPPI for final manufactured goods: Food products\nCPI: Food\n \n-10\n0\n10\n20\n30\nMonetary Policy Review June 2013\n10\nBox 1\t\nChanges to the consumer price index1 \nIn line with international best practice,2 Statistics South Africa (Stats SA) recently revised the \nweights and made minor changes to the constituent goods and services in the consumer \nprice index (CPI) basket.3 Stats SA then chain-linked the CPI indices at the new price and \nweight reference period, namely December 2012.4\nThe revisions are based on the survey of household expenditure, the Income and \nExpenditure Survey (IES) 2010/2011,5 supplemented by additional data sources where \nnecessary. The IES 2010/11 weights are price-updated to reflect 2012 prices. The CPI \nindices are rebased to December 2012 (December 2012 index values equal 100), with the \nold and new indices linked in December 2012 to ensure continuity and comparability of the \nnew basket of items and weights.\nTable B1.1 compares weights across expenditure categories, including certain within-category \ngroups that have incurred significant changes. With the increase in consumer spending on \nservices relative to goods, expenditure on services now commands a weight of 50,14 per \ncent. Medical insurance costs are a major driver in the miscellaneous goods and services \ncategory, contrasting with the lower weight of the health category which excludes health \ninsurance and medical aid subscriptions.\nTable B1.1\t Comparison of change in CPI weights*\nCOICOP categories\n2008\n2012\nDifference**\nChange\nPer cent\nPercentage \npoints\nPer cent\nGoods......................................................................\n54,20\n49,86\n-4,34\n-8,01\nServices...................................................................\n45,80\n50,14\n4,34\n9,48\nAdministered prices.................................................\n14,66\n18,48\n3,82\n26,06\nFood and non-alcoholic beverages..........................\n15,68\n15,41\n-0,27\n-1,72\nAlcoholic beverages and tobacco............................\n5,58\n5,43\n-0,15\n-2,69\nClothing and footwear..............................................\n4,11\n4,07\n-0,04\n-0,97\nHousing and utilities.................................................\n22,56\n24,52\n1,96\n8,69\n Electricity.............................................................. \n1,68\n4,13\n2,45\n145,83\nHousehold contents, equipment and maintenance..\n5,86\n4,79\n-1,07\n-18,26\nHealth......................................................................\n1,47\n1,46\n-0,01\n-0,68\nTransport..................................................................\n18,80\n16,43\n-2,37\n-12,61\n Petrol....................................................................\n3,93\n5,68\n1,75\n44,53\nCommunication........................................................\n3,22\n2,63\n-0,59\n-18,32\nRecreation and culture.............................................\n4,19\n4,09\n-0,10\n-2,39\nEducation.................................................................\n2,19\n2,95\n0,76\n34,70\nRestaurants and hotels............................................\n2,78\n3,50\n0,72\n25,90\nMiscellaneous goods and services...........................\n13,56\n14,72\n1,16\n8,56\n Insurance..............................................................\n7,71\n9,92\n2,21\n28,66\n Medical insurance..............................................\n3,68\n7,90\n4,22\n114,67\n*\t The weights of CPI represent the proportions of consumption expenditure by households in a specific period.\n**\t Increased/Decreased compared to 2008\nSource: Statistics South Africa\n1\t\nStatistics South Africa, “Consumer Price Index”, The South African CPI Sources and Methods Manual, \nRelease v.2 (Pretoria: Stats SA, 20 February 2013).\n2\t\nThe International Labour Organisation (ILO) recommends that CPI reweighting occurs at least every five \nyears. Stats SA last reweighted CPI in 2008.\n3\t\nStats SA classifies all measured items according to Classification of Individual Consumption by Purpose \n(COICOP) standards.\n4\t\nSee also Box 1 in the March 2013 Quarterly Bulletin of the South African Reserve Bank for details on the \nreweighted and rebased consumer price index.\n5\t\nStatistics South Africa, “Income and Expenditure of Households 2010/2011”, Statistical release P0100 \n(Pretoria: Stats SA, November 2012).\n11\nMonetary Policy Review June 2013\nIn total, the weight for administered prices has increased from 14,66 per cent to 18,48 per \ncent, driven by significant electricity and petrol price increases (see Figure B1.1). The new \nweights reflect the substantial increase in these prices, with that of electricity increasing by \n146 per cent (or 2,45 percentage points) to 4,13 per cent, and that of petrol by 45 per cent \n(or 1,75 percentage points) to 5,68 per cent. \nAverage electricity price\n95 unleaded petrol price in Gauteng\nFigure B1.1 Electricity and petrol prices\nCents per Kwh\n0\n20\n40\n60\n2012\n2011\n2010\n2009\n2008\n2007\n2006\n2005\n300\n600\n900\n1 200\n1 500\nCents\nSources: Eskom, South African Reserve Bank and Department of Energy \n2013\n2011\n2010\n2009\n2008\n2007\n2006\n2005\nThe 2012 reweighting entailed several changes to the composition of CPI, with multiple \nproducts added, including a newly designed seasonal fruit basket, and others excluded to \nreflect current consumer behaviour. Package holidays is a new group that has been added to \nthe CPI, with a weight of 0,21 per cent. \nOn a broader level, the measurement of rural CPI has been revised to reflect prices experienced \nby consumers in rural areas themselves rather than merely reflecting secondary area prices. \nPrices will therefore be measured according to the place of purchase rather than the residential \narea. This change should increase the accuracy of data on rural areas and the understanding \nof the differential impact, if any, of inflation by geographical area. \nFigure B1.2 illustrates the Bank’s baseline inflation forecast and the estimated change to the \nforecast as a result of the new weights and base year through to 2014. These changes caused \nforecasted inflation to increase, on average, by approximately 0,2 percentage points over \n2013. Nonetheless, it is clear that the overall inflation trajectory has not been altered by these \nchanges. It should be noted that in Figure B1.2 both the baseline and the estimated change \nare forecasts, which may be modified due to revisions of assumptions. \nPercentage points\nPer cent\n2010\n2011\n2012\n2013\n2014\nFigure B1.2 Inflation forecast with changes to CPI\n \nHeadline CPI (2008 = 100)\n \nDifference in percentage points (right-hand scale)\n \nSources: Statistics South Africa and South African Reserve Bank\n-0,05\n0,05\n0,15\n0,25\n0,35\n0,45\n0,55\n2,0\n2,5\n3,0\n3,5\n4,0\n4,5\n5,0\n5,5\n6,0\n6,5\nHeadline CPI (new weights, Dec 2012 = 100)\nMonetary Policy Review June 2013\n12\nBox 2\t\nMonetary policy and various measures of inflation\nIn pursuing the Bank’s primary objective, the Monetary Policy Committee (MPC) focuses \non an inflation target over the medium term in the interest of balanced and sustainable \ngrowth. The interpretation of inflation outcomes is at times complicated by temporary or \nidiosyncratic shocks. In such conditions, policy-makers can look through temporary \nvolatility by referencing various core measures of inflation that focus on underlying \ninflationary pressures.\nCore measures can be derived by means of exclusion-based and statistical trimmed mean \napproaches, with the purpose of extracting the persistent component of inflation. Statistics \nSouth Africa (Stats SA) publishes various exclusion-based measures that remove certain \nitems from the headline CPI. In terms of exclusions, the Bank in its analyses focuses mostly \non CPI measures that exclude administered prices and CPI measures that exclude food, \npetrol and energy prices (see Figure B2.1). \nFigure B2.1 Headline inflation and exclusion-based core measures\nPercentage change over 12 months\n-6\n-3\n0\n3\n6\n9\n12\n15\n-6\n-3\n0\n3\n6\n9\n12\n15\nPercentage change over 12 months\nSource: Statistics South Africa\n2003\n2005\n2007\n2009\n2011\n2013\n2003\n2005\n2007\n2009\n2011\n2013\nHeadline CPI \nCPI excluding food and non-alcoholic beverages (NAB)\nCPI excluding petrol\nCPI excluding food and NAB, and petrol\nCPI excluding food and NAB, petrol and energy\nHeadline CPI \nCPI excluding administered prices\nAnother inflation measure is Stats SA’s newly introduced trimmed mean inflation. \nConceptually, this measure excludes items falling in the last 5 per cent of the tail \n(extremity) of the distribution of price-change observations for products and services, \nthus limiting the influence of these extreme changes on the calculation of the weighted \naverage inflation number.1 See Figure B2.2 for a comparison of the key measures \nof inflation.\n1\t\nElementary indices are sorted by the size of their price change, with the cut at the 5 per cent and the \n95 per cent cumulative weight points. Changes in the price of products and services surveyed less \nfrequently (on a quarterly, semi-annual and annual basis) will be considered in terms of a rolling average \nbetween surveys.\n13\nMonetary Policy Review June 2013\nFigure B2.2 Comparison of main inflation measures\nPercentage change over 12 months\n \nTrimmed mean\n \nTargeted inflation \nSources: Statistics South Africa and own calculations\nCPI excluding food and NAB, petrol and energy\nJan\nMar\n2012\n2013\nMay\nJan\nMar\nMay\nJul\nSep\nNov\n3,5\n4,5\n5,5\n6,5\nFigure B2.3 indicates that average long-run inflation measures of the various exclusion-\nbased core measures are not significantly different from that of headline CPI over the period \nfrom January 2003 to April 2013. This is indicative of core measures capturing the \nunderlying trend component of inflation, with the price shocks dissipating over a horizon of \n18 to 24 months. Furthermore, the volatility of core measures over the review period, \nmeasured as the standard deviation2 as shown in Figure B2.3, is close to or less than the \nvolatility of headline CPI inflation. This indicates that the volatility of non-core items \ncontributes most to volatility in headline CPI.\n \nStandard deviation and per cent\nFigure B2.3 Comparison of long-run measures of inflation \nVolatility\nAverage inflation, Jan 2003 to Apr 2013\n* NAB: Non-alcoholic beverages\nSources: Statistics South Africa and own calculations\nCPI excluding\nadministered prices\nCPI excluding food and\nNAB, petrol and energy\nCPI excluding food\nand NAB, and petrol\nCPI excluding petrol\nCPI excluding food\n and NAB*\nHeadline CPI\n0\n1\n2\n3\n4\n5\n2\t\nThe standard deviation is a measure of the dispersion of individual observations from the mean.\nMonetary Policy Review June 2013\n14\nInternational economic policy developments\nMonetary policy decisions are made taking into account current and expected developments in \nthe global economy. This section reviews medium-term developments, and assesses the near-\nterm outlook in terms of prospects, risks and uncertainties for inflation.\nInternational economic developments\nAlthough the trajectory for global economic growth in 2013 has not changed much since \nOctober 2012, economic outcomes in key areas have started to diverge, giving rise to the \ncharacterisation of a ‘multispeed’ recovery in global economic activity. More rapid growth \nin emerging-market and developing economies (developing Asia in particular) is set against \ncontinued, very weak outcomes in Europe and a stronger-than-expected recovery in the \nUS. In the absence of demand pressures, and with an expected softening of food and oil \nprices, inflationary pressures are likely to remain subdued in most advanced and emerging- \nmarket economies. \nMultispeed global growth\nDespite very poor economic outcomes in the fourth quarter of 2012, a trough in global growth \nof 2,25 per cent was actually experienced in the second quarter of 2012. The global economy \ngrew by 3,2 per cent in 2012. This global growth rate masked considerable diversity in national \noutcomes, underscoring the key role of a few major world economies in global outcomes and \npresaging the current ‘multispeed’ trajectory. As of April 2013, the International Monetary Fund \n(IMF) projects global real GDP to increase by 3,3 per cent in 2013; revised down from 3,5 per \ncent in January 2013 and 3,6 per cent in October 2012. Global economic growth is expected to \nbe significantly higher in 2014 at 4,0 per cent.\nThe gap analysis (Figure B2.4) shows that the gap between headline CPI and core measures \nhas further analytical value as it distinguishes between transitory and more permanent \nchanges affecting inflation. Large gaps are indicative of short-term (transitory) price shocks.\nFigure B2.4 Gap analysis \nPercentage change over 12 months\nGap in percentage points\n \nHeadline CPI\n \nDifference between headline CPI and CPI excluding food and NAB, petrol and energy (right-hand scale)\n \nDifference between headline CPI and CPI excluding administered prices (right-hand scale)\nSources: Statistics South Africa and own calculations\n2003\n2004\n2005\n2006\n2007\n2008\n2010\n2009\n2012 2013\n2011\n-2\n0\n2\n4\n6\n-5\n0\n5\n10\n15\n15\nMonetary Policy Review June 2013\nAnnual percentage change\n-3\n-2\n-1\n0\n1\n2\n3\nMay\nMar\nJan\nNov\nSep\nJul\nMay\nMar\nJan\nFigure 7 \nEvolution of real GDP forecasts for 2013 for the G-7 and \n \neuro area\n \nUnited States\n \nEuro area\n \nItaly\nSource: Consensus Economics Consensus Forecasts\n \nJapan\n \nGermany\n \nCanada\n \nUnited Kingdom\n \nFrance \n2012\n2013\nGrowth in advanced economies\nEconomic conditions in major advanced economies deteriorated in the fourth quarter of 2012, \nwith real GDP growth contracting by 2,3 per cent in the euro area and by 1,2 per cent in the United \nKingdom (UK). During the same quarter, Japan’s real GDP expanded marginally by 0,2 per cent \nas it recovered from a mild recession, and the US economy grew by a slow 0,4 per cent.\nThe variable economic growth performances of advanced economies in the latter part of 2012 \nhave continued in 2013. The US leads the recovery, supported by positive trends in the labour \nand housing markets and household consumption expenditure – though somewhat countered by \nan expected drag on growth from fiscal consolidation. Real GDP growth in the US is expected to \naccelerate from 1,9 per cent in 2013 to 3,0 per cent in 2014.\nThe outlook for some of South Africa’s other major advanced-economy trading partners is less \npositive. The IMF’s forecast for the euro area has been revised in January 2013 to a contraction \nof 0,2 per cent and further to 0,3 per cent in April, with a gradual strengthening in the quarterly \noutcome to 1,0 per cent by the fourth quarter of 2013. ECB estimates for the euro area are \nsimilar, with growth of 1,4 per cent expected in 2014. The pace of the recovery is expected to \nbe considerably slower in the periphery. In April 2013 the euro area manufacturing Purchasing \nManagers’ Index (PMI) remained below 50 at 46,7, while the contraction in Europe’s car market \naccelerated to a 10,2 per cent year-on-year decline in March 2013.\nIn 2012 the German economy slowed to 0,7 per cent, with its GDP contracting by 2,7 per \ncent in the fourth quarter. This was followed by weak positive growth in the first quarter of \n2013, with the manufacturing PMI temporarily breaching 50 in February 2013. The ECB and the \nBundesbank project 0,4 per cent growth in real GDP for Germany in 2013 and 1,8 to 1,9 per cent \nin 2014. The European Commission’s GDP growth estimate for France is a small contraction of \n0,1 per cent in 2013 before improving to growth of 1,1 per cent in 2014. The recovery in the UK \nis progressing slowly in the context of ongoing fiscal consolidation, with the IMF projecting the \neconomy to expand by 0,7 per cent in 2013 and 1,5 per cent in 2014.\nMonetary Policy Review June 2013\n16\nTable 6\t\nIMF projections of world growth and inflation for 2013 and 2014*\nPer cent\nShare of \nglobal \nGDP**\nReal GDP growth\nConsumer\nprice \ninflation\n2012\n2013\n2014\n2013 2014\nWorld............................................................\n100,0\n(3,6)\n[3,5]\n3,3\n(4,1)\n[4,1]\n4,0\n3,8\n3,8\nAdvanced economies..................................\n50,1\n(1,5)\n[1,4]\n1,2\n(2,3)\n[2,2]\n2,2\n1,7\n2,0\nUnited States............................................\n18,9\n(2,1)\n[2,0]\n1,9\n(2,9)\n[3,0]\n3,0\n1,8\n1,7\nJapan........................................................\n5,6\n(1,2)\n[1,2]\n1,6\n(1,1)\n[0,7]\n1,4\n0,1\n3,0\nEuro area..................................................\n13,7\n(0,2) [-0,2] -0,3\n(1,2)\n[1,0]\n1,1\n1,7\n1,5\nUnited Kingdom........................................\n2,8\n(1,1)\n[1,0]\n0,7\n(2,2)\n[1,9]\n1,5\n2,7\n2,5\nCanada.....................................................\n1,8\n(2,0)\n[1,8]\n1,5\n(2,4)\n[2,3]\n2,4\n1,5\n1,8\nOther advanced economies......................\n7,3\n(3,0)\n[2,7]\n2,5\n(3,5)\n[3,3]\n3,4\n2,1\n2,4\nEmerging-market and developing countries.\n49,9\n(5,6)\n[5,5]\n5,3\n(5,9)\n[5,9]\n5,7\n5,9\n5,6\nSub-Saharan Africa...................................\n2,5\n(5,7)\n[5,8]\n5,6\n(5,5)\n[5,7]\n6,1\n7,2\n6,3\n South Africa...........................................\n0,7\n(3,0)\n[2,8]\n2,8\n(3,9)\n[4,1]\n3,3\n5,8\n5,5\nCentral and eastern Europe......................\n3,4\n(2,6)\n[2,4]\n2,2\n(3,2)\n[3,1]\n2,8\n4,4\n3,6\nCommonwealth of Independent States.....\n4,3\n(4,1)\n[3,8]\n3,4\n(4,2)\n[4,1]\n4,0\n6,8\n6,6\nDeveloping Asia........................................\n25,1\n(7,2)\n[7,1]\n7,1\n(7,5)\n[7,5]\n7,3\n5,0\n5,0\nChina ...................................................\n14,9\n(8,2)\n[8,2]\n8,0\n(8,5)\n[8,5]\n8,2\n3,0\n3,0\nIndia......................................................\n5,6\n(6,0)\n[5,9]\n5,7\n(6,4)\n[6,4]\n6,2\n10,8\n10,7\nMiddle East and North Africa....................\n5,8\n(3,6)\n[3,4]\n3,1\n(3,8)\n[3,8]\n3,7\n9,6\n9,0\nLatin America and the Caribbean..............\n8,7\n(3,9)\n[3,6]\n3,4\n(4,1)\n[3,9]\n3,9\n6,1\n5,7\n*\t IMF projections as at October 2012 ( ) and January 2013 [ ] in parenthesis\n** GDP shares based on the IMF’s purchasing power parity valuation of country GDPs for 2012\nSource:\t IMF, World Economic Outlook, various issues\nTable 7\t\nGlobal manufacturing PMI: Overall\nIndex points\n2012\n2013\nCountry\nSep\nOct\nNov\nDec\nJan\nFeb\nMar\nApr\nUnited States.............\n51,6\n51,7\n49,9\n50,2\n53,1\n54,2\n51,3\n50,7\nEuro area...................\n46,1\n45,4\n46,2\n46,1\n47,9\n47,9\n46,8\n46,7\n Germany.................\n47,4\n46,0\n46,8\n46,0\n49,8\n50,3\n49,0\n48,1\n France....................\n42,7\n43,7\n44,5\n44,6\n42,9\n43,9\n44,0\n44,4\nUnited Kingdom.........\n49,0\n47,8\n49,0\n51,0\n50,8\n48,2\n48,6\n49,8\nJapan.........................\n48,0\n46,9\n46,5\n45,0\n47,7\n48,5\n50,4\n51,1\nChina.........................\n47,9\n49,5\n50,5\n51,5\n52,3\n50,4\n51,6\n50,4\nIndia...........................\n52,8\n52,9\n53,7\n54,7\n53,2\n54,2\n52,0\n51,0\nGlobal........................\n48,8\n48,8\n49,6\n50,0\n51,5\n50,9\n51,2\n50,5\n*\t Italics indicate outcomes below the 50 index points neutral level, non-italics outcomes above the 50 index points neutral \nlevel, green an increase in the level in the latest survey, red a decrease and black no change. \nSource: JPMorgan\nIn Japan policy stimulus is expected to be significant, delivering a real GDP boost from fiscal \npolicy alone of about 0,6 per cent in 2013. A weaker currency and external demand-driven \nrebound are expected to help the economy expand by 1,6 per cent in 2013, followed by softer \ngrowth of 1,4 per cent in 2014.\n17\nMonetary Policy Review June 2013\nFor the advanced economies, a slow start in 2013 is projected to be followed by a gradual \nacceleration in the second half of the year, with real GDP growing by around 2 per cent on \naverage. For 2013 as a whole, growth in advanced economies will be broadly the same as \nin 2012 at about 1,2 per cent before increasing to 2,2 per cent in 2014. The Organisation \nfor Economic Co-operation and Development (OECD) composite leading indicator projects a \nmoderate expansion in member economies (Figure 8).\nPercentage change over 12 months\n-20\n-15\n-10\n-5\n0\n5\n10\n15\nFigure 8 \nSelected OECD indicators of global economic activity\n \nComposite leading indicator\nSource: OECD\n \n Industrial production index\n1999\n2001\n2003\n2005\n2013\n2007\n2009\n2011\nEmerging and developing economies\nDecelerating demand from advanced economies helped to slow real GDP growth in emerging-\nmarket and developing economies from 6,4 per cent in 2011 to 5,1 per cent in 2012. These \neconomies have subsequently gathered momentum on the back of policy adjustments, resilient \ndomestic consumption and investment, and improving global demand. Nonetheless, insufficient \nexternal demand and structural constraints will weigh against more robust outcomes in the \nmedium term. The IMF projects that economic growth will increase to 5,3 per cent in 2013 and \n5,7 per cent in 2014.\nGrowth in China and India slowed sharply in 2012, but these economies are expected to grow \nin 2013 by 8,0 per cent and 5,7 per cent respectively. Brazil’s GDP growth rate is expected to \nstrengthen from 0,9 per cent in 2012 to 3,0 per cent in 2013. Russia’s real GDP is forecast to \nexpand in 2013 by 3,4 per cent, as in 2012.\nAccording to the IMF, seven of the world’s ten fastest-growing economies between 2011 and \n2015 will be located in sub-Saharan Africa (SSA), with economic growth in the region projected \nto accelerate from 4,8 per cent in 2012 to an average of about 5,9 per cent in 2013–14. \nEconomic activity in both resource-rich and lower-income economies in SSA is expected to be \nincreasingly broad-based.\nCommodity prices and global inflation\nWeak demand and downwardly revised projected emerging-market growth contributed to a \ngeneral decrease in commodity prices from a recent high in September 2012. The near-term \noutlook for commodity prices reflects a slight softening of oil prices on the back of improved \nsupply prospects. \nMonetary Policy Review June 2013\n18\nSofter commodity prices and the absence of excess demand pressures in the major advanced \neconomies suggest that global inflationary pressures are likely to remain subdued. Global \ninflation fell to about 3,6 per cent in February 2013 from 3,9 per cent in February 2012, and \nis expected to remain close to this level through to 2014. In the US and euro area inflation is \nexpected to ease to below the 2 per cent level, while that of Japan is projected to become \nslightly positive in 2013 before increasing to 3,0 per cent in 2014. \nInflation is expected to remain contained in emerging-market and developing economies, with a \nslight deceleration in consumer price inflation from 5,9 per cent in 2013 to 5,6 per cent in 2014. \nHowever, inflationary pressures are high in some emerging-market and developing countries where \noutput gaps are closing faster. In developing Asia inflation is expected to increase from 4,5 per cent \nin 2012 to 5,0 per cent in 2013 and 2014. China’s inflation is expected to increase modestly to \n3,0 per cent in 2013. In contrast, inflation in SSA is expected to decrease from 9,1 per cent in 2012 \nto 6,3 per cent in 2014.\nFiscal trends\nWith a relatively subdued economic recovery in many parts of the world, gradual fiscal consolidation \nhas remained a challenge due to slower economic growth and the impact of lower spending \non growth. The impact of fiscal consolidation on growth in advanced economies is expected \nto rise somewhat in 2013. In the advanced economies general government deficit ratios have \ndeclined but debt ratios continued to increase, although at a slower pace than in previous years. In \nemerging-market economies debt ratios fell, while deficit ratios increased modestly, but stronger \neconomic growth is expected to improve these ratios going forward (Table 8). \nTable 8\t\nFiscal balances and government debt\t \t\nPer cent of GDP\nProjections\n2010\n2011\n2012\n2013\n2014\nFiscal balances\nWorld........................................................................................\n-6,0\n-4,5\n-4,3\n-3,5\n-3,0\nAdvanced economies................................................................\n-7,8\n-6,6\n-5,9\n-4,7\n-3,8\nEmerging markets.....................................................................\n-3,1\n-1,7\n-2,1\n-2,2\n-2,2\n South Africa...........................................................................\n-5,1\n-4,0\n-4,8\n-4,8\n-4,2\nGeneral government gross debt\nWorld........................................................................................\n79,5\n79,7\n81,1\n79,3\n78,6\nAdvanced economies................................................................\n101,5\n105,5\n110,2\n109,3\n109,5\nEmerging markets.....................................................................\n40,3\n36,7\n35,2\n34,3\n33,6\n South Africa...........................................................................\n35,8\n39,6\n42,3\n42,7\n43,7\nSource: IMF, Fiscal Monitor, April 2013\nOil price developments\nCrude oil prices moderated from October to November 2012, before rising to a recent high \nin February 2013, primarily in response to improved confidence in the global economic \nrecovery. The subsequent marked decline in crude oil prices reflected worse-than-expected \nshort-term economic outcomes and the Organization of the Petroleum Exporting Countries’ \n(OPEC’s) expectations that oil supply would continue to exceed demand for oil by about \n1 million barrels per day.\nBetween November 2012 and February 2013, the international price of crude oil has fluctuated \nbetween a low of US$105,82 per barrel and a high of US$119,34 per barrel. As economic \ngrowth rates stalled and expected growth rates were marked down, the price of Brent crude \n19\nMonetary Policy Review June 2013\ndeclined markedly to US$96,79 per barrel on 17 April 2013 – its lowest level since July 2012. \nSubsequently, the price of Brent crude increased slightly to US$102,21 per barrel on 23 May \n2013 (Figure 9). \nFigure 9 \nPrice of Brent crude oil \n2005\n2004\n2006\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n2014\nUS dollar per barrel\n \nBrent crude spot price\n \nFutures prices (24 January 2013)\n \nFutures prices (20 March 2013)\n \nFutures prices (latest: 23 May 2013)\nSource: Bloomberg\n20\n40\n60\n80\n100\n120\n140\n160\nFutures contracts dated 23 May 2013 for delivery in the third and fourth quarters of 2013 traded \nat around US$102,41 and US$101,57 per barrel respectively, as near-term futures prices for \noil caught up with concerns about slowing global economic growth. The International Energy \nAgency (IEA) and OPEC have both lowered their short- and medium-term forecasts of global oil \ndemand for 2013. Over the longer term, supply will be shaped by more rapid economic growth \nin the emerging and developing world, as well as US shale gas production, with the latter \nexpected to expand significantly over the next five years. \nThe persistently high level of the price of Brent crude oil, combined with the weaker exchange \nrate of the rand, imparted both a negative income and a negative price shock to the domestic \neconomy. In addition to increasing inflation, these shocks have diverted households’ and firms’ \nspending power, and pushed up the deficit on the trade account of the balance of payments. \nMore recent weakness in oil prices, if maintained, could support an easing of domestic \ninflationary pressures in coming months.\nInternational monetary policy developments\nSince the previous MPR, the global trend of monetary easing has continued with greater \nuse of quantitative easing (QE) and increased forward guidance. After a range of interest \nrate reductions in 2012, most economies maintained existing monetary policy settings \nin order for the full policy impact to become visible. Some emerging-market economies \ncontinued to ease policy gradually in 2013. On balance, policies have been set to support \neconomic growth, which has consistently underperformed in most countries. Price \noutcomes remain a key concern for all central banks, with considerable variation in \nemphasis on deflation and inflation across advanced and emerging economies. Recent \nweakness in global growth has again, on balance and with variation across countries, \nmoderated global inflation pressures. \nMonetary Policy Review June 2013\n20\nPolicy in advanced economies\nSubdued inflationary pressures and poor growth facilitated a continuation of accommodative \nmonetary policy in advanced economies. This led to improved global financial market conditions \nand risk appetite, along with signs of resilience in real economic activity in 2013. Policy in the US \ncontinues to set the tone across advanced economies. The Fed has maintained the federal \nfunds rate at zero to 0,25 per cent since December 2008. This rate was recently linked explicitly \nto unemployment remaining above 6,5 per cent, and inflation (between one and two years \nahead) no more than 0,5 percentage points above the 2 per cent longer-run goal, and with \ninflation expectations remaining well anchored.4 \nUnsterilised purchases of securities, or QE, have also continued, with the asset purchase \nprogramme accumulating US$40 billion of mortgage-backed securities per month. After the \ncompletion of the maturity extension programme at the end of 2012, the Fed commenced with \nthe purchases of longer-term Treasury securities at an initial pace of US$45 billion per month. \nThese measures supported the mortgage market, exerted downward pressure on longer-\nterm interest rates and eased financial conditions. The Fed’s balance sheet contracted by \nUS$20 billion in 2012 to US$2,9 trillion but is projected to expand by US$1,0 trillion in 2013.\nTable 9\t\nCentral bank total assets\nUS$ billions\n2011\n2012\n2013*\nBank of England..............................................................\n452,8\n662,4\n616,3\nEuropean Central Bank....................................................\n3 605,8\n3 957,5\n3 324,9\nThe United States Federal Reserve..................................\n2 928,5\n2 908,9\n3 354,3\nBank of Japan.................................................................\n1 613,5\n1 661,7\n1 552,8\n*\t\nTotal assets to date: Bank of England (15 May 2013), European Central Bank (17 May 2013), the United States Federal \nReserve (15 May 2013) and Bank of Japan (30 April 2013).\nSources:\tNational central banks\nSince the previous MPR, the BOJ proceeded with aggressive monetary easing by steadily \nincreasing the outstanding amount of the Asset Purchase Program and also announcing the \nintroduction of the Open-Ended Asset Purchases Method (i.e., without a set termination date) from \nJanuary 2014 at ¥13 trillion per month. Its Loan Support Program was enhanced by establishing \nan unlimited Stimulating Bank Lending Facility to provide long-term funds. These measures are \nintended to make financial conditions more accommodative, encourage lower long-term interest \nrates and proactive credit demand, and to reduce risk premiums.\nIn January 2013 the BOJ changed from a medium-term inflation goal of 1 per cent to a long-\nterm price stability target of 2 per cent. This policy adjustment was followed in early April with \nthe introduction of further quantitative and qualitative monetary easing to achieve an inflation \ntarget of 2,0 per cent as soon as possible within two years. The BOJ changed the main \noperating target for money-market operations from the uncollateralised overnight call rate to \nthe monetary base, and intends to almost double the monetary base over the next two years \nby injecting about ¥60–70 trillion per year into the Japanese economy. In addition, to bring \nabout a further decline in interest rates across the yield curve, the BOJ will purchase Japanese \nGovernment Bonds (JGBs) of about ¥50 trillion per annum while extending their maturity from \nless than three years to about seven years. With the aim of lowering the risk premia of assets, \nthe BOJ will purchase exchange-traded funds and real-estate investment trusts. Collectively, \nthese measures are intended to overcome almost two decades of deflation, achieve sustainable \neconomic growth and ensure financial stability in Japan.\nIn response to lower inflation and rising unemployment in 2013, the ECB lowered its rate on main \nrefinancing operations in May to 0,50 per cent after keeping it at 0,75 per cent since July 2012. \nMonetary policy in the euro area has remained accommodative, supported by various refinancing \noperations, unconstrained liquidity for banks, and the Outright Monetary Transactions (OMTs) \n4.\t The focus on \nspecific, quantifiable \nthresholds for \nunemployment and \ninflation is referred to \nas the ‘Evans Rule’.\n21\nMonetary Policy Review June 2013\nbond-buying program. These measures are intended to repair the transmission of monetary \npolicy and to equalise sovereign borrowing costs across the euro area as reflected by significant \nnarrowing of peripheral country bond spreads. \nTable 10\t\nSelected central bank interest rates\nPer cent\nCountries\n25 Oct 2012 23 May 2013\nReal \ninterest rate*\nLatest decision\nCumulative\n2012\n2013\nSouth Africa..................\n5,00\n5,00\n-0,20\n23 May 2013\n(-0,50)\n(0,00)\nUnited States................ 0,00 – 0,25 0,00 – 0,25\n -1,80 – -1,55\n1 May 2013\n(0,00)\n(0,00)\nJapan**.........................\n0,30\n0,30\n-2,85\n22 May 2013\n(0,00)\n(0,00)\nEuro area......................\n0,75\n0,50\n-1,10\n2 May 2013\n(-0,25)\n(-0,25)\nUnited Kingdom............\n0,50\n0,50\n-1,96\n9 May 2013\n(0,00)\n(0,00)\nCanada.........................\n1,00\n1,00\n-0,78\n17 Apr 2013\n(0,00)\n(0,00)\nChina............................\n6,00\n6,00\n2,50\n8 Apr 2013\n(-0,56)\n(0,00)\nIndia..............................\n8,00\n7,25\n-0,55\n3 May 2013\n(-0,50)\n(-0,75)\nRussia...........................\n8,25\n8,25\n2,65\n15 May 2013\n(0,25)\n(0,00)\nBrazil.............................\n7,25\n7,50\n2,20\n17 Apr 2013\n(-3,75)\n(0,25)\nAustralia........................\n3,50\n2,75\n -0,25 – 0,75\n7 May 2013\n(-1,25)\n(-0,25)\nNew Zealand.................\n2,50\n2,50\n1,10\n24 Apr 2013\n(0,00)\n(0,00)\nSwitzerland................... 0,00 – 0,25 0,00 – 0,25\n -0,20 – 0,05\n14 Mar 2013\n(0,00)\n(0,00)\nIsrael.............................\n2,25\n1,50\n-0,30\n13 May 2013\n(-0,75)\n(-0,50)\nSouth Korea..................\n2,75\n2,50\n-0,30\n9 May 2013\n(-0,50)\n(-0,25)\nChile.............................\n5,00\n5,00\n2,00\n16 May 2013\n(-0,25)\n(0,00)\nPoland..........................\n4,75\n3,00\n1,40\n8 May 2013\n(-0,25)\n(-1,00)\nTurkey...........................\n5,75\n4,50\n-0,40\n16 May 2013\n(-0,25)\n(-1,00)\nNigeria..........................\n12,00\n12,00\n1,40\n21 May 2013\n(0,00)\n(0,00)\nGhana...........................\n15,00\n16,00\n6,70\n22 May 2013\n(2,50)\n(1,00)\nKenya...........................\n13,00\n8,50\n1,40\n7 May 2013\n(-7,00)\n(-2,25)\n*\t\nThe real interest rate is calculated as the difference between the central bank’s current nominal policy rate and one-year-\nahead projected inflation.\n**\t The Bank of Japan announced a change in its monetary target from the uncollateralised overnight call rate to the monetary \nbase (to increase by ¥60–¥70 trillion annually) on 4 April 2013, thus the basic loan rate is now used in the table.\nSources:\tNational central banks and Bloomberg\nIn the UK, the Bank of England (BoE) maintained the official bank rate paid on commercial \nbank reserves at 0,5 per cent. The stock of asset purchases financed by issuance of central \nbank reserves was also maintained at the £375 billion level set in July 2012 and has been \nrolled out at an average rate of £1,1 billion5 per month since then. Together with the Funding \nfor Lending Scheme,6 which was extended until January 2015, these asset purchases are \nintended to ease credit conditions in the UK. Small and medium-sized enterprises benefited \nfrom this source of credit extension, and money-market interest rates declined to below the \npolicy rate. \nFollowing the UK government review of the monetary policy framework, the Chancellor of the \nExchequer updated the remit of the BoE in March 2013. While a flexible inflation-targeting \nframework and a 2 per cent inflation target are retained, the new BoE remit requires clarification \nof policy trade-offs and recognises that inflation may temporarily deviate from the target to avoid \nundesirable output volatility. \nAfter leaving its cash rate unchanged at 3,0 per cent at successive policy meetings since the \nlast reduction in December 2012, the Reserve Bank of Australia (RBA) lowered the cash rate by \n5.\t The monthly \naverage is the \noutcome of both \nredemptions and \ninactivity over the \nperiod 5 July 2012 to \n2 May 2013.\n6.\t The Funding for \nLending Scheme \nallows banks to borrow \nat a ratio of 10 to 1 for \nevery pound lent out to \nsmall companies.\nMonetary Policy Review June 2013\n22\n25 basis points to 2,75 per cent in May. The RBA noted that the inflation outlook afforded scope \nto ease the policy rate further to encourage sustainable growth in the economy, consistent with \nachieving the inflation target.\nPolicy in emerging-market economies\nEmerging-market economies continued to deal with limited fiscal space, accelerating credit \ngrowth and divergent inflation outlooks. As shown in Table 10, real policy rates in most emerging \nmarkets remain positive, compared to the negative real rates in advanced economies. Within \nthe Brazil, Russia, India, China and South Africa group of countries (BRICS), South Africa had \nthe lowest nominal policy rate and the second-lowest real policy rate.\nDuring its first quarterly meeting of 2013, the Monetary Policy Committee of the People’s Bank \nof China (PBC) assessed China’s real economy as having maintained its growth momentum \nand the financial sector as operating smoothly, with prices stable but with the future trend of \ninflation uncertain. Despite policy rate stability, the PBC has drained liquidity of 638 billion yuan \n(US$102,7 billion) for the year to date through repurchase transactions.\nIn order to support economic growth, the Reserve Bank of India (RBI) reduced its policy repo \nrate by 25 basis points to 7,75 per cent in January 2013, followed by equivalent reductions in \nMarch and May. The RBI indicated limited room for further monetary easing. Brazil’s Monetary \nPolicy Committee (COPOM) increased the Selic rate by 0,25 basis points in April 2013 in \nresponse to higher inflation and a deteriorating forecast for inflation. The move comes in the \nwake of reductions in 2012 that were intended to support the rapidly slowing economy. Since \nDecember 2012, the Central Bank of the Republic of Turkey (CBRT) reduced policy rates twice, \nby 50 basis points on each occasion. The Banco de México also lowered its policy rate by \n50 basis points in March 2013 to 4,0 per cent, the first change in rates since July 2009.\nDomestic economic developments \nand growth outlook\nMonetary policy decisions are made on the basis of current and expected domestic \ndevelopments in the wider economy. This section reviews medium-term developments, and \nassesses the near-term outlook in terms of prospects, risks and uncertainties for inflation.\nExchange rate developments \nThe rand continues to be influenced by external developments and is highly sensitive to \nchanges in global risk perceptions as reflected by portfolio capital flows. Since the previous \nMPR, however, domestic economic and political developments have become considerably \nmore important factors in rand movements. Currency volatility creates uncertainty and \ncurrency weakness poses an increased upside risk to the inflation outlook, among other \neffects. On a bilateral basis, the trend of the rand diverged from that of emerging markets, \nweakening in steps since October 2012 to its lowest post-crisis level of R9,66 to the \nUS dollar in May 2013. On a nominal trade-weighted basis, the rand has depreciated by \n7,4 per cent since the end of October 2012, with the real effective exchange rate (REER) at \nits weakest level since early 2009.\nThe rand has exhibited a general trend depreciation since about May 2012, with both global and \ndomestic factors contributing to significant short-term volatility, as shown in Figures 10 and 11. \nDivergence from the trend in other emerging markets started in May 2012 and has escalated \nfrom October 2012. South Africa’s expected inclusion in the Citigroup World Government Bond \nIndex (WGBI) stabilised the rand somewhat in the period from June to September, before the \ninclusion actually started and before mining-sector events resulted in further weakness. \n23\nMonetary Policy Review June 2013\n \n90\n95\n100\n105\n110\n115\n120\nIndices: 3 September 2012 = 100\nDec\nJan\nFeb\n2012\n2013\nMar\nMay\nJun\nApr\nSep\nOct\nNov\nFigure 10 \nExchange rate performance against the US dollar\n \nSouth African rand\n \nBrazilian real\n \nMexican peso \n \n \nSources: Reuters and own calculations\n \nCanadian dollar\n \nAustralian dollar \nRand per dollar\nRand per euro\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nFigure 11 \nBilateral exchange rates of the rand\n \nRand per US dollar\n \nRand per euro (right-hand scale)\nSource: Bloomberg \n6\n8\n10\n12\n6\n9\n12\n15\nFrom November 2012 to early January 2013, the rand appreciated by 5,5 per cent against the US \ndollar. With the dollar strengthening due to better economic news in late December 2012 and early \nJanuary 2013, the rand began to depreciate in a more sustained way. The crisis in Cyprus \ngenerated further impetus to the depreciation as investors sought out safe havens, thus the US \ndollar appreciated. This rise in risk aversion towards emerging markets can be seen in the \nJPMorgan Emerging Markets Bond Index Plus (EMBI+) spreads,7 which, as shown in Figure 12, \nreveal significant deterioration in sovereign risk in 2013 towards the end of March. The retracing of \nthe EMBI+ towards lower levels since March may have reflected expectations of sustained \nmonetary accommodation and liquidity in global markets, rather than a prelude to currency \nappreciation. Subsequently, risk aversion again increased markedly during May. \n7.\t The EMBI+ is a \nUS dollar emerging-\nmarkets debt \nbenchmark that tracks \nreturns for actively \ntraded external \nemerging-market debt.\nMonetary Policy Review June 2013\n24\nBasis points\n100\n150\n200\n250\n300\n350\nFigure 12 \nSovereign risk spreads\n \nEMBI+ spread\n \nEMBI Mexico\nSource: JPMorgan\n \nEMBI South Africa\n \nEMBI Brazil\nSep\nOct\n2012\n2013\nNov\nDec\nJan\nFeb\nMar\nApr\nMay\nJun\nCapital flows into rand-denominated assets shifted from bonds to equities, in particular from \nDecember 2012. This shift reflected a pause in non-resident purchases of bonds, and supported \na moderation in share market volatility (VIX®).8 As from March 2013 net purchases again favoured \nbonds. Cumulative net purchases of bonds amounted to R22,3 billion in 2013 up to 23 May \ncompared with R88,6 billion in the whole of 2012. Non-resident interest in shares changed from \nnet sales of R3,4 billion in 2012 to net purchases of R13,0 billion to 23 May 2013 (see Figure 13).\n-25\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n0\n10\n20\n30\n40\n50\nMay\nMar\nJan\nNov\nSep\nJul\nMay\nMar\nJan\nNov\nSep\nJul\nMay\nFigure 13 \nNon-resident net purchases of domestic securities and \n \nrisk aversion\nIndex\nR billions\n \nNet equity purchases\n* Data up to 23 May 2013\n*\nVIX® (right-hand scale)\nNet bond purchases\n2011\n2012\n2013\nSources: JSE Limited and I-Net Bridge\n8.\t The Chicago Board \nOptions Exchange \nMarket Volatility Index \n(VIX®) measures the \nimplied volatility of \nS&P 500 index options \nand serves as a \npopular indicator of \ninvestors’ perception \nof risk.\n25\nMonetary Policy Review June 2013\nProspects for capital inflows are less certain than they have been in recent years, as some of \nthe underlying drivers of flows – the carry trade9 and low returns in advanced economies – \ncontinue to evolve with global conditions. A reduction in the pace of capital inflows to South \nAfrica – either as part of the trend affecting the emerging-market economies or as an idiosyncratic \nshock to South Africa – will affect the value of the currency and sustainability of the current-\naccount deficit, with potentially serious policy implications.\nIn recent months domestic factors have played a critical role in driving down the currency. \nResurgent labour market instability, the effect of work stoppages on exports, the trade \ndeficit and a ratings downgrade by Fitch in January 2013 (following that of Moody’s in \nSeptember, and Standard & Poor’s (S&P) in October 2012) contributed strongly towards a \n14,3 per cent depreciation against the US dollar from 1 January to date. These factors and \nunderlying macroeconomic risks in the form of twin deficits continue to differentiate South \nAfrica from other emerging markets, many of which exhibit significantly better growth and \nmacroeconomic fundamentals. \nThe nominal effective exchange rate (NEER) post-crisis peak occurred in December 2010. Since \nthen the NEER has experienced persistent weakness, declining by 23,3 per cent as shown in \nFigure 14.10 The weighted average NEER is based on trade in, and consumption of, manufactured \ngoods between South Africa and its most important trading partners, and provides a nominal \nmeasure of competitiveness. \nIndex: 2000=100 (foreign currency per rand)\nIndex\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nFigure 14 \nExchange rate of the rand and commodity prices\nNominal effective exchange rate of the rand (NEER)\nThompson Reuters/Jefferies CRB Total Return Index* (right-hand scale)\n40\n60\n80\n100\n100\n200\n300\n400\n500\n* The TRJ/CRB Total Return Index tracks international commodity prices\nSources: Bloomberg and South African Reserve Bank \nThe monthly average NEER depreciated to 61 index points in March and April 2013 – its most \ndepreciated level since early 2009. Some part of the currency weakness can be attributed to \nsofter commodity prices, as suggested by an index that tracks returns to commodities which \nmirror the rand quite closely (Figure 14).11\nThe REERs12 of developed commodity-exporting countries, such as Australia and Canada, have \nmoved sideways since mid-2011 despite the decline in commodity prices. REERs provide an \ninflation-adjusted measure of competitiveness. South Africa’s REER generally follows that of other \ncommodity exporters, but the pattern has broken down as from mid-2011 (Figure 15). South \nAfrica’s REER depreciated by 10,7 per cent from March 2012 to April 2013 – its weakest level since \nearly 2009, as with the NEER. This implies that South Africa’s exports have become less expensive \nrelative to its trading partners and competitors, and ought to support export volumes.\n9.\t For further details \non the carry trade and \nthe rand as a carry \ntrade target, see \nBox 2 in the May 2011 \nSouth African Reserve \nBank Monetary Policy \nReview (Pretoria: \nSouth African Reserve \nBank, May 2011) http://\nwww.resbank.co.za/\nPublications/Pages/\nPublications-Home.\naspx).\n10.\tThe methodology \napplied is described in \nan article in the South \nAfrican Reserve Bank \nQuarterly Bulletin \n(Pretoria: South \nAfrican Reserve Bank, \nDecember 2008) \nhttp://www.resbank.\nco.za/Publications/\nPages/Publications-\nHome.aspx. The \nweighted average \nexchange rate of the \nrand is calculated \nagainst 15 currencies. \nThe weights of the five \nmajor currencies are in \nbrackets: \neuro (34,82), \nUS dollar (14,88), \nChinese yuan (12,49), \nBritish pound (10,71) \nand Japanese \nyen (10,12). \nIndex 2000 = 100.\n11.\tThe TRJ/CRB Total \nReturn Index reflects \na long-only, broadly \ndiversified investment \nin commodities.\n12.\tThe Bank \nfor International \nSettlements (BIS) \nREER indices include \na total of 61 entities, \nincluding individual \neuro area countries \nand the euro area \nas a separate entity. \nThe base year for the \nindices is 2010 and the \nREERs are geometric-\nweighted averages \nof bilateral exchange \nrates adjusted by \nrelative consumer \nprices.\nMonetary Policy Review June 2013\n26\nIndices: 2010 = 100\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nFigure 15 \nReal effective exchange rates\n70\n80\n90\n100\n110\n120\n \nSouth Africa \n \nCanada\n \n \nSource: Bank for International Settlements\n \nAustralia\n \nMexico\n \nBrazil\nLabour markets \nLabour markets in South Africa remained constrained by subdued economic growth and \nincreased instability as unrest and wage demands spread from mining to agriculture and \nbeyond. These developments pose substantial risks to the outlook for economic growth, \nemployment and inflation. Unit labour cost growth – a primary driver of the inflation \noutlook – accelerated in 2012 to an average rate slightly higher than the upper band of \nthe inflation target range, as increases in remuneration outpaced the marginal increases \nin productivity. Employment creation remained subdued, with the recovery in formal non-\nagricultural employment continuing to lag real economic activity since the economic \nrecovery commenced.\nThe cost of labour per unit of output in the economy, known as ‘unit labour costs’,13 grew by \nabout 10 per cent per year between 2008 and 2010, before slowing to growth of 5,9 per cent in \n2011 and 6,3 per cent in 2012. Over the course of 2012, unit labour costs accelerated from \nquarter to quarter (Figure 16), rising from 5,5 per cent in the final quarter of 2011 to 7,4 per cent \nin the third quarter of 2012, before decelerating to 5,7 per cent.\nAverage wage settlements in the collective bargaining system moderated slightly in 2012 from \n2011, growing by 7,6 per cent, according to the Andrew Levy Wage Settlement Survey of \n2012 (Figure 17). With inflation rising in 2012 compared to 2010 and 2011, the significant real \nwage gains of those years have moderated somewhat but remain positive. Outcomes in 2013 \nhave increased, suggesting considerable real wage rigidity in the economy despite sluggish \neconomic growth and weak job creation. \n13.\tUnit labour costs \nrepresent a link \nbetween productivity \nand the cost of labour \nin producing output. \nThe Bank calculates \nquarterly unit labour \ncosts as the ratio \nof total salaries and \nwages to gross value \nadded in the formal \nnon-agricultural sector.\n27\nMonetary Policy Review June 2013\nPercentage change over four quarters\n2004\n2005\n2007\n2008\n2009\n2010\n2011\n2012\n2006\nFigure 16 \nRemuneration per worker, labour productivity and \n \nunit labour cost in the formal non-agricultural sector\n \nNominal unit labour cost\n \nLabour productivity\n \n \nSources: Statistics South Africa and South African Reserve Bank calculations\n-2\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\nRemuneration per worker\nPer cent\n1994\n1996\n1998\n2000\n2002\n2004\n2006\n2008\n2010\n2013*\nFigure 17 \nAverage annual inflation and wage settlements\n \nCPI\n \n* Data for 2013 are for the first three months of the year \nSources: Andrew Levy Employment Publications and Statistics South Africa\n0\n2\n4\n6\n8\n10\n12\nAverage wage settlements\nTable 11 shows the average wage settlements in the major sectors in 2012 reported by Andrew \nLevy Employment Publications. In 2012 the highest and lowest average wage settlements \nwere, as in 2011, respectively in the mining- and in the municipal and utility sectors. The rate of \nincrease in settlements reached in the first quarter of 2013 ranged from 6,0 per cent in the retail \nand catering sector to 10,0 per cent in the transport and freight sector.\nMonetary Policy Review June 2013\n28\nTable 11\t\nAverage percentages of wage settlement by major sector in 2012\nSector\nPer cent\nBuilding and construction................................................................................................... \n7,8\nChemical............................................................................................................................\n7,8\nClothing and textile ...........................................................................................................\n7,5\nCommunication.................................................................................................................. \n7,5\nFinance..............................................................................................................................\n7,0\nFood and agriculture.......................................................................................................... \n7,1\nFood and manufacturing....................................................................................................\n7,3\nHealth and education.........................................................................................................\n7,5\nMetal and engineering........................................................................................................\n8,0\nMining................................................................................................................................\n8,6\nMunicipal and utility............................................................................................................\n6,8\nPaper and printing............................................................................................................. \n7,4\nRetail and catering.............................................................................................................\n7,7\nTransport and freight.......................................................................................................... \n8,0\nSource: Andrew Levy Employment Publications\nTotal employment creation in the formal non-agricultural sector as reported by Stats SA’s \nQuarterly Employment Statistics (QES) survey has remained positive but subdued since June \n2010. Total employment increased marginally from 8,379 million in the fourth quarter of 2011 to \n8,461 million in the final quarter of 2012 – remaining below the peak of 8,512 million recorded in \nthe corresponding quarter of 2008 (Table 12). \nTable 12\t\nEmployment in formal non-agricultural industries\nThousands\nTotal employment\nIndustry\n2008\n2010\n2011\n2012\n4th qr\n1st qr\n4th qr\n3rd qr\n4th qr\nMining and quarrying............................................................. \n518\n491\n518\n518\n519\nManufacturing........................................................................\n1 275\n1 187\n1 158\n1 150\n1 154\nElectricity, gas and water supply............................................\n59\n56\n59\n62\n62\nConstruction..........................................................................\n474\n418\n426\n434\n429\nWholesale trade and retail trade.............................................\n1 747\n1 630\n1 700\n1 690\n1 709\nTransport, storage and communication..................................\n366\n359\n369\n372\n383\nFinancial intermediation, insurance, real-estate and \nbusiness services...................................................................\n1 914\n1 742\n1 831\n1 835\n1 841\nCommunity, social and personal services...............................\n2 159\n2 203\n2 318\n2 378\n2 364\nTotal.......................................................................................\n8 512\n8 086\n8 379\n8 439\n8 461\nSource:\t Statistics South Africa Quarterly Employment Statistics\nThe more recent outcomes of the Quarterly Labour Force Survey (QLFS) show a deterioration \nin total employment in the first quarter of 2013, including a rise in the unemployment rate to \n25,2 per cent from 24,9 per cent in the fourth quarter of 2012, caused by a rise in labour force \nparticipation. The recovery in formal non-agricultural employment has continued to lag that of \nreal economic activity since the economic recovery commenced (Figure 18). \n29\nMonetary Policy Review June 2013\nIndices: First quarter 2008 = 100\n90\n95\n100\n105\n110\n115\nFigure 18 \nNon-agricultural economic activity and employment*\n \nReal GDP excluding agriculture\n* Data is seasonally adjusted\nSources: Statistics South Africa and South African Reserve Bank\n \nFormal non-agricultural employment\n2013\n2012\n2008\n2009\n2010\n2011\nReal-estate and equity prices\nThe real-estate market shows signs of a slight improvement in demand, along with a positive \nincrease in real house prices. Domestic share prices scaled new highs in line with improved \ninternational financial market conditions, but in some contrast to softer commodity prices \nand labour unrest in the resources sector.\nThe real-estate market continues to be constrained by the fragile domestic economic recovery, \nhigh household debt levels and limited supply of mortgage finance. These factors are mirrored \nin nominal house price growth which, since October 2009, has grown at a subdued 4,5 per cent \nper year as recorded by First National Bank (FNB) and Lightstone. Absa’s House Price Index, \nthough more volatile, recorded a positive rate of change from August 2012, and increased \nstrongly from February 2013, the highest growth rates in any of the indices since June 2010 \n(see Figure 19). Adjusted for inflation, real house prices increased by 5,0 per cent in April 2013.\nPercentage change over 12 months\n2004\n2005\n2006\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n-20\n-10\n0\n10\n20\n30\n40\n \nAbsa\n \nLightstone\nSources: Absa, First National Bank, Lightstone and own calculations\nFigure 19 \nHouse prices \n \nFirst National Bank\n \nAbsa: Real\nMonetary Policy Review June 2013\n30\nInternational financial market conditions continued to improve as accommodative monetary \npolicies (in the form of low interest rates and increased global liquidity) encouraged greater \nrisk-taking by investors. The FTSE/JSE All-Share Price Index (Alsi) moved higher in line with \ninternational markets and following the trend in emerging markets. A stronger recovery in the US \neconomy appears to be supporting a rise in share prices there, beyond the levels reached prior \nto the Lehman crisis in October 2007. Figure 20 indicates the disparity between equity markets \nas the euro area remains weighed down by the still-unresolved sovereign debt crisis. \nIndices: 2 January 2007 = 100\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nFTSE/JSE All-Share Index\nEuro area (Dow Jones Euro Stoxx 50)\nBrazil (Bovespa)\nAustralia (ASX All Ordinaries)\nFigure 20 \nInternational share price indices*\n0\n50\n100\n150\n200\n250\nUnited States (S&P 500)\nTurkey (Istanbul)\nMexico (Mexico City IPC)\nCanada (Toronto 300 Composite)\n* Based on local currency share prices\nSources: JSE Limited and I-Net Bridge\nThe strong performance of domestic shares continued as the Alsi surpassed its previous record \nhigh of 22 May 2008 on 17 January 2012, and then scaled successive highs, breaching the \n40 000 index level in early 2013 to a new all-time high of 41 836 index points on 22 May 2013. \nIndices: 2 January 2007 = 100\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nFTSE/JSE:\n \nAll-Share Index\n \nIndustrial Index\nSources: JSE Limited, I-Net Bridge and own calculations\nFigure 21 \nDomestic share price indices\n50\n100\n150\n200\n250\n300\nAll-Share Index: Real \nResources Index\nFinancial Index\n31\nMonetary Policy Review June 2013\nThese gains were supported by trends in global equities through dual-listed share prices and \nthe impact of the depreciation of the rand. Year to date the Alsi decreased in US dollar terms by \n7,6 per cent, while increasing by 4,1 per cent in rand terms. Since October 2012, the Alsi was \nsupported by the performance of the Industrial and Financial Indices, with sideways movement \nin the Resources Index reflecting softer commodity prices and domestic labour unrest. In real \nterms, the Alsi increased by 3,7 per cent from September 2012 to April 2013 but still yielded an \noverall loss compared to May 2008 (Figure 21).\nFiscal policy \nIn the context of subdued global and domestic economic growth, the 2013 Budget \nmaintained its countercyclical approach. The weaker growth outcome for 2012 and into \n2013 resulted in an increase in the budget deficit as revenue underperformed. Though fiscal \nconsolidation has been delayed, the focus of the budget remains on fiscal sustainability and \nnational development through investment and structural reforms.\nThe February 2013 Budget Review projected a small countercyclical rise in the consolidated \ndeficit for the fiscal year 2012/13 from 4,8 per cent of GDP in the 2012 Medium Term Budget \nPolicy Statement (MTBPS) to 5,2 per cent of GDP. With GDP growth slowing and revenue coming \nin weaker than expected, spending plans have been kept stable. Consolidated government \nrevenue for the fiscal year 2012/13 as shown in Table 13 amounted to R887,8 billion, which was \nlower than the estimated R900,6 billion in 2012.\nFor 2013/14, the projected GDP outcome is expected to help reduce the consolidated government \ndeficit to 4,6 per cent, somewhat lower than the 4,8 per cent projected for 2012/13 in the October \n2012 MTBPS. The projected consolidated budget deficit for 2015/16 is 3,1 per cent of GDP.\nTable 13\t\nPublic finance data\n2011/12\n2012/13\n2013/14 2014/15 2015/16\nOutcome\nMTBPS \nestimates\nBudget \nestimates\nMedium-term estimates\nConsolidated government* (R billions)\nRevenue..........................................................\n836,9\n900,6\n887,8\n985,7\n1 091,1\n1 199,8\nExpenditure.....................................................\n954,2\n1 057,1\n1 055,9\n1 149,4\n1 244,3\n1 334,1\nBudget balance...............................................\n-117,3\n-156,5\n-168,0\n-163,7\n-153,2\n-134,4\nTotal net loan debt**........................................\n989,7\n1 166,0\n1 165,1\n1 357,3\n1 544,5\n1 719,8\nAs a percentage of GDP\n \n \n \n \n \n \nBudget balance...............................................\n-3,9\n-4,8\n-5,2\n-4,6\n-3,9\n-3,1\nTotal net loan debt**........................................\n33,3\n35,7\n36,3\n38,6\n39,8\n40,3\nPublic-sector borrowing requirement...............\n5,5\n7,1\n 7,4\n 6,4\n 5,2\n 4,4\n*\t\nIncludes national government, provinces, social security funds and selected public entities \n**\t\nNational government\nSources: National Treasury Medium Term Budget Policy Statement (MTBPS), October 2012 and Budget Review 2013\nGovernment took steps to manage the expected widening of the budget deficit by spelling out \nadditional measures to control spending. Real expenditure growth is reduced to an average \nof 2,3 per cent per annum over the Medium Term Expenditure Framework (MTEF) period \ncompared to 2,9 per cent in the 2012 MTBPS.\nLargely as a result of the wider budget deficit, the 2013 Budget Review projects the public-\nsector borrowing requirement (PSBR) to increase from 7,1 per cent indicated in the 2012 Budget \nReview to 7,4 per cent of GDP in 2012/13, before declining to 4,4 per cent in 2015/16. The \ngrowth in the PSBR has also reflected the borrowing required by non-financial public-sector \nenterprises and corporations for capital expenditure, which has averaged 2,0 per cent of GDP \nMonetary Policy Review June 2013\n32\nsince 2007/08. Planned spending on public-sector infrastructure over the next three years of the \nMTEF period amounts to R827 billion, and the value of major public-sector projects in progress \nor under consideration until 2023 amounts to R3,6 trillion.\nSubstantial budget deficits and the slow economic recovery have worsened South Africa’s debt \nposition in recent years. With the projected decline in the budget deficit over the MTEF period, \ntotal net loan debt is expected to stabilise in 2015/16 at R1,7 trillion and as a ratio to GDP at \n40,3 per cent compared with a ratio of 39,2 per cent indicated in the 2012 MTBPS.\nThe real growth of the wage bill has moderated slightly since 2009/10 (Figure 22), but the \nconsolidated general government wage bill remains historically high at a ratio of 36,2 per cent \nof total expenditure in fiscal year 2011/12. Although real growth in capital expenditure has \ndecreased significantly since 2008/09, the 2013 budget projects that real capital expenditure will \ngrow at an annual rate of 3,4 per cent over the MTEF period. Despite extending the outstanding \nmaturity of government debt, growth in national government’s debt-service costs has recently \nincreased in real terms from -4,6 per cent in 2009/10 to 4,6 per cent in 2011/12. However, debt- \nservice costs as a ratio to GDP is expected to remain at 2,8 per cent over the medium term.\nPercentage change over 12 months\n-10\n-5\n0\n5\n10\n15\n20\n2010/11\n2008/09\n2006/07\n2004/05\n2002/03\nFigure 22 \nReal growth rates of selected aggregates*\n \nCurrent expenditure\n \nPublic-sector wage bill\n* 3-year moving average\nSources: National Treasury, South African Reserve Bank and own calculations\n \nCapital expenditure\n \nDebt-service costs\nThe 2013 Budget Review announced that tax policies would be reviewed to ensure that public \nspending is supported by an appropriate revenue base in a fair and equitable tax system. \nMonetary conditions \nOverall credit and money-supply growth remained inflation-neutral and broadly in line with \nnominal GDP growth. Modest single-digit growth in money supply peaked at 8,5 per cent in \nMarch 2013 in contrast to double-digit growth rates in total loans and advances excluding \nmortgage loans, which topped out at 18,6 per cent in December 2012. Other loans and \nadvances, in particular general loans, remained the main driver of the uneven recovery of \ncredit extension.\n33\nMonetary Policy Review June 2013\nThe low interest rate environment and vehicle sales supported credit extension, which was \notherwise constrained by the size of outstanding household debt. Banks’ total loans and \nadvances to the private sector firmed to a post-recession high of 10,0 per cent in December \n2012, before moderating somewhat to 8,1 per cent in March 2013 (Figure 23). In real terms, \ngrowth in total loans and advances increased modestly to 4,1 per cent in December 2012 – its \nfastest pace since October 2008. As of December 2012, growth in mortgage lending fell below \nits 2,1 per cent per year average growth rate in 2012 to a record low 1,6 per cent in March 2013. \nPercentage change over 12 months\n-10\n0\n10\n20\n30\n40\n50\nFigure 23 \nBanks’ loans and advances to the private sector by type\n \nTotal loans and advances\n \nGeneral loans\n \nTotal loans and advances excluding mortgages\n \nTotal loans and advances: Real\n \nOther loans and advances\n \nMortgages\n2007\n2008\n2009\n2010\n2011\n2012\n2013\nAs growth in household income slowed, private-sector credit growth (excluding mortgage loans) \npeaked at 18,6 per cent in December – its strongest rate of growth since September 2008. \nIt moderated to 14,5 per cent in March 2013, continuing its above 10 per cent growth rate for \n18 consecutive months. The increased momentum in credit extension was supported by growth \nin other loans and advances (consisting of general loans, credit card advances and overdrafts). \nGrowth in general loans, boosted by unsecured lending to households, peaked at 23,5 per cent \nin December 2012 before moderating somewhat. \nDemand, output and expected growth\nEconomic activity regained some lost momentum in the final quarter of 2012. This was \nfollowed by weaker-than-expected growth in the first quarter of 2013. On the supply side, \ndeclining output levels in the mining sector contrasted with reasonable growth rates in \nthe secondary and tertiary sectors in the fourth quarter of 2012. On the demand side, \nexpenditure growth contracted in the final quarter of 2012. South Africa’s terms of trade \ndeteriorated as commodity prices weakened. Consistent with the Bank’s composite leading \nindicator, South Africa’s economic growth outlook has remained fragile and below potential \nthus far in 2013. \nThe economy regained some lost momentum in the final quarter of 2012 as it rebounded from \nthe sharply lower growth of 1,2 per cent of the third quarter (Table 14). Excluding mining and \nagriculture, the economy grew by 2,7 per cent in the fourth quarter of 2012. The secondary \nsector rebounded from the earlier contraction to grow by 3,6 per cent, boosted by 5,0 per cent \ngrowth in manufacturing output. For the calendar year 2012 as a whole, real GDP increased by \n2,5 per cent compared to 3,5 per cent in 2011. Real gross domestic expenditure increased by \n4,1 per cent in 2012, slightly slower than the 4,6 per cent recorded in 2011.\nMonetary Policy Review June 2013\n34\nDespite the depreciation of the rand, real exports of goods and services contracted in all but \nthe third quarter of 2012 and increased by only 0,1 per cent in 2012 (compared to 5,9 per cent \nin 2011). This reflected subdued global growth, weak international demand, and the disruptive \neffect of domestic labour unrest on production and distribution. These effects were cushioned \nsomewhat by the depreciated exchange rate and higher international commodity prices. Real \nimports, in step with the moderation in domestic demand, contracted by 12,4 per cent in the \nfourth quarter of 2012, largely because of a decline in the volume of imported vehicles and \ntransport equipment. Overall growth in import volumes, however, still amounted to 6,3 per \ncent in 2012 compared to 9,7 per cent in 2011. With import prices increasing faster than export \nprices, South Africa’s terms of trade deteriorated in the fourth quarter of 2012 and also on an \nannual basis (to -3,0 per cent) compared to 2011.\nSouth Africa’s trade balance deteriorated steadily from a surplus of R16,4 billion in 2011 to a \ndeficit of R75,5 billion in 2012. The deficit on the services, income and current transfer account \nto GDP shrank slightly by 0,1 per cent from 2011 to 2012. Relative to GDP, the deficit on the \ncurrent account of the balance of payments increased to 6,3 per cent in 2012 from 3,4 per cent \nin 2011. During 2012 the current-account deficit peaked at 6,8 per cent in the third quarter, \nbefore narrowing slightly to 6,5 per cent in the fourth quarter. \nTable 14\t\nGrowth in real GDP and expenditure components\nPer cent*\n2011\n2012\nYear\n1st qr\n2nd qr\n3rd qr\n4th qr\nYear\nFinal consumption expenditure \nHouseholds...................................................\n4,8\n4,0\n3,2\n2,7\n2,4\n3,5\nGeneral government......................................\n4,6\n1,9\n3,7\n8,3\n-0,7\n4,2\nGross fixed capital formation.............................\n4,5\n4,6\n5,4\n5,6\n4,3\n5,7\nChanges in inventories (R billions)**...................\n5,1\n5,9\n6,3\n5,1\n-4,1\n3,3\nGross domestic expenditure............................\n4,6\n4,4\n4,4\n4,1\n-0,9\n4,1\nExports of goods and services.......................... \n5,9\n-3,0\n-6,1\n1,6\n-4,3\n0,1\nImports of goods and services.......................... \n9,7\n4,8\n-0,5\n12,0\n-12,4\n6,3\nGross domestic product.................................. \n3,5\n2,5\n3,4\n1,2\n2,1\n2,5\n*\t Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data \n**\t Constant 2005 prices\nHousehold consumption expenditure grew by 3,5 per cent in 2012 compared to 4,8 per cent in \n2011. Spending remained constrained by rising inflation and moderate growth of 3,8 per cent \nin real household disposable income, compared to 5,2 per cent in 2011. Despite an increase in \ncredit extension, the ratio of household debt to nominal disposable income receded slightly to \n75,8 per cent in the fourth quarter of 2012.\nConsumption expenditure by general government in 2012 remained strong at 4,2 per cent. \nExcluding expenditure on armaments, the fourth-quarter growth rate was 3,6 per cent.\nGrowth in real gross fixed capital formation slowed to 4,3 per cent in the final quarter of 2012, reflecting \nthe net effect of a moderation in capital outlays by public corporations and general government, and \ncontinued momentum of private business enterprises. For 2012 as a whole, real gross fixed capital \nformation increased by a fairly good 5,7 per cent compared to 4,5 per cent in 2011.\nReal inventory investment turned negative in the fourth quarter of 2012 as the mining and \nmanufacturing sectors depleted inventories to offset the effect of labour market instability \non production.\n35\nMonetary Policy Review June 2013\nGlobal economic conditions remain subdued and adversely affect South Africa’s economic \noutlook. South Africa’s growth prospects therefore remain fragile at a below-potential pace. \nGrowth in real GDP of 0,9 per cent was recorded in the first quarter of 2013. Projected growth \nhas been lowered since the October 2012 MPR, reflecting the weaker global outlook and \nthe negative impact of some domestic developments. The negative output gap of 2,0 per \ncent is expected to widen over the short term and reflects the continued subdued state of \nthe economy. The May 2013 MPC meeting projected annual average growth in real output \nof 2,4 per cent in 2013, somewhat slower than the March 2013 forecast of 2,7 per cent, and \n3,5 per cent in 2014 compared to 3,7 per cent in the previous forecast (Figure 24). This may have \nto be revised down at the next MPC meeting. (See Box 3 for an evaluation of the accuracy of the \nBank’s economic growth forecasts.)\nPercentage change at seasonally adjusted annualised rates\n2006\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n2014\n2015\nFigure 24 \nReal GDP growth forecast\n-10\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n8\n10\nLooking forward, the relatively flat trajectory (with a slightly increasing trend since June 2012) of \nthe Bank’s composite leading business cycle indicator is consistent with the growth forecast \n(Figure 25). The Bank’s coincident business cycle indicator has continued to trend upwards. \nShort-term indicators show relatively positive sentiment on the supply side of the economy, but \nstill low consumer confidence on the demand side.\nIndices: 2010 = 100\n50\n70\n90\n110\n130\nFigure 25 \nComposite business cycle indicators\n \nLeading business cycle indicator \n \n Coincident business cycle indicator\n \nDownward phases of the business cycle \n1994\n1996\n1998\n2000\n2002\n2004\n2006\n2008\n2010\n2013\nMonetary Policy Review June 2013\n36\nThe Rand Merchant Bank (RMB)/Bureau for Economic Research (BER) Business Confidence \nIndex (BCI) increased by 6 index points from 46 index points in the fourth quarter of 2012 to \n52 index points in the first quarter of 2013 – to a level close to the post-recession peak of 55 in the \nfirst quarter of 2011. Sentiment improved in four of the five sectors, with confidence declining only \nin the retail sector. According to the first-quarter 2013 BER Manufacturing Survey, manufacturing \nbusiness confidence improved further by 4 index points to a still-low 42 index points.\nThe Ernst & Young/BER Retail Confidence Index fell by 4 index points to 50 index points in the \nfirst quarter of 2013, having been below the neutral level in the second and third quarters of 2012. \nThe FNB Building Confidence Index increased for the second consecutive quarter to 37 index \npoints in the first quarter of 2013 – its highest reading since 2010. The improvement was mainly \ndriven by retailers of building materials who saw significant growth in sales during the first \nquarter of 2013. Only subcontractors recorded a decline in confidence.\nTable 15\t\nDomestic economic sentiment indicators\nHistoric range\nMost recent\nAs at MPR:*\nLow\nHigh\nLow\nHigh\nOct 2012\nJun 2013\nRMB/BER Business Confidence Index.....................\n10\n91\n23\n55\n47\n52\nBER Manufacturing Confidence Index......................\n11\n93\n11\n51\n33\n42\nErnst & Young/BER Retail Confidence Index............\n0\n94\n35\n63\n46\n50\nFNB Building Confidence Index................................\n11\n89\n23\n38\n26\n37\nKagiso Purchasing Managers’ Index........................\n34,6\n63,4\n47,1\n55,4\n48,3\n50,5\nFNB/BER Consumer Confidence Index....................\n-33\n23\n-6\n15\n-1\n-7\n*\t Improved/Worsened since previous MPR\nSources: Kagiso Securities, Rand Merchant Bank, First National Bank, Ernst & Young and the Bureau for Economic Research, \nStellenbosch University\nThe Kagiso Purchasing Managers’ Index (PMI) has improved unevenly from a recent low of \n47,1 index points in October 2012, to above 50 index points in February 2013, before falling \nto 49,3 index points in March. This decline reflects weak economic conditions in the euro \narea – the largest market for exports of South African factory goods. In contrast to the trend \nin South Africa’s major trading partners, the PMI then moved back to just above the neutral \nlevel at 50,5 index points in April 2013, signalling a slight improvement. Two of the five sub-\nindices were below the 50 mark, and the changes have been greatly influenced by volatile \nmovements in the major contributors to the PMI, namely business activity at 52,2 index points \nand new sales orders at 53,7 index points.\nThe forward-looking indicators of the PMI suggest a marginal improvement in manufacturing \nconditions. In April 2013 expected business conditions increased to 51,3 index points from \n47,0 in March – still significantly lower than the recent high of 58,2 index points in January 2013. \nThe increase in the ratio of new sales orders to inventories to 1,1 in April 2013 suggests relatively \nlow inventory levels to demand. \nThe FNB/BER Consumer Confidence Index (CCI) recorded its fourth successive negative \nreading as it declined further to a nine-year low of -7 index points in the first quarter of 2013 – \neven lower than at the height of the financial crisis in 2008. This was reflected by a significant \ndeterioration in sentiment regarding the South African economic outlook, the financial situation \nof households and willingness to buy durable goods.\n37\nMonetary Policy Review June 2013\nBox 3\t\nAn accuracy analysis of real gross domestic product growth forecasts \nThe accuracy of seasonally adjusted real gross domestic product (GDP) growth forecasts \nis assessed using real-time data, which is economic data known to the forecaster at the \npoint of preparing the forecast.1 Real-time data is that set of data that formed the basis of \nthe forecaster’s view of the future.\nIn South Africa average revisions to the actual quarterly GDP growth figures have been \n1,1 percentage points between the first quarter of 1990 and the third quarter of 2012, with a \nmaximum revision change of 4,2 percentage points recorded in the second quarter of 1996 \n(Figure B3.1). Most revisions during this period are upwards.\nFigure B3.1 Data revisions to gross domestic product\nPer cent\n \nFirst release\n \nRevised data\n1990\n1992\n1994\n1996\n1998\n2000\n2002\n2004\n2008\n2006\n2012\n2010\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n8\n10\nForecast errors are calculated as the forecast values minus the actual values. Therefore, a \nnegative mean forecast error indicates that the model tends to under-predict the actual (first \nrelease) GDP outcomes. Overall forecast performance is assessed using a number of \ndescriptive statistics. The most frequently used measures are the average forecast error \n(measuring projection bias in terms of systematic over- or under-estimation) and the root \nmean square error (indicating the absolute size of the error and how it relates to the variability \nof the series).\nWhen the average forecast errors of the Bank’s core model and those of the Reuters \nConsensus Forecast for the period March 2001 to December 2012 are compared (Figure \nB3.2), it is clear that all the average forecast errors are positive and therefore biased. Both \nthe Bank and the Reuters participants, on average, overestimated the actual outcome of \nGDP over all forecast horizons, that is, one-quarter-ahead to seven-quarters-ahead \nforecasts.2 Note that both the respective sets of forecasts have errors increasing initially \nalong the early part of the forecast horizon but then declining along the remainder of the \nforecast horizon.3\n1\t\nForecasted GDP growth rates are quarter-on-quarter annualised numbers.\n2\t\nReuters only publishes forecasts that extend seven quarters into the future.\n3\t\nThe root mean square error increases over the first several quarters as short-term indicators become \nprogressively less useful. As the forecast horizon increases, accuracy gradually improves because of \nmean reversion in GDP growth rates. Forecast error bias is positive at all horizons in part because initial \ndata releases over a large portion of the sample were subsequently revised upwards.\nMonetary Policy Review June 2013\n38\nFigure B3.2 Average forecast error of gross domestic product\nPercentage points\n \nCore\n \nReuters\nQuarters ahead\n7\n6\n5\n4\n3\n2\n1\n0\n0,4\n0,8\n1,2\n1,6\n2,0\nFigure B3.3 shows that the Bank’s forecasts outperform those of the Reuters Consensus \nForecast over all seven forecast horizons when comparing the respective root mean \nsquare errors.4\nFigure B3.3 Root mean square error of gross domestic product\nPercentage points\n \nCore\n \nReuters\nQuarters ahead\n7\n6\n5\n4\n3\n2\n1\n0\n1\n2\n3\n4\nThe Bank communicates forecasts of GDP growth to the general public through the use of \nprobability distributions in the form of fan charts to indicate the balance of uncertainties \nsurrounding possible future outcomes. When comparing the first release GDP growth rates \n4\t\nThe root mean square error is calculated in three steps. Firstly, the forecast errors are calculated and then \nsquared. Secondly, the average of these numbers is calculated and, finally, the square root is taken to \nbring the answer back to the same unit measure as the original data.\n39\nMonetary Policy Review June 2013\nwith the probability distribution around the individual one-year-ahead forecasts (see \nFigure B3.4), the values fall within the 90 per cent probability range in all periods except from \nthe third quarter of 2008 to the second quarter of 2009.5 This reflects the extraordinary \nshocks and impact of the global financial crisis on the real economy, resulting in forecast \nerrors at levels significantly outside the historical probability ranges.\nFigure B3.4 Probabilities for gross domestic product forecasts*\nPer cent\n* For successive revised quarters, the change in confidence intervals reflects new information\n Actual GDP\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n8\n2008\n2009\n2010\n2011\n2012\nNote: The shaded area depicts a 90 per cent confidence interval\nThe Bank’s forecasting performance is also compared to the 16 individual forecasters or \ninstitutions and the average of the four best that participate in the Reuters survey. In \nTable B3.1 the root mean square errors of the various forecasts are compared over the one- \nto four-quarters-ahead horizons. \nTable B3.1 Forecasting error comparison\nRoot mean square error\t\n\t\n\t\n\t\nQuarters ahead\n1\n2\n3\n4\nCore model.......................................................\n1,2899\n2,3905\n2,7934\n3,3376\nAverage of top four forecasts from Reuters.......\n1,9664\n2,4333\n3,1673\n3,3952\nAverage of total Reuters consensus forecasts...\n2,1341\n2,7728\n3,2612\n3,5466\nSources: Reuters and own calculations\n5\t\nThe forecast probability distribution of GDP, namely the width of the forecast fan, is based on the historical \nshocks that have impacted on the real economy.\nMonetary Policy Review June 2013\n40\nMonetary policy\nSince the publication of the previous MPR in October 2012, below-trend growth and subdued \nglobal inflation continue to characterise global conditions, notwithstanding improvements in \nsome economies. Monetary policy in advanced economies remains highly accommodative. \nGlobal developments continued to affect South Africa’s economic growth and inflation \noutcomes, but a range of domestic factors have become relatively more prominent. The \ndomestic economic landscape worsened as a result of widespread labour market instability, \nwith a general rise in uncertainty and a decline in confidence. As a result, the outlook for \ndomestic economic growth has deteriorated with the balance of risks to the downside. The \nnegative output gap persists and remains significant. Weaker domestic and global output \nhas further contributed to a widening current-account deficit, ratings downgrades and a \ndepreciated currency. These factors have sustained upside risks to the inflation outlook, \ncontributing to successive decisions to keep the policy rate unchanged at 5,0 per cent per \nannum over the period (Figure 26). The outlook for inflation remains persistently skewed to \nthe upside.\nPer cent\n2004\n2003\n2005\n2006\n2007\n2008\n2009\n2010\n2011\n2012 2013\nPrime overdraft rate\nRepurchase rate\nThree-month negotiable certificates of deposit rate\nFigure 26 \nThe repurchase rate and other short-term interest rates\n4\n6\n8\n10\n12\n14\n16\n18\nThe period since the previous MPR has seen both a general deterioration in global economic \nconditions and some sign of improvement. Neither development has been unalloyed, however. \nConsiderable strengthening in the US economy in 2013 is not evident in many others. \nFinancial market conditions have also improved quite robustly in various markets, but can be \nseen to be increasingly disjointed from real economic outcomes in many of these markets. \nSecular developments appear to explain these variations and have given rise to the notion \nof a ‘multispeed’ recovery. One common feature of 2013 has been a moderation in inflation \npressures in nearly all economies, barring a few. South Africa, India and Brazil fall outside the \nmain group by exhibiting stronger inflation pressures. \nThe building up of inflation remains a policy challenge. For South Africa, inflation pressures do \nnot derive from economic growth straining at available skills and resources. The output gap \nremains substantial and negative, suggesting considerable unused resources of capital and \nlabour. Demand in the economy has been, and remains, well supported by fiscal and monetary \npolicy settings, with a sustained and large fiscal deficit and real interest rates that have been \nnegative since November 2010. \n41\nMonetary Policy Review June 2013\nWhile the relative weights of the various factors propelling inflation have changed over the past \nyear, rand depreciation, oil prices and food prices have all increasingly played a key role in South \nAfrica’s inflation outcomes. \nFigure 27 Policy analysis\nPer cent\nPercentage of GDP\nPercentage of GDP\nPer cent\nChange in percentage points\n2015*\n2014*\n2013*\n2012\n2011\n2010\n2009\n2008\n2007\n2006\n2005\n2004\n2003\n-10\n-5\n0\n5\n10\n15\n-10\n-5\n0\n5\n10\n15\n-3\n0\n3\n6\n9\n12\n15\nEconomic activity and external balance\nMonetary policy\nFiscal policy\nReal GDP\nNominal GDP\nCurrent-account balance (right-hand scale)\nReal repurchase rate (nominal rate adjusted by Reuters one-year-ahead CPI forecast)\nConsumer price inflation: Targeted inflation\n-6\n-4\n-2\n0\n2\n-6\n-4\n-2\n0\n2\n2014/15*\n2012/13*\n2010/11\n2008/09\n2006/07\n2004/05\n2002/03\nBudget balance of national government\nChange (right-hand scale)\n2015*\n2014*\n2013*\n2012\n2011\n2010\n2009\n2008\n2007\n2006\n2005\n2004\n2003\n* Note: Data for 2013 to 2015 and fiscal years 2012/13 to 2014/15 are estimates from the \n Budget Review 2013\nSources: South African Reserve Bank, Statistics South Africa, Budget Review 2013, National Treasury\nand own calculations\nGlobal factors\nGlobal factors have continued to be critical to the considerations of monetary policy. In October \nand November 2012 the global environment was marked by the euro area returning to recession \nand heightened concern about whether and how the US ‘fiscal cliff’ would be resolved and \nabout its impact on the US economy. \nMonetary Policy Review June 2013\n42\nIn early 2013, however, improvements in global financial market sentiment were evident, with \nprogress made in respect of the US ‘fiscal cliff’ and more muted concerns about sovereign \ndebt in the euro area. Global economic growth prospects, however, remained constrained \nby downside risks due to persistent structural problems and the unresolved euro area crisis. \nMonetary policy in most countries was expected to remain accommodative and increasingly \nexpansionary, in particular in Japan.\nEvents in Cyprus in February unsettled global markets and reinvigorated pessimism about \nthe euro area’s prospects at the same time as real economic indicators suggested weaker \nmomentum. In successive months it became increasingly clear that global growth exhibited \nthree distinct trends: stronger growth in some advanced economies, sustained weakness in \nothers, and generally more rapid but also more variable growth in emerging markets. \nIn the US, the recovery continued to strengthen, with a rising consumer confidence index, \nstronger job creation and wealth effects from both a booming equity market and the \nrecovering housing market. However, the euro area remained in recession, contracting \nby 0,9 per cent in the first quarter of 2013, as deleveraging by households, banks and \ngovernments continued, and financial markets fragmented and restructured. Peripheral \nEurope has and will continue to experience negative or, at best, very low growth for some \ntime. In Japan economic growth accelerated sharply in the first quarter of 2013, although \nstructural factors may constrain the efficacy of the fiscal, monetary and structural policy \nstimulus packages that were announced recently. \nEmerging markets remain the main global source of growth, but there are signs of moderation \nin some of the systemically important countries, particularly China and India. The Brazilian \neconomy should recover modestly this year. The rebalancing of the Chinese economy away \nfrom fixed capital formation and production towards internal consumption has resulted in some \nslowdown, and has contributed to the declining trend of global commodity prices.\nGlobal inflation has moderated, reflecting persistently slow global growth and weaker commodity \nprices. This has prompted further monetary easing by the ECB and the BOJ. Alongside the \nFed’s QE programme, these accommodative policy stances continue to increase global liquidity \nand, under current conditions, can be expected to be maintained over the medium term. \nDomestic factors\nGlobal factors have contributed to weaker-than-expected South African growth, exogenous \nprice pressures and a depreciating exchange rate. However, domestic factors have become \nmore important in assessing the future trajectory of growth and inflation. While the rand has \ntrended lower in line with some of the other emerging markets, the depreciation has been \nconsiderably more pronounced as a result of South African-specific developments. Some of \nthese factors carry major risks to inflation in addition to economic growth. \nDomestic economic growth has remained fragile and below potential, with a low probability \nfor the closure of the negative output gap in the medium term. Forecasts for growth hovered \naround 2,6 per cent for 2013 throughout the period since October 2012. In the new year \ndomestic growth prospects remained subdued despite better-than-expected fourth-quarter \nGDP growth and positive developments in the mining and manufacturing sectors in January. \nThe mining sector was expected to remain under pressure, given the unsettled labour relations \nenvironment, while the outlook for manufacturing improved tentatively. \nThis relatively benign environment deteriorated in subsequent months as consumer confidence \nweakened and disruptions in the mining sector worsened. Electricity supply constraints became \nmore evident and global growth prospects failed to improve. The growth forecast of the Bank \nhas been revised down from 2,7 per cent to 2,4 per cent for 2013 and from 3,7 per cent to \n43\nMonetary Policy Review June 2013\n3,5 per cent in 2014. Growth is expected to accelerate to 3,8 per cent in 2015. The risks to \neconomic growth lie to the downside as a result of the potential for further job and output \nlosses, particularly in the mining sector. \nGovernment and household consumption is expected to be constrained by a range of factors, \nincluding relative price adjustments and high debt levels. Investment by public-sector corporations \nshould continue to provide some growth momentum, but private-sector investment remains \nsensitive to confidence and uncertainty. Slower expenditure growth is reflected in a moderation in \ngrowth in credit extended, especially from December 2012 through to March 2013. \nWidespread labour market instability and work stoppages reduced output and export volumes \nin the mining sector. These factors also raised the possibility of protracted wage negotiations, \nabove-inflation wage settlements and a sustained widening of the deficit on the current account \nof the balance of payments. These developments, along with fiscal considerations, contributed \nto the ratings downgrades by rating agencies.\nA key risk to the inflation and growth outlook has been and continues to be the prospect of \nsharply rising unit labour costs arising out of combinations of overly-high wage settlements \nand/or falling output and productivity. Protracted and disruptive strike action risks lowering \noutput and exports. Excessively high wage settlements will come at the expense of retention of \nemployees, employment creation and could result in higher inflation. A wage-price spiral would \nnegate the benefits of wage increases to workers and undermine the competitive gains of the \ncurrency depreciation. Wage, salary and price restraint at all levels, including executive pay, \ncould underpin confidence and provide stability to prices, including that of the currency, in ways \nthat boost economic growth.\nInflation forecasts\nThe inflation forecast deteriorated significantly between November 2012 and January 2013, with \nthe average of 5,5 per cent for 2013 shifting to 5,8 per cent. Inflation was expected to peak at \n6,1 per cent in the third quarter of 2013 and then to moderate gradually to 5,1 per cent in the \nfinal two quarters of 2014.\nThis near-term deterioration was mainly due to an expected increase in food price inflation and \nrand depreciation. The pattern of upside risk to the inflation forecast and downside risk to growth \ncontinued in the assessment, informed by sustained pressure of food prices, uncertainty about \nexchange rate movements, the overall impact of the new CPI and the possible impact of higher \nwage increases relative to benign demand pressures. Inflation expectations remained anchored \nat around the upper end of the inflation target range.\nTable 16\t\nThe Bank’s real GDP growth and targeted inflation forecasts \nPer cent\nMPC meetings\nReal GDP\nTargeted inflation\n2013\n2013\nExpected peak\nExpected to stabilise\nSeptember 2012..........\n3,4\n5,2\n4th quarter 2012 at \n5,4 per cent\nat 5,0 per cent level \nto the end of 2014\nNovember 2012...........\n2,9\n5,5\n1st quarter 2013 at \n5,7 per cent\nat 5,0 per cent level in \n2014\nJanuary 2013...............\n2,6\n5,8\n3rd quarter 2013 at \n6,1 per cent\nat 5,1 per cent level in the \nsecond half of 2014\nMarch 2013.................\n2,7\n5,9\n3rd quarter 2013 at \n6,3 per cent\nat 5,2 per cent level in the\nfinal quarter of 2014\nMay 2013.....................\n2,4\n5,8\n3rd quarter 2013 at \n6,1 per cent\nat 4,9 per cent level in the\nfinal quarter of 2015\nMonetary Policy Review June 2013\n44\nWhile the risks to the forecast from food prices moderated somewhat over the medium term, \nthe exchange rate, wage settlements and petrol prices remained important upside risk factors. \nAdministered prices, on average, also remained well in excess of the upper end of the target \nrange. The growth rate for electricity price inflation was adjusted from 16,0 per cent to 7,5 per \ncent with effect from July 2013. \nInflation increased to 5,9 per cent in February 2013, contributing alongside rising petrol prices and \ndepreciation, to a slight deterioration to the March inflation forecast. The March inflation forecast \nwas adjusted up to an average of 5,9 per cent in 2013 and 5,3 per cent in 2014. The temporary \nbreach in the upper end of the target range shifted out to the third quarter of 2013, at an average \n6,3 per cent for the quarter, before moderating gradually to 5,2 per cent in the final quarter of 2014. \nThe most recent inflation outcomes, for March and April, also came out at 5,9 per cent, but with \nvariation in the underlying drivers of the overall rate. Food price inflation measured 6,3 per cent \nin April, reversing the downward trend that had prevailed since November 2012. Core inflation, \nwhich excludes food, petrol and electricity, measured 5,2 per cent, marginally up from 5,1 per \ncent in March.\nThe May inflation forecasts for 2013 and 2014 have declined slightly, to 5,8 and 5,2 per cent \nrespectively due to changed assumptions about international commodity prices, including oil, and \nlower global inflation. A temporary breach of the upper end of the target range is still expected \nin the third quarter of 2013, but at a lower average level of 6,1 per cent (6,3 per cent previously), \nfollowed by a gradual moderation of inflation to 4,9 per cent in the final quarter of 2015. \nCore inflation has risen and is expected to be significantly higher, averaging 5,3 per cent for \n2013 compared to the previous forecast of 4,8 per cent. This follows the sharp increase in \nmedical insurance costs in the February CPI. Core inflation is also expected to be adversely \naffected over the coming months by increases in a number of administered prices, particularly \nwater and municipal rates and taxes. This measure is expected to peak at 5,4 per cent in \nboth the third and fourth quarter of 2013, and to average 5,0 per cent and 4,6 per cent in the \ncoming two years. Despite the higher near-term trend, this indicator is still assessed to reflect \nan absence of significant demand pressures. \nInflation expectations remain stable and anchored, as confirmed by both the Reuters survey \nof analysts and the survey conducted by the BER. For the latter, respondents expect inflation \nto average 6,0 per cent in both 2013 and 2014, and 6,1 per cent in 2015. \nRisks to the outlook\nWith strong and negative global headwinds, the South African economy has become especially \nvulnerable to declining domestic and foreign investor confidence. This has been reflected in the \ndepreciating and volatile exchange rate, which was already under pressure from the widening \ndeficit on the current account of the balance of payments. \nA backdrop of weakening commodity prices increases the risk that concerns over the financing \nof a large current-account deficit create further volatility and negative sentiment. Non-residents \nhave remained net buyers of bonds and equities in 2013, totalling about R35,3 billion, and it \nwill be important for these flows to be maintained. These developments have the potential to \naffect, directly and indirectly, South Africa’s credit ratings, and increase the cost of much-needed \nfinance. Although inflation is forecast to remain relatively contained, these factors have raised \nthe upside risks to the outlook at a time of worsening real growth prospects. \nThe impact of the weaker rand on inflation is dependent on the extent, speed and duration of \nthe depreciation, and on the phase of the business cycle. The current level of the exchange rate, \nif sustained, poses a significant upside risk to the inflation outlook. While some of the recent \ndecline reflects changes in the underlying fundamentals, the rand remains highly vulnerable to \nchanges in sentiment and overshooting. \nInternational oil prices are expected to remain constrained by the subdued global growth \nenvironment, but vulnerable to political developments in the Middle East in particular. Having \nreached a recent high of around US$119,34 per barrel in mid-February 2013, Brent crude oil \n45\nMonetary Policy Review June 2013\nprices have remained in a range of between US$96 and US$111 per barrel since the beginning \nof April. Recent exchange rate movements have raised the probability of further petrol price \nincreases in the near term and may reverse the recent moderation in food prices. The exchange \nrate poses an upside risk to food inflation as prices of agricultural commodities such as wheat \nand maize are based on international prices.\nThe deteriorating outlook for the South African economy remains a major concern for monetary \npolicy, even though many of the drivers of the outlook lie outside the ambit of the Bank. These \ndrivers include the financing of the deficit on the current account of the balance of payments; the \nfractious labour relations environment and the associated risks of protracted work stoppages \nand excessive wage increases; electricity supply constraints; upside risks to inflation; downside \nrisks to growth and employment creation in a context of high unemployment; and declining \ndomestic and foreign investor confidence which could impact directly on capital flows. These \ninterrelated developments are reflected in the volatility and weakness in the exchange rate. \nGlobal factors may have lessened somewhat in the balance of risks, but these nonetheless \nremain critically important and significant. Sentiment towards the South African economy is also \na function of developments originating in foreign capitals and their markets. In particular, risks \nto financial markets and global capital flows from excessive global liquidity pushing up asset \nprices have grown in recent months. An early reversal of the US monetary policy stance looks \nless proximate, and likely to be extremely cautious, but its timing is complicated by excessive \nasset price increases and exuberance in financial markets.\nBox 4\t\nThe role of the repurchase rate and the prime rate in the transmission of \nmonetary policy\nThis box describes the role of the repurchase (repo) rate and the prime overdraft rate in \nmonetary policy, and the difference between these two rates. The Bank, in the conduct of \nmonetary policy, sets the level of the fixed repo rate at which short-term loans are provided to \nbanks. This rate affects banks’ funding costs and lending rates via the money-market yield \ncurve and liquidity conditions. The level of banks’ lending rates is determined by three main \nfactors: operations, funding and capital costs; borrowers’ credit risk profiles; and lenders’ \nappetite for risk. Variations in these factors cause fluctuations in lending rates relative to the repo \nrate and the prime rate (Figure B4.1). This, in turn, influences other interest rates, the exchange \nrate of the rand, asset prices, the real economy and, ultimately, inflation.\nPer cent\n2000\n2002\n2004\n2006\n2008\n2010\n2012\nPrime rate\nWeighted average bank lending rate on rand-denominated loans and advances\nRepurchase rate\nSources: Banks’ BA returns (DI returns prior to January 2008) and own calculations\nFigure B4.1 Lending rates in the banking sector\n4\n6\n8\n10\n12\n14\n16\n18\nMonetary Policy Review June 2013\n46\nThis is known as the ‘monetary policy transmission mechanism’. Owing to changes in market \nconventions, the role of the prime ‘overdraft’ rate in the domestic banking system changed in \nthe 1980s from a ‘minimum overdraft rate’ (or ‘best’ lending rate) to a single reference \n(or benchmark) rate for different types of loans. These loans have since been priced relative or \nlinked to the prime rate, with this link facilitating the transmission of broadly equivalent changes \nin the repo rate to existing floating rate loans. However, new loans are priced relative to the \ncurrent repo and prime rates, and prevailing market conditions. As a result, banks can charge \nhigher risk premia on new loans if they perceive lending conditions as riskier even during periods \nwhen the repo rate is lowered and vice versa.1 This is illustrated by the shaded areas in \nFigure B4.2.\nBasis points\n2000\n2002\n2004\n2006\n2008\n2010\n2012\nMark-up to repurchase rate\nDiscount or premium to prime rate\nEasier monetary policy\nSource: Own calculations\nMargin to prime rate\nMargin to repurchase rate\nFigure B4.2 Relative margins to banks’ weighted average lending rate \n-300\n-200\n-100\n0\n100\n200\n300\n400\n500\nIn 2001 the spread between the repo rate and the prime rate widened to an appropriate, stable \nand constant 350 basis points, with the understanding that market interest rates would respond \nto changes in the repo rate. \nFigure B4.3 shows how the weighted average bank lending rate2 on rand-denominated loans and \nadvances responds to and closely follows the monetary policy response. From a lending rate \nadjustment perspective, prime-linked assets tend to re-price faster in a downward interest rate cycle. \nThis, together with banks’ procyclical increase of risk premia on new loans, explains the narrower \nmargin to prime and wider margin to repo in a downward interest rate cycle (Figure B4.2).\nFigure B4.3 clearly shows that the prime rate is only a reference rate, with lending priced \naccording to risk – on aggregate, at a discount to the prime rate. This refutes the general \nmisconceptions that loans are priced off prime and that the size of the spread affects lending \nrates. Lending rates are not influenced by the 350 basis point spread between the repo rate \nand the prime rate. However, changes in the repo rate translate into changes in the prime rate \nand because floating rate loans are linked to the prime rate, the repo rate indirectly affects \nfloating rates. Thus, the role of the spread is to facilitate the transmission of monetary policy to \nexisting floating rate loans that are linked to the prime rate. \nAkin to differentiating interest rates based on clients’ risk profiles, banks also differentiate \nbetween products based on risk, as shown in terms of the respective weighted average interest \nrate levels of the credit products.3 (Figure B4.4).\n1\t\nThe tendency of banks to include a higher (lower) risk premium in the price of credit when the repo rate is low \n(high) is referred to as ‘procyclical behaviour’.\n2\t\nThe annualised weighted lending rate of banks is calculated as the total rand-denominated interest income \nflow divided by the stock of loans and advances.\n3\t\nThe Bank calculates a weighted average rate per credit product by weighing the 5 major banks’ reported \nweighted average rates based on outstanding balances.\n47\nMonetary Policy Review June 2013\nFigure B4.3 The level of weighted lending rates in the latest downward\n \ncycle in interest rates\nPer cent\n \nRepurchase rate\n \nMortgage advances\nSources: Banks’ BA returns and own calculations\nPrime rate\nCredit card advances\nOverdrafts\n2008\n2009\n2012\n2010\n2013\n2011\n0\n5\n10\n15\n20\n25\nIt is evident that credit card advances are deemed more risky than overdrafts, whereas \ncollateralised mortgage advances are deemed less risky. \nFigure B4.3 shows how lending rates have declined, as expected, across all bank product \ncategories during the latest monetary policy easing cycle that started in December 2008. \nHowever, with the exception of overdrafts, margins on all credit product categories increased \nover this period, thus reaffirming the procyclical behaviour of banks (Figure B4.4).\nBasis points\nBasis points\nFigure B4.4 Margins of weighted bank lending rates relative to the \n \nrepurchase rate\n \nOverdrafts\n \nCredit card advances\n \nMortgage advances\n \nWeighted average bank lending rate \n \nOverdrafts\n \nCredit card advances\n \nMortgage advances\n \nWeighted average bank lending rate \n0\n200\n400\n600\n800\n1 000\n1 200\n-200\n-150\n-100\n-50\n0\n50\n100\n150\n200\n2013\n2012\n2011\n2010\n2009\n2008\nChange in margins from November 2008 to March 2013\nMonetary Policy Review June 2013\n48\nBibliography\nSouth African Reserve Bank, press release, “Monetary Policy and Reserve Bank \nAccommodation Procedures” (Pretoria: South African Reserve Bank, 7 March 1998)\nhttp://www.resbank.co.za/publications/detail-item-view/pages/publications.\naspx?sarbweb=3b6aa07d-92ab-441f-b7bf-bb7dfb1bedb4&sarblist=21b5222e-7125-4e55-\nbb65-56fd3333371e&sarbitem=4466. Accessed 21 January 2013. \nSouth African Reserve Bank and the Banking Association of South Africa, “The Role of the \nPrime Rate and the Prime-Repurchase Rate Spread in the South African Banking System” \n(8 April 2010) http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/ \n4279/Summary%20of%20the%20main%20conclusion.pdf. Accessed 21 January 2013.\nExpectations and the Bank’s inflation forecast\nGiven prospects, risks and uncertainties, the outlook for inflation is presented in this section.\nIndicators of inflation expectations\nInflation expectations are an important factor in product price-setting and in wage \nnegotiations, and hence in determining future inflation outcomes. Inflation expectations \nremained well anchored with the Reuters survey showing average inflation well within the \ntarget range, the BER inflation expectations survey indicating inflation at, or just above, the \nupper band of the target range and break-even inflation rates suggesting inflation slightly \nabove 6 per cent.\nMeasured headline CPI inflation fluctuated in a narrow range of between 5,4 and 5,7 per cent from \nSeptember 2012 to January 2013 and then increased by 0,5 percentage points to 5,9 per cent \nfrom February through to April. The first-quarter 2013 BER survey of inflation expectations shows \naverage inflation expectations for 2013 slightly lower at 6,0 per cent compared to the 6,1 per cent \nsurveyed in the fourth quarter of 2012 (Figure 28). Inflation is expected to remain stable at 6,0 per \ncent in 2014 and then to increase moderately to 6,1 per cent in 2015. Lower expected inflation in \n2013 resulted from a decline in the expectations of business people and trade union officials, with \nthose of business above the inflation target and increasing from 2013 to 2014.\nAnnual averages, per cent\n5,0\n5,5\n6,0\n6,5\n2013\n2014\n2015\nFigure 28 \nBER surveys of headline CPI inflation expectations\n6,0\n6,2\n6,2\n6,1\n6,0\n6,1\n6,0\nSurvey conducted during:\n \n3rd qr 2012\nSource: Bureau for Economic Research, Stellenbosch University \n \n4th qr 2012\n \n1st qr 2013\n49\nMonetary Policy Review June 2013\nInflation expectations, as surveyed by Reuters (Table 17), continued to suggest that the average \nyear-on-year percentage change in CPI would be less than 6 per cent. The median forecast for \n2013 has increased slightly from 5,4 per cent in September 2012 to 5,8 per cent in April 2013 \nand has remained around 5,4 per cent for 2014.\nThe quarterly average year-on-year percentage change in CPI, according to the April 2013 survey, \nis expected to peak in the third quarter of 2013, while remaining within the inflation target range \nuntil the fourth quarter of 2014 (the final quarter of the survey). Forecasts of some respondents \nindicate a breach of the target to as high as 7,0 per cent in the third quarter of 2013.\nTable 17\t\nReuters survey of CPI inflation forecasts: April 2013*\n2013\n2014\n2015\nMean...............................................................\n[5,3]\n(5,8)\n5,8\n[5,4]\n(5,5)\n5,4\n(5,5)\n5,6\nMedian.............................................................\n[5,4]\n(5,8)\n5,8\n[5,4]\n(5,4)\n5,4\n(5,5)\n5,5\nHighest............................................................\n[6,2]\n(6,2)\n6,5\n[6,0]\n(6,4)\n6,1\n(6,0)\n6,2\nLowest.............................................................\n[4,6]\n(5,0)\n5,3\n[4,8]\n(5,0)\n5,0\n(4,8)\n4,8\nNumber of forecasters.....................................\n[20]\n(19)\n19\n[16]\n(19)\n19\n(13)\n16\n* \t September 2012 [ ] and March 2013 ( ) survey results in parenthesis\nSource: \tReuters\nFigure 29 shows inflation expectations associated with break-even inflation rates. The break-\neven inflation rate proxy for expected inflation is measured as the difference between the \nnominal yields on conventional South African government bonds and the real yields on CPI \ninflation-linked government bonds of similar maturity. The changes in the trend and level of \nbreak-even inflation rates since the October 2012 MPR reflected, among other things, changes \nin the exchange value of the rand and, more recently, net bond purchases by non-residents. \nShort-term break-even inflation rates have caught up with longer-term break-even inflation \nrates. The longer-term break-even inflation rates have consistently breached 6 per cent from late \nSeptember 2012, followed by the shorter-term rates for brief periods from November 2012 and \ncontinually from late February 2013. This reflected less favourable near- and long-term inflation, \nwith the short-term break-even inflation rates affected by increasingly negative real yields on \ninflation-linked bonds since November 2012.\nPercentage points\nFigure 29 \nBreak-even inflation rates\n5,0\n5,5\n6,0\n6,5\n7,0\n \nSpread between R203 and R211 bonds (4-year maturity)\n \nSpread between R186 and R197 bonds (10- to 13-year maturity)\nSources: JSE Limited and own calculations\n2011\n2012\n2013\nMonetary Policy Review June 2013\n50\nThe South African Reserve Bank inflation forecast\nSince the October 2012 MPR, the Bank’s forecast for annual 2013 targeted headline CPI \ninflation reflected a deterioration from 5,2 per cent at the September 2012 meeting of the \nMPC to 5,9 per cent in March 2013. Subsequently, the inflation outlook improved slightly. \nAlthough the projected peak receded slightly by 0,2 percentage points, the upper end of \nthe target range will still be breached marginally at 6,1 per cent in the third quarter of 2013. \nHeadline CPI is expected to gradually move back to within the target range to 4,9 per cent \nin the final quarter of 2015.\nThe most recent projections of the Bank’s core quarterly forecasting model, presented to the \nMPC meeting on 21–23 May 2013, are reproduced in the form of a fan chart in Figure 30. The CPI \ninflation forecast of the Bank has been revised marginally downwards since the MPC’s previous \nmeeting in March 2013, primarily as a result of lower global inflation and commodity prices.\nAccording to the central projection, which is conditional on an unchanged repurchase rate, \nheadline CPI inflation is now expected to average 5,8 per cent in 2013 and 5,2 per cent in \n2014, compared with the averages of 5,9 per cent and 5,3 per cent respectively projected \nat the time of the March 2013 meeting. At this meeting, the Bank’s assumption for electricity \ntariff increases in the CPI basket had already been lowered to 7,5 per cent from July 2013. The \naverage quarterly CPI inflation rate was expected at the May 2013 meeting to breach the upper \nend of the target range and peak at 6,1 per cent in the third quarter of 2013 before returning to \nwithin the target range, while moderating gradually to an average rate of 4,9 per cent in the final \nquarter of 2015.\nWhen the unchanged repo rate assumption is replaced with the Reuters average expected \npath for the repo rate, headline CPI inflation is expected to average 5,7 per cent in 2013 and \n5,1 per cent in 2014, with the average quarterly CPI inflation rate temporarily breaching the \n6 per cent level in the third quarter of 2013.\nPer cent\nFigure 30 \nTargeted inflation* forecast\n0\n2\n4\n6\n8\n10\n12\n14\n2006\n2007\n2008\n2009\n2010\n2011\n2012\n2013\n2014\n2015\n*\t\nCPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban \nareas thereafter\nNote:\t\nThe MPC uses the fan chart to assess the risks inherent in the forecast and also to \ncommunicate the uncertainties that lie ahead. If future economic developments are \ndeemed to be particularly volatile, the bands will be wider. If a fairly stable future is \nforeseen, the bands will, in turn, be narrower. The fan chart allows policy-makers to focus \ntheir discussion on the risks lying ahead and their effects on inflation. The fan chart uses \nconfidence bands to depict varying degrees of certainty. The darkest band of the fan \nchart covers the most likely 10 per cent of the probable outcomes foreseen for inflation, \nincluding the central projection. Each successive band, shaded slightly lighter and added \non either side of the central band, adds a further 10 per cent to the probability, until the \nwhole shaded area depicts a 90 per cent confidence interval.\n51\nMonetary Policy Review June 2013\nIn the absence of significant demand pressures, the Bank’s forecast of core inflation (i.e., \nheadline CPI excluding food, petrol and electricity prices) shows a rising trend within the inflation \ntarget range, mainly due to expected increases in administered prices. This measure of core \ninflation is now expected to average 5,3 per cent in 2013 compared to 4,8 per cent previously, \nand with a higher peak of 5,4 per cent in the third and fourth quarter of 2013.\nGiven that the central projection for targeted inflation is the most likely outcome, the balance of \nrisks to the inflation forecast in Figure 30 is viewed as being on the upside. These upside risks \nare mainly driven by the exchange rate and wage pressures but are mitigated somewhat by the \ndownward revision of the commodity price assumption. Headline CPI inflation is expected to \naverage 5,8 per cent in 2013 and 5,2 per cent in 2014.\nAssessment and conclusion\nIn 2012 global economic activity remained weak, although stabilising somewhat in the latter \npart of the year when financial market tensions moderated. Subsequently, a weak start in 2013 \ngradually gained growth momentum. Financial market tensions eased, and the deterioration in \nglobal economic conditions moderated and reversed due to persistent and significant monetary \npolicy easing. Global inflation remained benign. \nGlobal inflation is expected to remain broadly unchanged, while global real economic activity \nis expected to progress gradually, with the US leading the way among advanced economies. \nAlthough short-term risks have eased, global prospects remain uncertain, with global economic \nactivity likely to suffer periodic setbacks. \nDomestic activity rebounded somewhat with the lessening of mining-sector tensions, and with \nsome signs of improved global prospects and better financial conditions. This improvement \nproved short-lived, however, as ongoing prominent negative domestic factors undermined \nconfidence and demand slowed. Since May 2012, the rand has depreciated by almost \n25 per cent against the US dollar, reflecting primarily domestic uncertainty but also global \ndevelopments. These factors have shaped, and will continue to shape, inflation outcomes over \nthe medium term and at present create serious upside risk to the inflation forecast.\nSince July 2012, the Bank’s economic growth outlook has oscillated around 2,9 per cent. In \nMay it was again revised slightly lower to 2,4 per cent and downside risks were identified. The \noutput gap is expected to widen in 2013 before stabilising in 2014 and narrowing in 2015. The \ninflation forecast for the medium term has improved very slightly since the March 2013 MPC \nmeeting but the risks to the inflation outlook are to the upside.\nA more moderate inflation trajectory over the medium term would be brought about by greater \nstability of the exchange rate and commodity prices, more modest wage increases, and reduced \nadministered price pressures.\nMonetary policy has continued to provide stability through a period of both global and domestic \nuncertainty. The monetary policy stance has taken account of the expected temporary breach \nof the inflation target and the relatively weak economic recovery as reflected by a persistent \nnegative output gap. The unchanged repo rate at 5,0 per cent per annum, and the modest \nnegative real repo rate are expected to foster price stability and support the economic recovery. \nMonetary Policy Review June 2013\n52\nStatement of the Monetary Policy Committee\n22 November 2012\nIssued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the \nMonetary Policy Committee (MPC) in Pretoria\nSince the previous meeting of the Monetary Policy Committee (MPC) the domestic growth \noutlook has deteriorated, while the upside risks to inflation have increased. Widespread labour \nmarket instability and work stoppages have reduced output and export volumes, with the \npotential for employment losses. Risks to the inflation outlook have been increased by a further \ndepreciation of the rand exchange rate, partly in response to these developments, as well as by \na possible higher trend in wage settlements and the impact of the reweighting and rebasing of \nthe CPI basket by Statistics South Africa (Stats SA). \nAt the same time the global environment remains challenging with slowing growth in a number \nof regions, declining global industrial output, the worsening Japanese outlook, continued \nuncertainty regarding United States (US) fiscal policy and a resurfacing of concerns relating to \nthe resolution of the crisis in the eurozone, which is now in recession. \nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas \nat 5,6 per cent in October 2012, and up from 5,5 per cent in September, was 0,2 percentage \npoints above the market consensus. The categories of food and non-alcoholic beverages, \nhousing and utilities, and transport together accounted for 3,5 percentage points of the inflation \noutcome. The upside surprise was mainly attributable to food prices which increased by 2,8 per \ncent month on month, and 6,7 per cent on a year-on-year basis. Core inflation, as measured \nby the exclusion of food, petrol and electricity from CPI, measured 4,7 per cent, unchanged \nfrom September. Administered prices excluding petrol increased at a year-on-year rate of \n7,5 per cent.\nYear-on-year producer price inflation moderated further to 4,2 per cent in September, having \nmeasured 5,1 per cent in August. This favourable trend was driven mainly by lower rates of \nincrease in the prices of mining products. A marked acceleration was seen in the food-related \ncategories, with agricultural prices increasing at a year-on-year rate of 5,2 per cent in September, \ncompared with 4,3 per cent in August and a recent low of 1,7 per cent in May. Manufactured \nfood prices increased by 9,0 per cent and 10,1 per cent in August and September respectively.\nThe inflation forecast of the Bank reflects a deterioration in the inflation outlook for 2013 \ncompared with the previous forecast. Inflation is now expected to average 5,6 per cent in the \nfinal quarter of 2012, and 5,6 per cent for the year. It is expected to average 5,5 per cent in \n2013 and 5,0 per cent in 2014, with a peak of 5,7 per cent expected in the first quarter of 2013. \nThis near-term deterioration is mainly due to higher expected food price inflation and the recent \ndepreciation of the rand. Core inflation remains contained, indicating the absence of significant \ndemand pressures. This measure is expected to peak at 5,0 per cent in the first quarter of 2013, \nand to average 4,8 per cent and 4,5 per cent in 2013 and 2014 respectively. \nThese forecasts do not incorporate the new CPI weights and rebasing recently announced by \nStats SA as the finer details of these revisions, including the introduction of new products, and \nthe method of linking the old and new baskets, have not yet been finalised. Preliminary evidence \nsuggests that a slight upward bias to the Bank’s central projection for headline CPI inflation \ncould occur in 2013. On the assumption that the rate of increase in price changes for most \ngoods and services, apart from food and electricity, is more or less unchanged, the combined \naverage upward bias would be relatively small, in the order of around 0,2 percentage points. \nThe new weights and the rebased index will be incorporated formally into the Bank’s forecast in \n2013 after the revisions have been finalised by Stats SA.\nInflation forecasts of financial analysts surveyed by Reuters have also been revised upwards. \nFinancial analysts now expect inflation to average 5,5 per cent in 2013, compared with \n5,3 per cent in the previous survey. The expectation for 2014 remains unchanged at 5,4 per \ncent. It is unclear if these forecasts already take account of the changes to the CPI weights. \n53\nMonetary Policy Review June 2013\nThe break-even inflation rates have also exhibited a moderate upward trend since the previous \nMPC meeting.\nThe global economic outlook has deteriorated somewhat with a return to recession in the \neurozone. The prospects for the region remain bleak amid procyclical fiscal austerity, continued \nhousehold- and banking-sector deleveraging in a tighter regulatory environment, and renewed \nconcerns relating to the unresolved sovereign debt crisis. The deepening recession has served to \nheighten the solvency risk of the peripheral countries. The recently announced Outright Monetary \nTransactions (OMT) programme by the European Central Bank remains yet to be activated. The \nJapanese economy contracted in the third quarter and leading indicators point to a possible \nrecession. Although the United Kingdom economy experienced positive growth in the third \nquarter, the outlook is negative as the favourable impact from the Olympic Games dissipates. \nThe prognosis for the US economy remains highly dependent on progress in resolving the so-\ncalled fiscal cliff. The related uncertainty has already adversely affected investment decisions, \nand while some last-minute political compromise is likely, the ultimate extent of the fiscal \ncontraction and its impact on growth are still unclear. Failure to resolve this issue could result in \na recession and derail the nascent recovery in the housing market. \nProspects for emerging markets, while still positive, have also deteriorated somewhat during the \npast months, contributing to the downside risk to the global recovery. Trend growth rates in Asia \nare declining, and both China and India are expected to experience weaker growth rates, with \npossible implications for commodity prices.\nFor some time the exchange rate of the rand has been determined primarily by external \ndevelopments, particularly changing global risk perceptions. More recently, domestic factors \nappear to have become dominant determinants of the exchange rate. These include the \nincreased risk posed to the economic outlook by labour market developments in the mining \nand agricultural sectors in particular; the widening deficit on the current account of the balance \nof payments, which is likely to have been exacerbated by the stoppages; and the ratings \ndowngrades by two rating agencies while also retaining a negative outlook. Since the previous \nmeeting of the MPC, the rand has depreciated by about 6,7 per cent against the US dollar, by \n5,8 per cent against the euro, and by 5,8 per cent on a trade-weighted basis. \nInflows into the domestic bond market associated with South Africa’s inclusion in the World \nGovernment Bond Index of Citibank probably helped to moderate the degree of depreciation \nover this period. Since the beginning of the year, net purchases of South African bonds by non-\nresidents have totalled R85,2 billion. By contrast, non-residents have been net sellers of South \nAfrican equities since the beginning of the year to the value of R6,8 billion. \nThe rand is expected to remain sensitive to both unfolding domestic economic and political \ndevelopments, in addition to global risk perceptions. The extent to which the weaker rand feeds into \ninflation will be dependent on the trading range of the rand going forward and the duration of these \nmoves. Most analysts do not expect further weakening of the rand from current levels, and a number \nof them expect some recovery. However, the rand is expected to remain volatile and subject to \novershooting, and its depreciation poses an increased upside risk to the inflation outlook.\nThe domestic economic growth outlook has deteriorated recently, largely as a result of the \ncontinued global slowdown and aggravated by domestic events. Mining output has declined \nsignificantly as a result of work stoppages and there are likely to be longer-term implications for \noutput, exports and employment as the mines adjust to higher labour costs. Labour unrest in \nparts of the agricultural sector is also expected to affect output and prices adversely. \nRecent high-frequency data indicate that third-quarter growth was well below the 3,2 per cent \nrecorded in the second quarter. Mining output contracted at a quarter-to-quarter rate of 3,2 per \ncent in the third quarter and further contractions are expected in the fourth quarter. The physical \nvolume of manufacturing production was adversely affected by the road freight transport sector \nstrike in September when a contraction of 2,3 per cent was recorded on a month-to-month \nbasis. For the quarter as a whole manufacturing output increased by 0,3 per cent. The outlook \nfor the sector remains negative, with the Kagiso Purchasing Managers Index declining to a level \nof 47,1 in October, reflecting an expectation of contraction in the coming months.\nMonetary Policy Review June 2013\n54\nThe Bank’s forecast of gross domestic product (GDP) growth has been revised downward from \n2,6 per cent to 2,5 per cent in 2012. Growth in 2013 is now expected to average 2,9 per cent, \ncompared with 3,4 per cent previously, while the growth forecast for 2014 has been revised \ndown from 3,8 per cent to 3,6 per cent. Moreover, the risks to this forecast remain on the \ndownside. The RMB/BER Business Confidence Index declined marginally in the fourth quarter \nand remains below the 50 index level. \nConsumption expenditure by households appears to have lost some momentum recently following \nthe 2,9 per cent annualised growth rate in the second quarter. Consumer confidence in the third \nquarter, as measured by the FNB/BER Consumer Confidence Index improved marginally, but was \nstill at low levels that were not consistent with robust consumer spending. Nevertheless, growth in \nretail trade sales, which account for about half of household consumption expenditure, has been \nrelatively resilient having grown at a quarter-to-quarter rate of 1,9 per cent in the third quarter. \nHowever, passenger vehicle sales and expenditure on services were subdued.\nThere is, however, still little evidence of demand pressures on inflation. The resilience of \nconsumer demand has been attributed to a number of factors, including low interest rates, \nrelatively low inflation, real income growth, high growth rates in unsecured lending, and until \nrecently a relatively strong exchange rate. Some of these factors may be a constraint on \nexpenditure going forward, especially when combined with higher administered price increases \nwhich constrain discretionary spending.\nThe MPC is concerned about the recent trend in wage settlements and the potential negative \nimpact on the economy, particularly on growth and investment. These developments could also \nresult in lower growth in employment creation or an absolute decline in employment. Although \nthe reported headline increases granted in some of the settlements are higher than the actual \naverage increases, there is no doubt that the increases granted are well above inflation. This \nhas the potential to increase aggregate demand and prices with a risk of a possible wage-price \nspiral, which could negate the real benefits of these wage increases to workers. However, \nthe impact will be moderated to some extent by the inevitable job losses that are likely to \naccompany such increases in the context of a slowing economy. The cost-push effect of these \nwage increases will therefore depend on the actual increase in the total wage bill and unit labour \ncost developments. \nThe most recent wage data, which do not yet incorporate these latest trends, show that in \nthe second quarter of 2012 growth in unit labour costs was 6,1 per cent, while Andrew Levy \nEmployment Publications reported average wage settlement rates in collective bargaining \nagreements of 7,4 per cent for the first nine months of 2012. Wage settlements at these levels \nwere not assessed to pose a major risk to inflation and these trends will be closely monitored \nas the collective bargaining landscape has become more fractious.\nIt is also too early to assess the impact of recent developments on employment. According \nto the Quarterly Labour Force survey, total employment increased by about 200 000 in \nthe third quarter of 2012, but the increased number of unemployed workers resulted in the \nunemployment rate increasing to 25,5 per cent in September. It is expected, however, that \nthe positive employment trend in the non-gold mining sector observed during the past year is \nlikely to have reversed or slowed down, while the negative employment trends in manufacturing \nand gold mining are likely to persist. The net effect of higher wages and lower employment on \naggregate expenditure is therefore still unclear at this stage.\nCredit extension to the private sector moderated on a quarter-to-quarter basis in the third quarter \nof 2012, when an annualised increase of 5,4 per cent was recorded. Twelve-month growth \nin total loans and advances to the private sector was 8,8 per cent in September. However, \nmortgage loan growth remained subdued. When this category is excluded, loans increased at a \nsignificant twelve-month rate of 16,6 per cent. The main impetus has come from the persistently \nstrong growth in unsecured lending to households, and this has been related to real income \ngrowth particularly in the public sector. Growth in unsecured lending to households remains in \nexcess of 30 per cent but there are some tentative signs that this growth may be moderating. \nAlthough to date this has not represented a systemic risk, as it is still a small part of total loans \n55\nMonetary Policy Review June 2013\nand advances, this is being carefully monitored by the Bank. Unsecured lending has probably \nhelped to underpin household consumption expenditure.\nThe fiscal policy stance, as reflected in the Medium Term Budget Policy Statement (MTBPS) \nremains supportive of the economy through its contra-cyclical stance. Although the goal of fiscal \nconsolidation is being maintained, the timing has been pushed out further, as lower expected \ngrowth is likely to result in lower revenues. Growth in expenditure is projected to remain the \nsame as that set out in the February budget, and no large boost to aggregate demand is \nexpected that could impact on the inflation outlook. \nFood prices remain a significant risk to the inflation outlook. Global food prices, while still high, \nhave declined from recent peaks. The impact of this shock is still to fully filter through to domestic \nprices. Although there is usually a lag between the impact of global food price developments on \ndomestic prices, the impact appears to have been felt more quickly than is generally the case. \nThe recent depreciation is also expected to exacerbate the upside risk to food prices. Futures \nprices, however, indicate that maize prices may be moderating following a better-than-expected \ndomestic harvest.\nInternational oil prices have remained relatively unchanged since the previous meeting of the \nMPC, although in the past few days have increased following ongoing hostilities in the Middle \nEast. Domestic petrol prices declined in November despite the depreciation of the rand and, \nshould the exchange rate and international product prices remain at current levels, a further \nmoderate decline can be expected in December. However, international prices remain highly \ndependent on the global growth outlook and political developments in the Middle East.\nSince the previous MPC meeting the domestic landscape has seen a marked change. While \nthe global crisis remains unresolved, South Africa has seen significant developments that \nhave impacted on the economic outlook and confidence. These domestic developments, if \nnot addressed in a comprehensive and constructive manner, have the potential to derail the \nprogress made to date whereby South Africa has been able to withstand the worst contagion \neffects of the ongoing global crisis.\nWhile recognising that there are real issues that underlie the recent wave of wildcat strikes, \nthe Bank is concerned about the conduct of some of the parties involved in the recent labour \nmarket instability and, in particular, the unacceptable levels of violence that have accompanied \nthe strikes. It is critical that both employers and employees take constructive steps to address \nthe fraught relations that appear to be prevalent in a number of areas. Employers need to better \nappreciate the contribution to stability that an informed, experienced, skilled and organised \nworkforce can make, and also need to be better informed about, and sensitive to, the conditions \nand circumstances of their employees. An important element of this is to take measures that \nenable employees to be better informed about the financial situation, strategy and future plans \nof the companies and sectors that they work in. \nAt the same time employees need to ensure an end to the use of violence in labour relations. In \ntheir quest for fair and decent employment conditions, employees need to recognise the potential \nnegative effects of unsustainable cost structures on employment levels and competitiveness in \nthe absence of improved productivity. In the prevailing conditions there is the danger of a wage-\nprice spiral and, inevitably, it will be the workers who bear the brunt of the fallout.\nThe costs are not only the direct costs in terms of lost production, but also the possible \nincreased costs of finance. In the context of a very weak global economy, where South Africa \nshould strive to be a destination of choice and thereby grow the economy and achieve the \npursued developmental and employment goals, the ability to attract investment and improve \nthe country’s ratings must be a clear objective. \nWhile many of the strikes appear to have been resolved, long-term resolution of the underlying \ncauses requires ongoing, concerted action on the part of all the parties involved. We need \ncohesion and certainty of policy, as well as unity of purpose to build an inclusive, longer-term \nvision. The National Development Plan is a broad unifying framework that has been adopted \nby both Cabinet and Parliament, and could form the base to take the country forward, enabling \nSouth Africa to play an effective role in the continent as a favoured trading and investment partner. \nMonetary Policy Review June 2013\n56\nThe MPC assesses the balance of risks to the inflation outlook to be on the upside, given \nthe continued pressure of food prices, uncertainty of the exchange rate movements and \nthe reweighting and rebasing of the CPI. Furthermore, the possible impact of higher wage \nincreases could exert further upward pressure on inflation notwithstanding the concerns that \nrecent developments in the labour market could impact negatively on employment. The MPC \nconsiders that the demand pressures on inflation at this stage remain relatively benign, as \nevidenced in the contained trend of underlying inflation. There are also signs of moderation of \nconsumption expenditure against the backdrop of a weak supply side of the economy. The \nnegative output gap is expected to persist for some time, and the balance of risks to the growth \noutlook remains on the downside.\nIn the light of these factors, the MPC is of the view that the current accommodative stance \nremains appropriate and has therefore decided to keep the repurchase rate unchanged at \n5,0 per cent per annum. As always, the MPC will monitor developments closely and will not \nhesitate to act in a manner consistent with its mandate.\n57\nMonetary Policy Review June 2013\nStatement of the Monetary Policy Committee\n24 January 2013\nIssued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the \nMonetary Policy Committee (MPC) in Pretoria\nSince the previous meeting of the Monetary Policy Committee (MPC) there has been some \nimprovement in global financial market sentiment, but economic growth prospects in a number \nof the major advanced economies or regions remain constrained. Downside risks to the outlook \npersist as the structural problems in many countries, and in the eurozone, in particular, are still \nunresolved. Monetary policy in most countries is likely to remain accommodative in the absence \nof clear evidence of a sustained recovery, particularly against the backdrop of a relatively benign \nglobal inflation environment.\nDespite a generally positive reaction to the ANC elective conference, ongoing labour conflict, the \nproposed scaling down of mining operations and ratings agency downgrades are symptomatic \nof the challenging domestic outlook. In the absence of coherent and consistent structural \npolicy initiatives domestic economic growth is expected to continue to be well below both \nwhat is possible and required to make significant inroads into unemployment. In contrast to the \nsituation in most advanced economies, the risks to the inflation outlook remain on the upside, \ndue, in large part, to continued exchange rate and wage cost pressures. \nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all urban \nareas was 5,7 per cent in December 2012, up from 5,6 per cent in November. The categories of \nfood and non-alcoholic beverages, housing and utilities, and transport together accounted for \n3,5 percentage points of the inflation outcome. Food price inflation moderated from 7,5 per cent \nin November to 7,0 per cent, mainly as a result of lower meat and grain price increases. Core \ninflation, as measured by the exclusion of food, petrol and electricity from CPI, which had been \nunchanged at 4,7 per cent since September, increased to 4,9 per cent in December, mainly as \na result of increases in services price inflation and in line with the Bank’s forecast. Administered \nprices increased by 8,8 per cent, and by 7,6 per cent excluding petrol.\nHaving reached a recent low of 4,2 per cent in September 2012, year-on-year producer price \ninflation increased to 5,2 per cent in both October and November. This reversal of the previous \ndownward trend was mainly due to price increases in mining and quarrying, agricultural products \nand manufactured food. Agricultural prices increased at year-on-year rates of 6,3 per cent and \n5,9 per cent in October and November respectively, while manufactured food prices increased \nat rates of 10,9 per cent and 11,1 per cent in these months respectively.\nThe inflation forecast of the Bank reflects a further deterioration in the inflation outlook for \n2013 compared with the previous forecast. The forecasts do not yet incorporate the new CPI \nweights and rebasing recently announced by Statistics South Africa, but these changes will \nbe incorporated formally into the Bank’s next forecast. The impact on the inflation trajectory is \nlikely to be marginal. Having averaged 5,6 per cent in 2012, inflation is now expected to average \n5,8 per cent in 2013 and 5,2 per cent in 2014, compared with the previous forecasts of 5,5 per \ncent and 5,0 per cent for the respective years. Inflation is expected to peak at 6,1 per cent in the \nthird quarter of 2013 and then to moderate gradually to 5,1 per cent in the final two quarters of \n2014. This deterioration is largely due to higher expected food price inflation, the lagged effects \nof the depreciation of the rand and higher expected unit labour costs. \nThe forecast of core inflation is more or less unchanged, indicating the continued absence of \nsignificant demand pressures. This measure is expected to peak at 5,0 per cent in the first two \nquarters of 2013, and to average 4,9 per cent and 4,5 per cent in 2013 and 2014 respectively. \nInflation expectations remain anchored at around the upper end of the inflation target range. \nAccording to the Survey of Inflation Expectations conducted by the Bureau for Economic Research \n(BER) in the fourth quarter of 2012, inflation is expected to average 6,1 per cent in 2013 and \n6,2 per cent in 2014. This represents a marginal increase of 0,1 percentage point for 2013 compared \nwith the previous survey, while the forecast for 2014 is unchanged. Business executives are the \nMonetary Policy Review June 2013\n58\nmost pessimistic about inflation, having raised expected inflation rates to 6,6 per cent and 6,7 per \ncent in 2013 and 2014, while trade union respondents reduced their forecasts to 6,1 per cent and \n6,6 per cent respectively for these years. The forecasts of financial analysts increased marginally, \nbut remain within the target range for the forecast period. For the past four quarters expectations \nfor the next five years have remained unchanged at 6,2 per cent.\nThe global growth outlook remains challenging, notwithstanding improved sentiment in global \nfinancial markets following the interim deal related to the fiscal cliff in the US. The fiscal issues \nhave not been fully resolved, with decisions on expenditure cuts and the debt ceiling delayed \ntill later this year. While the worst-case fiscal scenario has been avoided, the uncertain fiscal \noutlook is likely to contribute to continued sub-trend US growth. On the positive side, there are \ncontinued signs of a recovery in the US housing market and improved corporate profitability. \nAlthough sovereign debt risks in the eurozone have subsided for now and bond spreads on \nperipheral European debt have narrowed significantly, the region is likely to remain in recession \nfor much of the year, as fiscal tightening and balance-sheet repair by banks and households \ncontinue. The unemployment rate has now reached 11,8 per cent, with youth unemployment at \n24 per cent. The outlook for Germany, the main growth driver in the region, has also deteriorated. \nGrowth prospects in the UK remain relatively weak, while the outlook for Japan is uncertain \ndespite the announcement of substantial fiscal and monetary policy stimuli.\nThe outlook for emerging markets, particularly those in Asia, is more positive. The Chinese \neconomy appears to have stabilised following concerns about a possible hard landing, and \nconsensus forecasts suggest some growth acceleration in 2013 in both China and India. Growth \nin Africa is expected to be sustained at rates in excess of 5 per cent, while Latin American \ngrowth is expected to be more restrained, but an improvement on 2012.\nThe rand exchange rate continues to pose an upside risk to the inflation outlook. The exchange \nrate has been impacted by the widening deficit on the current account of the balance of \npayments during 2012 and changing global and domestic risk perceptions, particularly relating \nto the adverse developments in the South African labour market, and the downgrades by the \nvarious ratings agencies. Since the previous meeting of the MPC, the rand has been fairly \nvolatile, having appreciated initially from R8,94 to the US dollar, to R8,45 at the end of the year, \nbut subsequently depreciated to current levels of around R9,00. Since the beginning of the year, \nthe rand has depreciated by 6,1 per cent on a trade-weighted basis and by about 6,6 per cent \nagainst the US dollar.\nWhile the rand is expected to remain sensitive to domestic and global developments and \ncontinued volatility can be expected, most analysts do not expect significant further sustained \ndepreciation in the coming months. The depreciation of the rand is expected to help moderate \nthe current-account imbalance, although platinum export growth may be undermined to some \nextent by possible shaft closures. However, financing of the deficit may be more challenging \ndespite relatively high domestic nominal bond yields, as sentiment towards South Africa \nhas deteriorated, and non-residents already hold over one-third of the stock of outstanding \ngovernment bonds. \nNon-resident net purchases of domestic bonds totalled R88,6 billion during 2012, due in part \nto South Africa’s inclusion in the Citibank World Government Bond Index. However, the pace \nof inflows declined substantially in the final quarter of the year, when net purchases amounted \nto R10,6 billion. Since the beginning of 2013, net purchases by non-residents have amounted \nto R4,3 billion. While non-residents were net sellers of equities during 2012 to the value of \nR3,4 billion, they were net buyers to the value of R7,3 billion in November and December. Year to \ndate, however, the negative trend regarding equities has continued with net sales of R2,3 billion \nas growth prospects remain weak.\nDomestic economic growth remains fragile and below potential following an annualised growth \nrate of 1,2 per cent in the third quarter of 2012, and an estimated growth rate of around 2,5 per \ncent for the year. A similar outcome is expected in 2013 with growth of 2,6 per cent forecast, \nrevised down from 2,9 per cent in the previous forecast. A more favourable outcome of \n3,8 per cent is forecast for 2014, compared with 3,6 per cent previously, driven in part by a \nmore favourable global outlook. However, the risks to these forecasts are assessed to be on \n59\nMonetary Policy Review June 2013\nthe downside, given uncertainties and instability in parts of the mining and agricultural sectors \nin particular. Constraints to growth are both external and internal. To achieve a higher internally-\ngenerated growth rate would require a serious commitment to implementing a range of structural \nreforms and making the necessary trade-offs as outlined in the National Development Plan.\nThe outlook for parts of the mining sector is bleak, following continued labour disputes and \nannouncements of possible closures of shafts and mines, a consequence of increased cost \npressures, weak global demand and prices. Although mining output increased on a month-\nto-month basis in November, on a three-month-to-three-month basis a contraction of 10,4 per \ncent was recorded. \nThere are mixed signals pertaining to the outlook for the manufacturing sector. The real volume \nof manufacturing production increased by 2,3 per cent in November, its highest month-on-\nmonth rate in 4 years, due in part to a rebound from widespread strike activity in previous \nmonths, and growth in the fourth quarter is estimated to have been relatively robust. Capacity \nutilisation has also increased. However, the Kagiso PMI declined to below the 50 index point \nlevel to 47,4 in December, indicating an expectation of some contraction in the sector.\nThe negative business sentiment evident in the confidence indicators is also reflected in the \ncontinued weakness in private-sector gross fixed capital formation. Recent developments in \nthe mining sector are likely to reinforce this weakness as plans are scaled back. Investment \nexpenditure is likely to remain underpinned by the government and state-owned enterprises. \nIn the third quarter of 2012, gross fixed capital formation grew at an annualised rate of 7,2 per \ncent, but private-sector capital formation, which accounts for just under two thirds of the total, \nonly grew at a rate of 2,8 per cent. \nGrowth in consumption expenditure by households moderated as expected in the third \nquarter of 2012 when it increased by 2,6 per cent. The main driver of the moderation was the \ndecline in expenditure growth on services and non-durable goods. However, there are also \nsigns of moderation in the growth of expenditure on durable and semi-durable goods, and \nthe depreciated exchange rate is likely to sustain this trend. Growth in motor vehicle sales has \nslowed in recent months, and there was a marked decline in the confidence of new vehicle \ntraders reported by the BER. Despite the higher-than-expected increase in retail trade sales in \nNovember, the quarterly rates suggest further moderation in growth. The FNB/BER Consumer \nConfidence Index declined by 2 index points to -3 index points in the final quarter of 2012.\nOn balance, the MPC does not assess growth in household consumption expenditure to be \nexcessive or to pose significant inflationary risks, and further moderation is possible. Factors \nthat affect the outlook for consumption expenditure, both positively and negatively, include \nconcerns regarding employment, wage settlements, credit extension particularly unsecured \nlending, and administered price increases which impact on discretionary spending. \nThe upward momentum of banks’ total loans and advances to the private sector has continued, \nwith twelve-month growth of 9,9 per cent recorded in November, the highest growth rate \nsince February 2009. Excluding mortgage advances, which remain subdued, the increase in \nNovember was 18,3 per cent. Bank credit extension to the household sector increased by \n10,4 per cent. General loans to households, which is mainly unsecured lending, while still \nexhibiting rates of growth in excess of 30 per cent, shows some signs of moderation amid \nreports that banks are becoming more cautious in extending new loans in this category. Access \nto new loans may also be constrained by the increased size of outstanding debt. However, \ndespite rising debt levels, household debt to disposable income appears to have stabilised at \naround 76 per cent.\nThe MPC remains concerned about the potential impact of the higher level of wage settlements \non employment and inflation. There are indications that wage increases are trending higher, \nwith growth in nominal remuneration per worker increasing from 7,2 per cent in the second \nquarter of 2012 to 8,1 per cent in the third quarter. Once productivity increases are accounted \nfor, this translates into unit labour cost increases of 6,1 per cent and 6,7 per cent in these \nrespective quarters. According to Andrew Levy Employment Publications, the overall average \nwage settlement rate in collective bargaining agreements amounted to 7,4 per cent in the first \nnine months of 2012. \nMonetary Policy Review June 2013\n60\nThe MPC is mindful of the danger of a possible wage-price spiral and further employment \nlosses should unaffordable real wage demands be granted while economic growth remains \nconstrained. The risks to inflation should this scenario play itself out are significant in the \nabsence of productivity gains. \nThe subdued pace of employment creation in the private sector has been further undermined \nby the fractious nature of recent wage negotiations and the announcement of further possible \nrestructuring in the mining sector, which would involve the closure or mothballing of mines or \nshafts. According to the Quarterly Employment Statistics survey of Statistics South Africa, non-\nagricultural formal sector employment grew by 1,0 per cent or 82 000 employees in the year \nto September 2012. Almost two-thirds of this increase was accounted for by the public sector, \nwhile net job losses over this period were experienced in the manufacturing and construction \nsectors, with employment in the mining sector unchanged. However, in the third quarter of 2012, \n15 000 jobs were shed in the mining sector and there are fears that this trend could continue. \nEmployment in the agricultural sector, which is not covered by the survey, is also at risk.\nFood prices continue to pose a significant near-term risk to the inflation outlook, although there \nare signs that these price pressures may moderate during the year as a result of favourable \nbase effects, as well as the recent moderation in global and domestic wheat and maize prices. \nThe price of these commodities will also be influenced by developments in the exchange rate of \nthe rand and unpredictable weather patterns.\nAdministered prices remain on average well in excess of the upper end of the target range, \nand there is as yet no clarity about the new Eskom tariffs to be implemented later this year. \nAt this stage a 16 per cent tariff increase is assumed in the forecast. International oil prices \nhave remained relatively stable for the past few months and are more or less unchanged from \nthe previous meeting of the MPC. Futures prices reflect an expectation of some moderation \nin coming months, but some volatility can be expected. The domestic price of petrol, which \nis also impacted by the exchange rate, declined by a cumulative 34 cents per litre since early \nNovember, but much of this decline is likely to be reversed in February.\nThe MPC continues to assess the balance of risks to the inflation outlook to be on the upside. \nWhile the risks to the forecast emanating from food prices may have diminished somewhat, \nparticularly over the medium term, the exchange rate and wage settlements remain the key \nupside risk factors. While the reweighting and rebasing of the CPI is still to be finalised, the \nimpact is likely to be marginal, but on the upside. Core inflation trends indicate that demand \npressures are relatively contained, and household consumption expenditure has continued \nto moderate.\nRisks to economic growth are assessed to be on the downside, particularly given the uncertain \noutlook for the mining industry and ongoing unsettled labour relations. The negative output gap \nis therefore expected to persist. The MPC remains concerned about the possibility of a wage-\nprice spiral and its potential to exacerbate the high level of unemployment in the economy. As \nwe noted in the previous MPC statement, concerted action is needed on the part of all the \nparties involved. We need cohesion of policy and decision-making to provide the necessary \ncertainty for sustainable economic growth and development. \nThe monetary policy stance remains accommodative and appropriate, with the real policy rate \nremaining slightly negative, notwithstanding the expected temporary breach of the inflation \ntarget. However, further accommodation at this stage is constrained by the upside risks to the \ninflation outlook. The MPC has therefore decided to keep the repurchase rate unchanged at \n5,0 per cent per annum. As always, the MPC will monitor developments closely and will not \nhesitate to act in a manner consistent with its mandate.\n61\nMonetary Policy Review June 2013\nStatement of the Monetary Policy Committee\n20 March 2013\nIssued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the \nMonetary Policy Committee (MPC) in Pretoria\nThere are a number of key developments that this meeting of the Monetary Policy Committee \n(MPC) had to consider, not least among them on the domestic front the challenge of moderate \ngrowth, rising inflation, a depreciated currency, a wider current-account deficit and difficult \nlabour relations and unemployment that remains stubbornly high. \nSince the previous meeting of the MPC the domestic inflation outlook has deteriorated slightly. \nRisks posed by the depreciation of the rand exchange rate have overshadowed the more \nfavourable developments, including lower electricity price increases and some moderation in \nfood price inflation. Nevertheless, inflation is expected to remain contained within the target \nrange apart from a temporary breach in the third quarter of 2013. The domestic economic \ngrowth prospects remain fragile amid continued tensions in the labour market, particularly in \nthe mining sector. \nThe global economy is still characterised by a multispeed recovery. However, recent events in \nEurope, particularly as they affect Cyprus, have increased risk and uncertainty in the region, \nand have the potential to reignite the banking and sovereign debt crisis and undermine growth \nprospects further. The global outlook is also clouded by the fiscal gridlock in the United States \n(US) that remains unresolved.\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all urban \nareas was 5,9 per cent in February 2013, up from 5,4 per cent in January. The upside surprise \nin February was mainly due to the increase in medical insurance costs, which resulted in the \ncontribution to CPI from miscellaneous goods and services increasing from 0,7 percentage \npoints to 1,1 percentage points. This category also impacted on core inflation, which increased \nmarkedly from 4,7 per cent in January to 5,3 per cent in February. Petrol prices also contributed \nto the upward trend, having increased by 11,9 per cent. Food price inflation measured 6,3 per \ncent, down from a recent high of 7,5 per cent in November 2012, and its contribution to overall \ninflation declined from 1,0 percentage points to 0,9 percentage points. Administered prices \nincreased by 8,9 per cent, and by 7,5 per cent, excluding petrol, year-on-year. The producer \nprice inflation for final manufactured goods measured 5,8 per cent in January.1\nThe inflation forecast of the Bank reflects a slight deterioration in the inflation outlook for 2013 \ncompared with the previous forecast. The forecasts incorporate the new CPI weights and \nrebasing announced by Statistics South Africa (Stats SA), as well as the lower electricity price \nincrease of 8 per cent granted to Eskom by NERSA. Inflation is now expected to average 5,9 per \ncent in 2013 and 5,3 per cent in 2014, compared with the previous forecasts of 5,8 per cent and \n5,2 per cent for these respective years. Inflation is expected to breach temporarily the upper \nend of the target range in the third quarter of 2013, when it is expected to average 6,3 per cent, \nand then to moderate gradually to 5,2 per cent in the final quarter of 2014. This deterioration is \nlargely due to the depreciation of the rand and higher petrol prices, which more than offset the \nimpact of the lower electricity price increases and a lower starting point.\nThe forecast of core inflation is more or less unchanged for 2013 but higher for 2014, yet still \nindicates the continued absence of significant demand pressures. This measure is expected \nto peak at 5,1 per cent in the second quarter of 2014, and to average 4,8 per cent and 4,9 per \ncent in 2013 and 2014 respectively. This forecast is likely to be adjusted upwards in the light of \nthe increase in medical insurance costs announced earlier today.\nInflation expectations as reflected in the Reuters survey of analysts conducted in February 2013 \nhave remained more or less unchanged since December. Expectations remained anchored \nwithin the target range. but close to the upper end, and, as with the Bank’s forecast, the peak \nis expected in the third quarter of 2013.\n1.\t\nStatistics South \nAfrica has adopted \na “stages-of-\nproduction” concept \nfor the producer price \nindex (PPI) and no \nlonger produces one \naggregated series. \nThe five producer \nprice series are (i) PPI \nfor final manufactured \ngoods; (ii) intermediate \nmanufactured goods; \n(iii) electricity and \nwater; (iv) mining; and \n(v) agriculture, forestry \nand fishing. The PPI \nfor final manufactured \ngoods is regarded \nas best representing \nthe effects of price \nchanges through \nthe five stages of \nproduction.\nMonetary Policy Review June 2013\n62\nThe global economic outlook presents a mixed picture following a disappointing fourth quarter \nin most of the advanced economies. Recent data from the US indicate positive trends in the \nlabour market and household consumption expenditure due in part to positive wealth effects \nfrom the housing and equity markets. However, uncertainty about the possible negative impulse \nfrom fiscal tightening continues amid political differences over fiscal policy. Economic growth is \nstill expected to remain below trend in 2013.\nThe outlook for some of South Africa’s other main advanced-economy trading partners is \nless positive. The eurozone remains in recession, and is not expected to recover before mid-\n2013 at the earliest. The tail risks from a sovereign debt crisis appeared to have subsided, but \nthe uncertainty created by the inconclusive Italian general election and the crisis in Cyprus \nhave renewed concerns about the stability of the region. The outlook for the United Kingdom \neconomy remains subdued against the backdrop of continued fiscal austerity.\nGrowth prospects in the Asian economies are more positive. The Japanese economy is expected \nto be bolstered by positive consumer sentiment in response to fiscal and monetary stimuli, but \nthe response on the capital expenditure side is still cautious. Nevertheless, an improved growth \nperformance is expected, particularly given the 18 per cent depreciation of the yen against the \nUS dollar since October 2012. Growth in China is expected to be sustained at relatively robust \nlevels as fixed investment expenditure remains strong despite a moderation in consumption \nexpenditure growth. Growth in other emerging markets remains positive.\nThese trends suggest that monetary policy in the advanced economies will remain \naccommodative for some time despite recent fears in the financial markets of an early reversal \nof quantitative easing in the US. The relatively weak growth outlook in the advanced economies \nhas contributed to the subdued global inflation environment.\nThe exchange rate of the rand continues to pose the main upside risk to the inflation outlook. \nSince the beginning of the year, the rand has depreciated by 8,4 per cent against the US dollar \nand fluctuated within a range of R8,45 and R9,26. However, given the significant realignment of \nglobal currencies, and particularly the depreciation of the Japanese yen and the pound sterling \nagainst the US dollar, the trade-weighted depreciation since the beginning of the year was more \nmoderate at 5,6 per cent.\nDomestic factors contributing to the recent rand depreciation include continued work stoppages \nin parts of the mining sector, which also have the potential to disrupt electricity supplies, and \nthe further widening of the deficit on the current account of the balance of payments, which \nmeasured 6,3 per cent in 2012. Some narrowing of the deficit is expected in the course of \nthe year in response to the depreciation, although the degree of response will be constrained \nby weak demand from advanced economies as well as strong infrastructure-related import \ndemands. Mining export growth will also be dependent on the resolution of labour market \nissues with a resumption of full production and on the extent of possible shaft closures. \nEquity and bond flows to emerging economies have generally moderated in the past few months, \nmaking for a more challenging global environment for financing the deficit. Inflows into South \nAfrican bond and equity markets have, however, been sustained, and year-to-date non-resident \nnet purchases of equities and government bonds have totalled R6,1 billion and R11,3 billion \nrespectively. These flows have, however, been volatile, and the growing proportion of bonds \nowned by non-residents, currently around 37 per cent of the total outstanding stock of debt, \ncould constrain the pace of inflows.\nThe rand is likely to remain sensitive to both domestic and global developments. The exchange \nrate is expected to remain volatile and subject to overshooting, and further sustained \ndepreciation would increase the upside risk to the inflation outlook. The Reuters Econometer \nsurvey conducted in February shows that most analysts still expect the rand to appreciate from \ncurrent levels during the year, although the degree of dispersion is indicative of the uncertainty \naround these forecasts. According to this survey, the consensus forecast for the rand/US$ \nexchange rate at the end of 2013 is R8,61, with a range of forecasts between R9,19 and R7,80.\nDomestic growth prospects remain relatively subdued, notwithstanding a better-than-\nexpected fourth quarter GDP growth outcome, and positive developments in the mining and \n63\nMonetary Policy Review June 2013\nmanufacturing sectors in January. The economy grew by 2,5 per cent in 2012, having recorded \nannualised growth of 2,1 per cent in the fourth quarter, despite a 9,3 per cent contraction in \nthe mining sector. The moderate pace of recovery is expected to continue in 2013. The Bank’s \nforecast is for growth of 2,7 per cent this year, marginally up from the previous forecast of \n2,6 per cent, and 3,7 per cent in 2014, compared with a previous forecast of 3,8 per cent. The \nrisks to these forecasts are assessed to be on the downside. \nThe flat trajectory of the Bank’s leading indicator of economic activity is consistent with this \nforecast. Growth this year is therefore expected to remain below potential output growth of \n3,5 per cent, and this is expected to result in a slight widening of the Bank’s revised estimate \nof the output gap which, at 2,0 per cent, reflects the continued subdued state of the economy.\nThe mining sector recorded year-on-year growth of 7,3 per cent in January, with three-month-on-\nthree-month growth of 5,4 per cent following four consecutive months of contraction. Nevertheless, \nthe sector is expected to remain under pressure, given the unsettled labour relations environment. \nThe outlook for manufacturing appears to have improved, but this recovery is still very tentative. \nThe sector grew at a year-on-year rate of 3,9 per cent in January, and by 1,8 per cent on a three-\nmonth-on-three-month basis. This was consistent with improvements in the Kagiso Purchasing \nManagers Index, which increased from 49,1 in January to 53,6 in February. \nGrowth in gross fixed capital formation, which measured 5,7 per cent in 2012, has been on a \nmoderate upward trend since 2009, driven mainly by investment growth of around 9 per cent \nby public corporations and general government. Private-sector investment growth moderated \nfrom 4,6 per cent in 2011 to 3,9 per cent in 2012 due in part to excess capacity in manufacturing \nand electricity supply constraints.\nWhile household consumption expenditure has been the main driver of growth since 2010, \nits contribution to growth has been diminishing. The general absence of demand pressures \nin the economy is reflected in the continued moderation in the growth in real consumption \nexpenditure by households, which grew by 3,5 per cent in 2012 compared with 4,8 per cent \nin 2011. Nevertheless, growth in the consumption of durable goods remained robust at 11 per \ncent, compared with demand for services, which grew at only 1,8 per cent in 2012. Sales of \nnew motor vehicles declined on both a month-on-month and on a three-month-on-three-month \nbasis in February. \nRetail trade sales in January appear to reflect this weakening trend, with a three-month-on-\nthree-month decline of 0,7 per cent, and a lower-than-expected year-on-year increase of 1,9 per \ncent. There are indications that consumption growth may moderate further in 2013 amid slower \nreal income growth, higher inflation, elevated household debt levels, and a possible slow-down \nin credit extension to consumers. \nTwelve-month growth in banks’ total loans and advances to the private sector measured \n8,9 per cent in January, following growth of 10,0 per cent in December. Loans and advances \nto the corporate sector grew by 7,5 per cent in January, and to the household sector by \n9,9 per cent. Growth in general loans to households – mainly unsecured lending – moderated to \n30,1 per cent, following a recent peak growth of 39,3 per cent in June. General loans to \nhouseholds amounted to 8,3 per cent of total loans and advances, and 14,6 per cent of loans \nand advances to household. Growth in this category of lending is likely to be constrained by \nlower income growth and high household debt levels. Household debt to disposable income \nmeasured 75,8 per cent in the final quarter of 2012. Non-mortgage debt as a percentage of \ntotal household debt increased from 37 per cent in the third quarter of 2009 to 46 per cent in \nthe final quarter of 2012.\nThe trend in wage settlements remains an upside risk to the inflation outlook, although recent \ndata is somewhat contradictory. The minimum wage in the agricultural sector has been increased \nby 52,2 per cent, and indications from the Andrew Levy Employment Publications are that wage \nsettlements in collective bargaining agreements picked up significantly from 6,8 per cent in \nthe third quarter of 2012 to 8,2 per cent in the fourth quarter. According to Stats SA, average \nsalaries and wages per worker in the non-agricultural sector increased over four quarters by \n7,0 per cent in the final quarter of 2012, down from 8,9 per cent in the previous quarter, while \nunit labour cost increases declined from 7,4 per cent to 5,7 per cent in the same period. \nMonetary Policy Review June 2013\n64\nThe MPC remains concerned about the possible impact of excessively high wage increases \non employment growth. Employment in the formal non-agricultural sector increased by \n1,0 per cent during 2012, compared with annual employment growth of 1,6 per cent in 2011. \nThis included employment growth of 0,2 per cent in the mining and quarrying industry, and a \n0,3 per cent contraction in the manufacturing sector. In the fourth quarter of 2012 mining-sector \nemployment increased by 1 000 employees, following a decline of 16 000 in the third quarter. \nOf concern is the seasonally adjusted annualised decline of 0,7 per cent in total non-agricultural \nemployment during the fourth quarter of 2012. \nThe recent national government budget tabled before parliament reflects a difficult balance \nbetween a commitment to medium-term fiscal consolidation and the need for counter-cyclical \npolicy. The projected deficit of 5,7 per cent for the past fiscal year was wider than initially \nbudgeted for – a result of lower revenue due to weaker economic growth. The fiscal deficit as \na percentage of GDP is budgeted to be 5,1 per cent in the 2013/14 fiscal year, and to decline \nto 3,6 per cent by 2015/16. The government net debt-to-GDP ratio is expected to stabilise at \naround 40 per cent in 2015/16, well below the international benchmark for debt sustainability of \naround 60 per cent. \nThere are indications that the pressures on inflation emanating from food prices may be \nmoderating. Food price inflation at the consumer price level declined from a recent high of \n7,5 per cent in November 2012 to 6,4 per cent in January and 6,3 per cent in February. A \nsimilar trend is evident at the producer price level where manufactured food inflation declined to \n5,9 per cent in January, compared with a recent peak of 11,1 per cent in November 2012. \nSimilarly, producer price inflation in agricultural products moderated from a recent high of \n6,3 per cent in October 2012 to 3,5 per cent in January. Global agricultural commodity prices \nhave declined, on average, by almost 20 per cent since their recent peak in August 2012, and \nexpectations are for further moderation in the absence of adverse weather shocks.\nAdministered prices continue to put upside pressure on inflation, although lower electricity price \nincreases from the third quarter will dampen some of these pressures. The petrol price, which has \nincreased by a cumulative R1,24 per litre since January 2013, remains an upside risk. Although \nglobal oil prices have declined over the past few weeks, resulting in an over-recovery of the petrol \nprice so far this month, it is unlikely to be sufficient to offset the adverse exchange rate impacts \nand the fuel levy increases – and a further increase in the petrol price is likely in April. \nThe MPC continues to assess the balance of risks to the inflation outlook to be on the upside, \nmainly due to the exchange rate and wage pressures. These upside risks are mitigated in part \nby lower risk from food price inflation. Underlying inflation appears to be relatively contained, \nconsistent with the moderating trend in consumption expenditure by households. \nThe economic growth outlook is more or less unchanged from the previous meeting of the MPC, \nand risks to the outlook remain on the downside. The unresolved labour disputes in the mining \nsector pose a significant risk to the exchange rate and to economic growth through their negative \nimpact on export revenues, employment growth and investor perceptions of South Africa.\nHowever, the depreciated exchange rate provides an opportunity for the manufacturing \nsector in particular to become more competitive despite the challenging export environment. \nEnsuring that this increase in competitiveness is sustained will require improved productivity, \nand the containment of wage and other cost pressures, which underline the need to keep \ninflation under control. \nThe MPC continues to assess the monetary policy stance to be appropriately accommodative, \ngiven the persistence of the negative output gap. At the same time, further accommodation \nremains constrained by the upside risks to the inflation outlook. The MPC has therefore decided \nto keep the repurchase rate unchanged at 5,0 per cent per annum. The committee will continue \nto apply monetary policy consistent with its mandate of price stability within a flexible inflation-\ntargeting framework. \n65\nMonetary Policy Review June 2013\nStatement of the Monetary Policy Committee\n23 May 2013\nIssued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the \nMonetary Policy Committee (MPC) in Pretoria\nThe South African economy is facing a number of domestic challenges, while headwinds \nfrom the fragile and uneven global recovery remain a constraint to growth. The uncertain, \nand increasingly difficult, labour relations environment continues to dominate the economic \nlandscape, contributing to declining domestic and foreign investor confidence. The growing \nvulnerability of the economy to changes in sentiment has been reflected in the depreciating \nand volatile exchange rate, which was already under pressure from the widening deficit on the \ncurrent account of the balance of payments. Although inflation is forecast to remain relatively \ncontained, these factors have raised the upside risks to the outlook at a time of worsening real \ngrowth prospects.\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas \nwas 5,9 per cent in April 2013, unchanged from the previous two months. However, the drivers of \nthe overall rate changed somewhat. Food price inflation measured 6,3 per cent in April, reversing \nthe downward trend that had prevailed since November 2012. The contribution of food to overall \ninflation remained unchanged at 0,9 percentage points, while housing and utilities contributed \n1,4 percentage points. Administered prices increased by 8,9 per cent, and by 7,8 per cent \nexcluding petrol. Core inflation, which excludes food, petrol and electricity, measured 5,2 per \ncent – marginally up from 5,1 per cent in March. The headline producer price inflation for final \nmanufactured goods measured 5,7 per cent in March – up from 5,4 per cent in February.\nThe inflation forecast of the Bank has remained relatively unchanged since the previous meeting \nof the MPC. Inflation is now expected to average 0,1 percentage points lower in 2013 and 2014 \nat 5,8 per cent and 5,2 per cent respectively, and to average 5,0 per cent in 2015. A temporary \nbreach of the upper end of the target range is still expected in the third quarter of 2013, but at \na lower average level of 6,1 per cent (6,3 per cent previously), followed by a gradual moderation \nof inflation to 4,9 per cent in the final quarter of 2015. The slight improvement is due to changed \nassumptions about international commodity prices, including oil, and lower global inflation.\nThe forecast for core inflation for 2013, at an average of 5,3 per cent, is significantly higher than \nthe forecast of 4,8 per cent previously. This follows the sharp increase in medical insurance \ncosts in the February CPI. Core inflation is also expected to be adversely affected over the \ncoming months by increases in a number of other administered prices, particularly water and \nmunicipal rates and taxes. This measure is expected to peak at 5,4 per cent in both the third \nand fourth quarter of 2013, and to average 5,0 per cent and 4,6 per cent in the coming two \nyears. Despite the higher near-term trend, this indicator is still assessed to reflect an absence of \nsignificant demand pressures. \nInflation expectations, as reflected in the Reuters survey of analysts conducted in April, has \nremained relatively stable for some months. The forecast is the same as the Bank’s for 2013, \nalthough higher for the next two years but still within the target range. The relatively anchored \ninflation expectations at the upper end of the target range are also evident in the survey \nconducted by the Bureau for Economic Research (BER) at Stellenbosch University in the first \nquarter of 2013. Overall, respondents expect inflation to average 6,0 per cent in both 2013 and \n2014, and 6,1 per cent in 2015. \nThe global economic environment remains challenging, with different regions growing at varying \nrates. Within the advanced economies, the United States (US) appears to be showing a number \nof positive signs of recovery: the University of Michigan’s consumer confidence index is at \nits highest in almost six years; labour market developments have been more favourable; and \nthere are strong wealth effects from the booming equity market as well as from the recovering \nhousing market. However, headwinds can be expected from the fiscal contraction resulting \nfrom the fiscal cliff compromise and the spending cuts that were part of the recent sequester. \nThe impact of this contraction is expected to be as high as 2 percentage points of GDP. \nMonetary Policy Review June 2013\n66\nThe eurozone remains in recession, having contracted at an annualised rate of 0,9 per cent in \nthe first quarter of 2013, compared with a contraction of 2,7 per cent in the previous quarter. The \nFrench economy has recorded two consecutive quarters of negative growth, while Germany \nmanaged to avoid recession by recording annualised growth of 0,3 per cent in the first quarter \nof this year. The eurozone is constrained by continued deleveraging by households, banks \nand governments, and the region is also characterised by increasing financial fragmentation. \nAlthough a slower pace of fiscal consolidation in the periphery has been agreed to in terms \nof the bail-out agreements, negative or, at best, very low growth is expected to persist in the \nregion for some time.\nThe Japanese economy rebounded from its 2012 recession in the first quarter of 2013, but \nit is still too soon to assess the impact of the fiscal, monetary and structural policy stimulus \npackages that were announced recently. The yen exchange rate, which has depreciated by \naround 30 per cent against the US dollar since October 2012, is likely to contribute positively \nto growth. \nEmerging markets remain the main global source of growth, but there are signs of moderation in \nsome of the systemically important countries, particularly China, India and Brazil. The rebalancing \nof the Chinese economy away from fixed capital formation and production towards internal \nconsumption has resulted in some slowdown, which has contributed to the declining trend of \nglobal commodity prices.\nThe persistence of slow global growth and weaker commodity prices have resulted in a \nmoderation in global inflation. This is particularly the case with respect to energy prices in the \nadvanced economies. This combination of lower inflation and slow growth prompted further \nmonetary easing by the European Central Bank, and with Japan yet to begin with its quantitative \nmonetary easing, these accommodative policy stances are likely to persist for some time. While \nthere are concerns about the possible risks posed to financial markets and global capital flows \nby an early reversal of the US monetary policy stance, any such action is likely to be extremely \ncautious, and is only expected to begin once a sustained recovery is well entrenched. There \nare, however, growing concerns that the buoyant conditions in the financial markets in many \ncountries are indicative of bubbles caused by excessive global liquidity, rather than reflecting \nunderlying positive growth prospects.\nMovements in the exchange rate of the rand continue to be impacted by external developments, \nbut since mid-2012 they have been compounded by domestic factors, which have undermined \ninvestor sentiment. The increasingly fraught labour relations environment, and high wage \ndemands in the mining sector in particular, are likely to continue to impact adversely on the \nvolume of mining exports against a backdrop of falling international commodity prices and \nconcerns about the widening of the current-account deficit of the balance of payments. These \ndevelopments also have the potential to affect, directly and indirectly, South Africa’s credit \nratings, and increase the cost of much-needed finance. The rand has also been influenced \nin recent weeks by the hedging related to renewable energy projects and by a strengthening \ndollar. Since the previous meeting of the MPC, the rand has depreciated by around 4,6 per cent \nagainst the US dollar and by 3,7 per cent on a trade-weighted basis.\nDespite the current negative sentiment towards the rand, non-residents have remained net \nbuyers of bonds and equities this year. Since January, non-residents have been net buyers of \nequities to the value of R12,7 billion, and bonds to the value of R22,5 billion. However, these \npositive inflows can reverse very quickly in response to changing risk perceptions. Furthermore, \nany hedging of these exposures, as is sometimes the case during periods of rand weakness, \nputs pressure on the rand even though the underlying assets are still held by non-residents. \nAs we have noted previously, the impact of the weaker rand on inflation is dependent on the \nextent, speed and duration of the depreciation, as well as the phase of the business cycle. While \nsome of the recent decline reflects changes in the underlying fundamentals, the rand remains \nhighly vulnerable to changes in sentiment. The rand has a tendency to overshoot in either \ndirection and, at times, for extended but uncertain periods, which makes the impact on inflation \ndifficult to forecast. The current level of the exchange rate, if sustained, poses a significant \nupside risk to the inflation outlook. \n67\nMonetary Policy Review June 2013\nDomestic growth prospects remain fragile amid low consumer confidence, continued output \ndisruptions in the mining sector, electricity supply constraints and a weak global environment. \nThe growth forecast of the Bank has been revised down from 2,7 per cent to 2,4 per cent for \n2013 and from 3,7 per cent to 3,5 per cent in 2014. Growth is expected to accelerate to 3,8 per \ncent in 2015. At these growth rates, the negative output gap will widen further before stabilising \nnext year, and begin to close during 2015. This outlook is consistent with the flat trajectory of \nthe Bank’s leading indicator of economic activity. Notwithstanding the increase in the Rand \nMerchant Bank/BER Business Confidence Index in the first quarter of 2013, given the difficult \nlabour relations environment in the country and the risks to global growth, the downside risk to \ngrowth remains as does the possibility of increased job losses.\nAlthough the physical volume of mining production recorded a quarter-to-quarter increase of \n6,1 per cent in the first quarter of 2013 following the disruptions in the previous quarter, output \ncontracted on a month-to-month basis in both February and March. The outlook for the sector \nremains bleak, with threats of shaft closures and retrenchments, falling commodity prices, high \nwage demands, and a risk of protracted periods of industrial action and further supply disruptions. \nManufacturing production declined in the first quarter of 2013 compared with the previous \nquarter, although the extent of the decline is complicated by the seasonal adjustment for the \nEaster weekend, which fell over March and April. The Kagiso Purchasing Managers Index, \nwhich increased marginally above the neutral 50 level in April, reflects the uncertain outlook for \nthe sector. The depreciated value of the rand should improve the competitiveness of the sector, \nprovided that gains are not eroded by rising wages and prices. The weaker rand is expected to \nresult in some narrowing of the trade deficit. However, the subdued global demand, together \nwith robust import volume growth, driven to a large extent by infrastructure projects, suggests \nthat the net export position will remain negative over the forecast period and continue to be a \nconstraint on growth. Nevertheless, the BER Manufacturing Confidence Index, while still low, \nimproved somewhat in the first quarter.\nThe outlook for household consumption expenditure – in recent years the main driver of growth \n– appears to have weakened with the FNB/BER Consumer Confidence Index declining to a \nnine-year low in the first quarter of 2013. Retail sales grew at a modest quarter-to-quarter rate \nof 0,6 per cent in the first quarter of this year, while sales contracted on a month-to-month \nbasis in March. This was consistent with the decline in the BER Retail Confidence Index in the \nfirst quarter. New vehicle sales growth, while increasing significantly on a year-on-year basis, \nmoderated to 0,1 per cent on a three-month-to-three-month basis in April 2013.\nConsumption expenditure by households is expected to be constrained in part by lower real \nincome growth, significant increases in the price of electricity and petrol, and high debt levels. The \nslowdown in expenditure growth has also been related to the moderation in some categories of \ncredit extension by banks. Year-on-year growth in total loans and advances to the private sector \nmoderated steadily from a recent peak of 10 per cent in December, to 8,1 percent in March \n2013. Excluding the weak growth in mortgage advances, year-on-year growth in loans and \nadvances declined from 18,5 per cent in December 2012 to 14,5 per cent in March. Although \ngrowth in unsecured lending to households remains at high levels, it has declined continuously \nsince September 2012, to measure 27,9 per cent in March. This moderating trend is expected to \ncontinue, due in part to the increasing number of impaired advances in this category of lending \nat some of the banks. However, the ratio of total impaired advances to total loans and advances \nin the banking sector continues to decline and stands at just below 4 per cent. \nA number of sectors in the economy are entering into wage-bargaining rounds. The MPC is \nincreasingly concerned about the prospect of settlements well above inflation and productivity \ngrowth, and the risk of protracted and disruptive strike action, with negative implications for \ngrowth and exports. Furthermore, excessively high settlements will come at the expense of \nretention of employees, employment creation and could result in higher inflation. The risk of a \nwage-price spiral remains high. This would negate the benefits of wage increases to workers, \nand undermine the competitive gains of the currency depreciation. According to Andrew Levy \nEmployment Publications, the overall wage settlement rate in collective bargaining agreements \nincreased from 7,6 per cent in 2012 to 7,9 per cent in the first quarter of 2013. Should this \nupward momentum continue, it is likely to impart an upside risk to inflation. At a time of high and \nMonetary Policy Review June 2013\n68\nrising unemployment, and slowing growth, the imperative of an economy-wide commitment \nto wage and salary restraint at all levels, including executive pay, cannot be over-emphasised. \nInternational oil prices are expected to remain constrained by the subdued global growth \nenvironment, but vulnerable to political developments in the Middle East in particular. Having \nreached a recent high of around US$118 per barrel in mid-February of this year, Brent crude \noil prices have remained in a range of between US$97 and US$105 per barrel since April. The \ndomestic price of petrol increased by 12 cents in April, but declined by 73 cents in May, mainly \nas a result of lower international oil prices. Although there is currently a small average over-\nrecovery on the petrol price, recent exchange rate movements have raised the probability of \nfurther petrol price increases in the near term.\nThe higher CPI food price increases in April may have reversed the favourable food price \ndevelopments observed in recent months. Since the end of November 2012 to date, domestic \nmaize prices have declined by about 17 per cent and wheat prices by around 9 per cent. This \nis reflected in the producer price index for agriculture which increased at a year-on-year rate of \n1,4 per cent in February and declined by 0,2 per cent in March. Manufactured food prices, by \ncontrast, increased by 6,1 per cent and 6,3 per cent in the same months respectively, in line \nwith CPI food price increases. The exchange rate poses an upside risk to food inflation as the \nprices of agricultural commodities such as wheat and maize are based on international prices. \nThe MPC is increasingly concerned about the deteriorating outlook for the South African \neconomy. There are a number of critical domestic issues that are contributing to the vulnerability \nof the economy that need to be addressed. urgently These include the financing of the deficit on \nthe current account of the balance of payments; the fractious labour relations environment and \nthe associated risks of protracted work stoppages and excessive wage increases; electricity \nsupply constraints; upside risks to inflation; downside risks to growth and employment creation \nin a context of high unemployment; and declining domestic and foreign investor confidence \nwhich could impact directly on capital flows. These interrelated developments are reflected in \nthe volatility and weakness in the exchange rate. There is an urgent imperative for all parties \n– government, business, labour and civil society – to interact and address these issues and \nvulnerabilities at a national level. While the Bank is prepared to play its part, many of these \nchallenges are beyond the role, scope and effectiveness of monetary policy. \nWhile a depreciated exchange rate is part of the balance-of-payments adjustment mechanism, \nthe competitive advantages thereof need to be realised through price and wage restraint. In the \nabsence of such restraint, the outcome is simply higher inflation, with the risk of an exchange \nrate–inflation spiral. Given the current unsettled environment in the economy, the MPC assesses \nthe risks to inflation to be on the up side, while many of the above factors contribute to a \ndownside risk to growth.\nThe MPC assesses the current stance of monetary policy to be accommodative. Given the risks \noutlined above, the scope for further monetary easing is limited at this stage. The MPC has \ntherefore decided to leave the repurchase rate unchanged at 5 per cent per annum. The MPC \nis ready to act appropriately in either direction in the event of material changes in the outlook.\n69\nMonetary Policy Review June 2013\nAbbreviations\nAlsi\t\n \t\nAll-Share Price Index\nAPI \t\n\t\nadministered price index\nBCI \t\n\t\nBusiness Confidence Index\nBER \t\n\t\nBureau for Economic Research [Stellenbosch University]\nBIS \t\n\t\nBank for International Settlements\nBoE \t\n\t\nBank of England\nBOJ \t\n\t\nBank of Japan\nBRICS\t\n\t\nBrazil, Russia, India, China and South Africa\nCBRT\t\n\t\nCentral Bank of the Republic of Turkey \nCCI \t\n\t\nConsumer Confidence Index\nCOICOP\t\n\t\nClassification of Individual Consumption by Purpose \nCOPOM \t \t\nBrazil’s Monetary Policy Committee\nCPI \t\n\t\nconsumer price index\nCPIX\t\n\t\nconsumer price index excluding mortgage interest cost for metropolitan \nand other urban areas\nCRB\t\n\t\nCommodity Research Bureau\nECB \t\n\t\nEuropean Central Bank\nEMBI+\t\n\t\n[JPMorgan] Emerging Markets Bond Index Plus \nFAO \t\n\t\nFood and Agriculture Organization\nFNB \t\n\t\nFirst National Bank\nGDP \t\n\t\ngross domestic product\nIEA\t\n\t\nInternational Energy Agency\nIES\t\n\t\nIncome and Expenditure Survey\nILO\t\n\t\nInternational Labour Organization \nIMF \t\n\t\nInternational Monetary Fund\nJGB\t\n\t\nJapanese Government Bond\nMPC \t\n\t\nMonetary Policy Committee\nMPF \t\n\t\nMonetary Policy Forum\nMPR \t\n\t\nMonetary Policy Review\nMTBPS \t\n\t\nMedium Term Budget Policy Statement\nMTEF \t\n\t\nMedium Term Expenditure Framework\nNAB\t\n\t\nnon-alcoholic beverages\nNEER \t\n\t\nnominal effective exchange rate\nNERSA\t\n\t\nNational Energy Regulator of South Africa\nOECD \t\n\t\nOrganisation for Economic Co-operation and Development\nOMT \t\n\t\nOutright Monetary Transactions \nOPEC \t\n\t\nOrganization of the Petroleum Exporting Countries\nPBC\t\n\t\nPeople’s Bank of China\nPMI \t\n\t\nPurchasing Managers’ Index\nPPI \t\n\t\nproducer price index\nPSBR\t\n\t\npublic-sector borrowing requirement\nQE \t\n\t\nquantitative easing\nQES \t\n\t\nQuarterly Employment Statistics\nQLFS \t\n\t\nQuarterly Labour Force Survey\nRBA\t\n\t\nReserve Bank of Australia\nRBI\t\n\t\nReserve Bank of India \nREER \t\n\t\nreal effective exchange rate\nRMB \t\n\t\nRand Merchant Bank\nS&P\t\n\t\nStandard and Poor’s\nSSA\t\n\t\nsub-Saharan Africa\nTRJ\t\n\t\nThompson Reuters Jefferies\nUK \t\n\t\nUnited Kingdom\nUS \t\n\t\nUnited States\nVIX®\t\n\t\nChicago Board Options Exchange Market Volatility Index\nWGBI \t\n\t\nWorld Government Bond Index [Citi]\nMonetary Policy Review June 2013\n70\nGlossary\nrepo\t\n\t\nrepurchase [rate]\nStats SA\t\n\t\nStatistics South Africa\nthe Bank \t \t\nSouth African Reserve Bank\nthe Fed \t\n\t\nUnited States Federal Reserve", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/MPR-June-2013 (1).pdf"}
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