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+{"doc_id": "093d4835876fdfd54e885f446f907fea", "text": "Monetary Policy\nReview\n \n \n May 2009\nMonetary Policy\nReview\nMay 2009\nSouth African Reserve Bank\nMonetary Policy Review May 2009\n© South African Reserve Bank\nAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in\nany form or by any means, electronic, mechanical, photocopying, recording or otherwise, without fully\nacknowledging the Monetary Policy Review of the South African Reserve Bank as the source. The contents of\nthis publication are intended for general information only and are not intended to serve as financial or other\nadvice. While every precaution is taken to ensure the accuracy of information, the South African Reserve Bank\nshall not be liable to any person for inaccurate information or opinions contained in this publication.\nEnquiries relating to this Review should be addressed to:\nExecutive General Manager and Chief Economist\nResearch Department\nSouth African Reserve Bank\nP O Box 427\nPretoria 0001\nTel. 27-12-3133668\nhttp://www.reservebank.co.za/mpr\nISSN: 1609-3194\nSouth African Reserve Bank\nMonetary Policy Review May 2009\nContents\nMonetary Policy Review\nIntroduction...........................................................................................................................\n1\nRecent developments in inflation...........................................................................................\n1\nThe evolution of indicators of inflation..............................................................................\n1\nFactors affecting inflation.................................................................................................\n7\nMonetary policy.....................................................................................................................\n21\nThe outlook for inflation.........................................................................................................\n24\nInternational outlook........................................................................................................\n24\nOutlook for domestic demand and supply ......................................................................\n27\nIndicators of inflation expectations ..................................................................................\n29\nThe South African Reserve Bank inflation forecast ..........................................................\n35\nAssessment and conclusion..................................................................................................\n36\nStatements issued by Mr T T Mboweni, Governor of the South African Reserve Bank\nStatement of the Monetary Policy Committee\n11 December 2008...............................................................................................................\n37\nStatement of the Monetary Policy Committee\n5 February 2009 ...................................................................................................................\n40\nStatement of the Monetary Policy Committee\n24 March 2009 .....................................................................................................................\n43\nStatement of the Monetary Policy Committee\n30 April 2009 ........................................................................................................................\n46\nBoxes\n1\nAdministered prices in the consumer price index........................................................\n5\n2\nRecent conventional and unconventional policy measures adopted by monetary \nauthorities in response to the global financial crisis .....................................................\n10\n3\nThe South African inflation-linked bond market and break-even inflation rates............\n31\nFigures\n1\nConsumer price inflation: Targeted inflation ................................................................\n2\n2\nTargeted inflation and food inflation.............................................................................\n3\n3\nFood prices in the PPI and CPI...................................................................................\n7\n4\nPrice of Brent crude oil ...............................................................................................\n9\nB2.1 Policy rates .................................................................................................................\n11\n5\nExchange rates of the rand.........................................................................................\n14\n6\nHouse prices...............................................................................................................\n16\n7\nShare prices indices and non-resident net purchases of shares..................................\n17\n8\nRemuneration per worker, labour productivity and unit labour cost in the formal \nnon-agricultural sector ................................................................................................\n19\n9\nGrowth in money supply and credit extension.............................................................\n20\n10\nBanks’ loans and advances by type ...........................................................................\n20\n11\nThe repurchase rate and other short-term interest rates .............................................\n21\n12\nSelected indicators of global economic activity ...........................................................\n27\n13\nRMB/BER Business Confidence Index........................................................................\n28\n14\nBreak-even inflation rates............................................................................................\n30\n15\nNominal, inflation-linked and break-even yields...........................................................\n31\nSouth African Reserve Bank\nMonetary Policy Review May 2009\nB3.1 Liquidity ratios (annualised) .........................................................................................\n32\nB3.2 Liquidity of inflation-linked government bonds in issue................................................\n32\nB3.3 Net purchases and sales on BESA by sector..............................................................\n33\nB3.4 Yields on inflation-linked government bonds ...............................................................\n34\n16\nTargeted inflation forecast ...........................................................................................\n35 \nTables\n1\nContributions to CPI inflation.......................................................................................\n2\n2\nThe effect of food, petrol and electricity prices on headline inflation............................\n4\n3 \nCPI: Goods and services inflation ...............................................................................\n4\n4 \nAdministered prices ....................................................................................................\n4\nB1.1 Change in weights of administered prices within various inflation measures \naccording to the classification of individual consumption by purpose...........................\n5 \nB1.2 Basket of regulated prices in the CPI for all urban areas.............................................\n6\nB1.3 Basket of administered prices that are not regulated in the CPI for all \nurban areas.................................................................................................................\n6\n5\nAnnual percentage change in real GDP and consumer prices.....................................\n8\n6\nSelected central bank interest rates ............................................................................\n10\n7\nGrowth in real GDP and expenditure components ......................................................\n15\n8\nReal value of building plans passed and buildings completed in larger municipalities...\n17\n9\nPublic finance data .....................................................................................................\n18\n10\nIMF projections of world growth and inflation for 2009 and 2010................................\n25\n11\nBER survey of CPI inflation expectations: First quarter 2009.......................................\n29\n12\nReuters survey of CPI forecasts: March 2009.............................................................\n30\nSouth African Reserve Bank\n1\nMonetary Policy Review May 2009\nMonetary Policy Review\nIntroduction\nGlobal output and trade have contracted sharply in the period since the previous\nMonetary Policy Review was published in November 2008. Financial markets remain\nunder stress, despite the introduction of extensive fiscal and monetary policy measures\nby governments and central banks, and falling asset prices and disruptions to credit\nmarkets have impacted powerfully on consumer demand. There is growing uncertainty\nabout the depth and duration of the economic slowdown, which is generally viewed as\nthe most severe of the post-war period. \nThe South African economy has not escaped the impact of these developments.\nDomestic production has contracted as a result of weak domestic demand and a\nsignificant decline in export demand. Real gross domestic product (GDP) contracted at\nan annualised rate of 1,8 per cent in the final quarter of 2008, largely as a result of a\nmarked slowdown in the manufacturing sector, and there is a general expectation that\ndomestic growth will remain lacklustre in 2009. Inflation is expected to continue to trend\ndownwards, although the volatility of developments in global markets and elevated levels\nof uncertainty subject inflation forecasts to higher risk than usual. \nThis Monetary Policy Review begins with an analysis of inflation developments and the\nfactors that have impacted on inflation, followed by an assessment of recent monetary\npolicy developments and a discussion of the outlook for inflation. Three topical issues\nare focused on in the boxes. The first box notes the impact on the administered prices\nindex of the recent changes to the consumer price index (CPI) announced by Statistics\nSouth Africa (Stats SA), while the second discusses the policy measures adopted by\nmonetary authorities in various countries in response to the global financial crisis. The\nthird box discusses the inflation-linked bond market in South Africa with a view to\nfacilitating the interpretation of break-even inflation rates. \nRecent developments in inflation\nThis section reviews recent trends in the main inflation indices and analyses\ndevelopments in the main factors impacting on inflation in South Africa.\nThe evolution of indicators of inflation\nThe inflation measure targeted by the South African Reserve Bank (the Bank) until the\nend of 2008 was specified in terms of the consumer price index excluding mortgage\ninterest costs for metropolitan and other urban areas (CPIX). As Figure 1 shows, the\nyear-on-year CPIX inflation rate peaked at 13,6 per cent in August 2008 and then\ndeclined continuously to 10,3 per cent in December. The main drivers of inflation over\nthe last quarter of 2008 were food prices, fuel and power (electricity prices), and\ntransport (petrol prices). The upward bias included in the year-on-year CPIX as a result\nof the treatment of non-discounted clothing and footwear averaged 0,29 percentage\npoints over the September–December 2008 period.1 Average CPIX inflation for \nthe calendar year 2008 was 11,3 per cent, with the upward bias averaging \n0,24 percentage points. \n1\nFrom January 2008,\nStats SA no longer included\nsale items in the clothing and\nfootwear prices collected for\nthe CPI. This change in the\ntreatment of clothing and\nfootwear prices, together with\nthe policy of not revising the\nCPI and CPIX indices, created\nan upward bias in the annual\nrates of change of the indices\nfor the period January–\nDecember 2008.\n2\nSince the release of the January 2009 CPI data, the targeted inflation measure has been\nthe headline CPI (CPI for all urban areas). The new CPI includes a number of significant\nchanges when compared to the previous CPI in terms of the methodology of data\ncollection, classification and weighting (these changes were discussed in the November\n2008 Monetary Policy Review). The year-on-year CPI inflation rate was 8,1 per cent in\nJanuary 2009. It then rose to 8,6 per cent in February before declining marginally to \n8,5 per cent in March (Figure 1). Inflation in the first quarter of the year was driven mainly\nby increases in food prices, alcoholic beverages, household maintenance and repair,\nelectricity, and in financial services. \nTable 1\nContributions to CPI inflation\nPercentage change over twelve months* and percentage points\n2009\nJan\nFeb\nMar\nTotal*...................................................................\n8,1\n8,6\n8,5\nOf which:\nFood and non-alcoholic beverages......................\n2,4\n2,4\n2,3\nAlcoholic beverages and tobacco........................\n0,6 \n0,6\n0,6\nHousing and utilities.............................................\n2,1\n2,0\n1,8\nHealth..................................................................\n0,1\n0,1\n0,2\nTransport .............................................................\n0,0\n0,3\n0,2\nEducation ............................................................\n0,2\n0,2\n0,2\nMiscellaneous goods and services ......................\n1,4\n1,6\n1,6\nOther ...................................................................\n1,3\n1,4\n1,6\nSource: Statistics South Africa\nTable 1 examines the contributions to the CPI inflation rate. In January 2009 the main\ncontributors to the year-on-year inflation rate of 8,1 per cent were food prices \n(2,4 percentage points), housing and utilities (2,1 percentage points), and miscellaneous\ngoods and services (1,4 percentage points). In February a similar pattern is observed,\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nPercentage change over twelve months\n0\n2\n4\n6\n8\n10\n12\n14\n2003\n2004\n2005\n2006\n2007\n2008\n2009\nFigure 1 \nConsumer price inflation: Targeted inflation*\n* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban areas\n thereafter\nSource: Statistics South Africa\nalthough there were increased contributions from transport (0,3 percentage points) and\nfrom miscellaneous goods and services (1,6 percentage points), driven by increases in\nthe insurance as well as health services components. March saw a decline in the\ncontribution of housing and utilities (1,8 percentage points) due to lower inflation in\nrentals for housing and owners’ equivalent rent (surveyed quarterly). The movements in\nthe contribution of transport in Table 1 were driven by changes in the price of petrol. The\nGauteng price of 95 octane unleaded petrol, which had declined from R10,70 per litre\nin July 2008 to R6,01 per litre in January 2009, rose to R6,61 per litre in February and\nR7,07 per litre in March.\nThe rates of increase in the prices of food items in the consumer price basket generally\nslowed in the period under review (Figure 2). The year-on-year inflation rate for all food items\nslowed from 19,2 per cent in August 2008 to 16,1 per cent in January 2009 and a still-high\n14,9 per cent in March. This trend has been driven by slowly declining, albeit persistently high,\ninflation in bread and cereals (36,5 per cent in August 2008 to 19,9 per cent in March 2009),\nand meat (11,9 per cent to 10,8 per cent over the same period). Vegetable price inflation\nhas been one of the factors limiting the decline in food price inflation, increasing sharply\nfrom a low of 0,5 per cent in September 2008 to 19,3 per cent in February 2009 before\nrecording 18,6 per cent in March.\nThe effect of excluding petrol, food and non-alcoholic beverages, and electricity prices from\nthe CPI inflation measure is considered in Table 2. Since petrol prices have provided\ndownward pressure on CPI inflation during 2009, despite rising in recent months, excluding\nthem from the CPI results in higher inflation rates for this core measure than the 8,5 per cent\nrecorded for headline CPI in March. Excluding petrol prices, the inflation rate for the\nremaining items in the headline CPI was 9,5 per cent in March. Food and non-alcoholic\nbeverages, by contrast, have provided upward pressure on CPI inflation. If these items had\nbeen excluded, headline inflation would have been lower at 7,5 per cent in March, although\nnotably higher than the 6,6 per cent recorded for this core measure in January. If both petrol\nprices and food and non-alcoholic beverages had been excluded from the CPI, inflation\nwould have been 8,6 per cent in March. Finally, if energy had been excluded along with the\nother categories, an inflation rate of 8,0 per cent would have been recorded in March 2009. \nSouth African Reserve Bank\n3\nMonetary Policy Review May 2009\nPercentage change over twelve months\n-10\n0\n10\n20\n30\n40\n2003\n2004\n2005\n2006\n2007\n2008\n2009\n \nAll food items\n \nMilk, cheese and eggs \n \nBread and cereals\n \nVegetables \n \nMeat\n \nTargeted inflation measure\nFigure 2 \nTargeted inflation* and food inflation\n* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban areas\n thereafter\nSource: Statistics South Africa\n4\nTable 2\nThe effect of food, petrol and electricity prices on headline inflation\nPercentage change over twelve months\n2009\nJan\nFeb\nMar\nHeadline CPI ..............................................................\n8,1\n8,6\n8,5\nCPI excluding petrol prices..........................................\n9,1\n9,5\n9,5\nCPI excluding food and NAB* prices ...........................\n6,6\n7,4\n7,5\nCPI excluding food, NAB and petrol prices..................\n7,8\n8,2\n8,6\nCPI excluding food, NAB, petrol and energy prices.....\n7,3 \n7,8\n8,0\n*\nNAB: Non-alcoholic beverage\nSource: Statistics South Africa\nThe inflation rates for the goods and services categories of the CPI in 2009 are presented\nin Table 3. Measured over twelve months, goods prices increased by 7,9 per cent in\nJanuary, and by 8,7 per cent in February and March. Within the goods category, inflation\nfor non-durable goods has been far higher (11,8 per cent in March) than for semi-durable\n(6,6 per cent in March) and durable (2,9 per cent in March) goods. Services prices rose\nby 8,2 per cent in January, by 8,5 per cent in February and by 8,4 per cent in March. \nTable 3\nCPI: Goods and services inflation\nPercentage change over twelve months\n2009\nJan\nFeb\nMar\nHeadline CPI.....................................................\n8,1\n8,6\n8,5\nGoods prices ....................................................\n7,9\n8,7\n8,7\nDurable goods...............................................\n1,7\n2,5\n2,9\nSemi-durable goods ......................................\n4,9\n5,7\n6,6\nNon-durable goods........................................\n11,6\n12,3\n11,8\nServices prices..................................................\n8,2\n8,5\n8,4\nSource: Statistics South Africa\nAdministered prices play a potentially important role in the inflation process. The changes to\nthe CPI made by Stats SA have also impacted on the administered prices index, as\ndiscussed in Box 1. Table 4 shows that the year-on-year inflation rate for administered\nprices was 1,4 per cent in January 2009 and 2,8 per cent in February and March. The\ninflation rate for regulated items increased from -0,7 per cent in January to \n1,5 per cent in February before slowing to 0,6 per cent in March, largely as a result of\nmovement in the petrol price. The inflation rate for unregulated items was constant at 5,0 per\ncent in January and February, and then increased to 6,8 per cent in March, largely as a\nresult of increases in the cost of schooling, tertiary education and university boarding fees. \nTable 4\nAdministered prices\nPercentage change over twelve months\n2009\nJan\nFeb\nMar\nTotal..................................................................\n1,4\n2,8\n2,8\nRegulated .........................................................\n-0,7 \n1,5\n0,6\nUnregulated .....................................................\n5,0 \n5,0\n6,8\nSource: Statistics South Africa\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nSouth African Reserve Bank\n5\nMonetary Policy Review May 2009\nBox 1 Administered prices in the consumer price index\nAn ‘administered price’, as reported in the consumer price index (CPI) published by Statistics South\nAfrica (Stats SA), is defined as “the price of a product which is set consciously by an individual\nproducer or group of producers and/or any price, which can be determined or influenced by\ngovernment, either directly or through a government agency/institution without reference to market\nforces”.2 This group of prices is of particular interest to monetary policy-makers as they constitute a\nsignificant portion of the CPI that may not be influenced by monetary policy implementation. \nStats SA reports the administered price index (API) as having a total weight of 14,66 per cent in the\ncurrent CPI for all urban areas. This is lower than the previous weights of 20,01 per cent in the\nconsumer price index excluding mortgage interest costs (CPIX) for metropolitan and other urban\nareas and 17,91 per cent in the CPI for metropolitan and other urban areas (Table B1.1).3 As Table\nB1.1 shows, most components of the API have a lower weighting in the new CPI when compared to\nboth the previous CPI and CPIX measures that were used until the end of 2008. \nTable B1.1 Change in weights of administered prices within various inflation\nmeasures according to the classification of individual consumption\nby purpose\nPer cent\nWeights (2000)\nWeights (2008)\nCPIX for\nCPI for\nCPI for\nmetropolitan and\nmetropolitan and\nall urban\nother urban areas\nother urban areas\nareas\nAdministered prices..............................\n20,01\n17,91\n14,66\nHousing.................................................\n7,98\n7,17\n5,16\nAssessment rates ..................................\n1,64\n1,49\n2,07\nSanitary fees ..........................................\n0,27\n0,24\n0,06\nRefuse removal ......................................\n0,37\n0,33\n0,09\nWater .....................................................\n1,81\n1,63\n1,10\nElectricity ...............................................\n3,55\n3,18\n1,68\nParaffin...................................................\n0,34\n0,30\n0,16\nTransport...............................................\n5,42\n4,82\n4,16\nPetrol .....................................................\n5,08\n4,55\n3,93\nPublic transport: Trains ..........................\n0,16\n0,14\n0,04\nPublic transport: Municipal buses ..........\n0,09\n0,05\n0,00\nMotor licences ......................................\n0,09\nMotor registrations.................................\n0,09\n0,08\n0,10\nCommunication.....................................\n3,11\n2,79\n2,75\nTelephone fees.......................................\n1,62\n1,46\n1,26\nTelephone rent and installation ...............\n0,34\n0,30\n0,00\nPostage ................................................\n0,02\n0,02\n0,02\nCellular telephone calls .........................\n0,89\n0,79\n1,47\nCellular telephone connection fees ........\n0,24\n0,22\n0,00\nRecreation and culture..........................\n0,26\n0,23\n0,13\nTelevision licences..................................\n0,26\n0,23\n0,13\nEducation..............................................\n2,97\n2,67\n2,18\nSchool fees ...........................................\n1,72\n1,55\n1,28\nUniversities/technikons/colleges.............\n1,25\n1,12\n0,90\nRestaurants and hotels.........................\n0,16\n0,14\n0,28\nUniversity boarding fees.........................\n0,16\n0,14\n0,28\nHealth ...................................................\n0,11\n0,09\n0,00\nPublic hospitals .....................................\n0,11\n0,09\n0,00\nSource: Statistics South Africa\n2\nStatistics South Africa,\n2009. “Consumer price index:\nJanuary 2009”, Statistical\nrelease P0141. Pretoria:\nStatistics South Africa, \n25 February.\n3\nThe reason for the differing\nweights of the API in the CPIX\nand CPI for metropolitan and\nother urban areas is the result of\na reweighting that occurs in the\nindex when the interest\ncomponent is removed. This\nensures that the total weight of\nboth indices is 100 per cent and\nhence all components remaining\nin the CPIX have a higher\nweighting than in the CPI.\n6\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nThe exceptions to this are assessment rates, motor licence and registration fees, cellular telephone\ncall charges, and university boarding fees. These changes are largely the result of changes in\nspending patterns captured in the Income and Expenditure Survey conducted in 2005/06. \nThe API is divided into a regulated component and an unregulated component, which are both\nreported in the CPI publication. Regulated administered prices are those that are set according to\ngovernment’s policy objectives and may or may not have an economic regulator. The products and\nservices included in regulated administered prices, as well as their weight in the CPI for all urban areas\nare shown in Table B1.2. Table B1.3 shows the products and services included in the unregulated\nportion of the API.\nTable B1.2 Basket of regulated prices in the CPI for all urban areas\nPer cent\nGroup\nProducts and \nReasoning for inclusion\nWeight\nservices\nHousing\nTotal\n2,94\nWater\nSet by local government within Department of \nWater Affairs and Forestry guidelines\n1,10\nElectricity\nSet by local government and regulated \nby National Electricity Regulator\n1,68\nParaffin\nRegulated by Department of Minerals and Energy\n0,16\nTransport\nTotal\n3,93\nPetrol\nRegulated by Department of Minerals and Energy\n3,93\nCommunication Total\n2,75\nTelephone fees\nRegulated by Independent Communications \nAuthority of South Africa (ICASA)\n1,26\nPostage\nRegulated by government\n0,02\nCellular telephone Regulated by Independent Communications \ncalls\nAuthority of South Africa (ICASA)\n1,47\nTotal\n9,62\nSource: Statistics South Africa\nTable B1.3 Basket of administered prices that are not regulated in the CPI for\nall urban areas\nPer cent\nGroup\nProducts and \nReasoning for inclusion\nWeight\nservices\nHousing\nTotal\n2,22\nAssessment rates\nA tax set by local government\n2,07\nSanitary fees\nSet by local government\n0,06\nRefuse removal\nSet by local government\n0,09\nTransport\nTotal\n0,23\nPublic transport: Trains\nSet by government agency\n0,04\nMotor licences\nSet by provincial government\n0,09\nMotor registrations\nSet by provincial government\n0,10\nRecreation and \nculture\nTotal\n0,13\nTelevision licences\nSet by government agency\n0,13\nEducation\nTotal\n2,18\nSchool fees\nSet by government agencies (schools)\n1,28\nUniversities/technikons/\nSet by government agencies \ncolleges\n(universities, technikons)\n0,90\nRestaurants and \nhotels\nTotal\n0,28\nUniversity boarding fees\nSet by government agencies (universities)\n0,28\nTotal\n5,04\nSource: Statistics South Africa\nInflation measured in terms of the year-on-year change in the headline producer price\nindex (PPI) continued to decline in the period under review, from 14,5 per cent year on\nyear in October 2008 to 5,3 per cent in March 2009. Focusing on the food component\nof the PPI, Figure 3 plots the inflation rates for the agricultural food and food at the\nmanufacturing-level components, alongside that for food in the CPI. The figure shows\nthat upward pressure on food price inflation at the consumer level from food production\nprices has been easing for some time. The inflation rate for the agricultural food PPI has\ndeclined since the end of 2007, falling below that of food in the CPI in April 2008 and\nPPI inflation for food at the manufacturing level has been slowing since July 2008, falling\nbelow the CPI food inflation rate in October 2008.\nFactors affecting inflation\nThis section reviews recent developments in some of the main drivers of inflation in\nSouth Africa. These include the external environment and the exchange rate, domestic\ndemand and output, fiscal policy, and monetary conditions. A discussion of the outlook\nfor these variables and their likely impact on inflation is presented in a later section.\nInternational economic developments\nWorldwide economic growth slowed significantly in 2008, buffeted by the deep\nfinancial crisis, sharp run-ups in energy and food prices, and declines in many\ndeveloped economies’ housing markets. According to the most recent International\nMonetary Fund (IMF) data, the global economy recorded growth of 3,2 per cent in\n2008, compared with 5,2 per cent in 2007 (Table 5). Global real GDP fell at an\nunprecedented annualised rate of 5 per cent in the fourth quarter of 2008.\nSouth African Reserve Bank\n7\nMonetary Policy Review May 2009\nPercentage change over twelve months\n2007\n2008\n2009\nSource: Statistics South Africa\nFigure 3 \nFood prices in the PPI and CPI\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n30\nPPI – food at agricultural level\nConsumer prices – food\nPPI – food at manufacturing level\n8\nTable 5\nAnnual percentage change in real GDP and consumer prices \nShare of global\nConsumer\nreal GDP*\nReal GDP\nprices**\n2008\n2007\n2008\n2007\n2008\nWorld ............................................................\n100,00\n5,2\n3,2\n4,0\n6,0\nAdvanced economies....................................\n55,3\n2,7\n0,9\n2,2\n3,4\nUnited States............................................\n20,7\n2,0\n1,1\n2,9\n3,8\nJapan ......................................................\n6,4\n2,4\n-0,6\n0,0\n1,4\nEuro area ..................................................\n15,7\n2,7\n0,9\n2,1\n3,3\nUnited Kingdom........................................\n3,2\n3,0\n0,7\n2,3\n3,6\nOther advanced economies......................\n7,4\n4,7\n1,6\n2,0\n4,3\nOther emerging-market and \ndeveloping countries ....................................\n44,7\n8,3\n6,1\n6,4\n9,3\nAfrica ........................................................\n3,1\n6,2\n5,2\n6,3\n10,1\nCentral and eastern Europe ......................\n3,5\n5,4\n2,9\n6,1\n8,0\nCommonwealth of Independent States ....\n4,6\n8,6\n5,5\n9,7\n15,6\nDeveloping Asia ........................................\n21,0\n10,6\n7,7\n5,4\n7,4\nChina ....................................................\n11,4\n13,0\n9,0\n4,8\n5,9\nIndia ......................................................\n4,8\n9,3\n7,3\n6,4\n8,3\nMiddle East ..............................................\n3,9\n6,3\n5,9\n10,5\n15,6\nWestern hemisphere ................................\n8,6\n5,7\n4,2\n5,4\n7,9\n*\nGDP shares based on the IMF’s purchasing-power-parity valuation of country GDPs for 2008\n**\nZimbabwe excluded\nSource: IMF World Economic Outlook, April 2009\nThe slide in global growth has proved to be far more severe than most forecasters had\nprojected prior to the failure of Lehman Brothers and the intensification of uncertainty in its\nwake. The business cycle dating committee of the United States (US) National Bureau of\nEconomic Research determined that a peak in economic activity occurred in the US\neconomy in December 2007. The peak marked the end of the 73-month expansion that\nbegan in November 2001 and the beginning of a US recession. For the US, economic\ngrowth of 1,1 per cent was recorded for the year 2008 compared with 2,0 per cent in 2007.\nHowever, growth in the US had weakened considerably by the second half of 2008 and\ndeclined at an annualised pace of 6,3 per cent in the fourth quarter of 2008 – the largest\nnegative value since 1982. Consumer spending, which comprises about 70 per cent of total\nexpenditure in the economy, declined at the fastest pace in almost three decades.\nJapan is in a sounder financial position than most advanced economies, but the country’s\ngrowth depends heavily on exports, which have been hit hard by declining foreign\ndemand. Thus, despite Japanese banks’ lower exposure to US mortgage-backed\nassets, Japan slipped into a recession as international trade diminished rapidly. Japan’s\neconomy shrank in the final quarter of 2008 at an annualised rate of 12,1 per cent – the\nfastest since the 1974 oil shock. The sharp fall in output reflects plunging net exports and\nbusiness investment, and faltering private consumption. Consequently, the economy of\nJapan shrank by 0,6 per cent in 2008, compared with real growth of 2,4 per cent in 2007. \nFor the euro area, economic growth of 0,9 per cent was recorded for the year 2008\ncompared with 2,7 per cent in 2007. First estimates show that real output had\ndeclined rapidly in the final quarter of 2008 – contracting the most in nearly 13 years\nas real GDP fell by 6,3 per cent at an annualised rate. Overall eurozone consumer\nprice inflation of 3,3 per cent in 2008 was well above the target ceiling of the European\nCentral Bank (ECB). \nMonetary Policy Review May 2009\nSouth African Reserve Bank\nIn the United Kingdom (UK), real GDP grew by 0,7 per cent in 2008 compared with 3,0 per\ncent in 2007 as further weakening in the housing market continued to impact negatively on\nthe components of final demand. Inflation in the UK rose from 2,3 per cent in 2007 to \n3,6 per cent in 2008.\nThe confluence of weakening external demand, tightening financing constraints and\ndeclining commodity prices led to much weaker growth outcomes in a broad swath of\nemerging economies. For developing Asia, recent economic data indicate that real\noutput growth moderated to 7,7 per cent in 2008 from 10,6 per cent in 2007. Growth\nin China and India is slowing, albeit from high rates, but domestic demand is being\nsupported by a strong policy stimulus. The Chinese economy recorded growth of 9 per\ncent in 2008, while India’s economy recorded growth of 7,3 per cent. \nGrowth in Africa remained relatively strong in 2008, with an expansion in real GDP of \n5,2 per cent but commodity prices fell sharply in 2008 from mid-year highs, causing an\nespecially large loss of income for commodity exporters. The severe deterioration in\nexternal growth not only reduced demand for African exports, but also began curtailing\nworkers’ remittances and the downturn was most pronounced in oil-exporting countries\nand other commodity-exporting countries. The 10,1 per cent inflation rate in 2008 was\nsignificantly higher than the rate of 6,3 per cent recorded the previous year. \nOil prices\nOil markets have been severely affected by the rapid slowdown in global economic\nactivity in the second half of 2008. With supply exceeding demand, substantial inventory\naccumulation occurred and international oil prices declined sharply. The price of Brent\ncrude oil fell from record highs of above US$145 per barrel in July 2008 to below US$35\nby the end of the year (Figure 4). After the Organization of the Petroleum Exporting\nCountries (OPEC) announced in December 2008 a reduction in production quotas of \n4,2 million barrels per day with effect from January 2009, oil prices fluctuated around\nUS$45 per barrel during the period from mid-February to mid-March 2009. In recent\nweeks prices have risen and have fluctuated around the US$50 per barrel level. \nSouth African Reserve Bank\n9\nMonetary Policy Review May 2009\nFigure 4 \nPrice of Brent crude oil \n2004\nJ M M J S N\n2005\nJ M M J S N\n2006\nJ M M J S N\n2007\nJ M M J S N\n2008\nJ M M J S N\n2009\nJ M M J S N\nUS dollar per barrel\nSource: Bloomberg\n20\n40\n60\n80\n100\n120\n140\n160\n10\nInternational monetary policy developments\nThe backdrop to international monetary policy developments in recent months was the\ncontinued weakening of the global economy and financial markets with inflation beginning\nto trend downwards in many countries. Consequently, central banks around the globe\ncontinued to ease their monetary policy stance aggressively. Since September 2008,\npolicy rates have been reduced by central banks in most countries (Table 6), including\nAustralia, Brasil, Canada, Chile, the Czech Republic, Denmark, Sweden, the euro area,\nHungary, India, Indonesia, Israel, Malaysia, Mexico, Poland, South Korea, Taiwan,\nThailand, Turkey and the UK.\nTable 6\nSelected central bank interest rates\nPer cent\nLatest decision\n(change in \nCountries\n1 Sep 2008\n30 Apr 2009\npercentage points)\nUnited States ....................................\n2,00\n0,00–0,25\n29 Apr 2009\n(0,00)\nJapan................................................\n0,50\n0,10\n30 Apr 2009\n(0,00)\nEuro area ..........................................\n4,25\n1,25\n02 Apr 2009\n(-0,25)\nUnited Kingdom ................................\n5,00\n0,50\n09 Apr 2009\n(0,00)\nCanada ............................................\n3,00\n0,25\n21 Apr 2009\n(-0,25)\nDenmark ..........................................\n4,60\n2,00\n03 Apr 2009\n(-0,25)\nSweden ............................................\n4,50\n0,50\n21 Apr 2009\n(-0,50)\nSwitzerland........................................\n2,75\n0,00–0,75\n12 Mar 2009\n(-0,25)\nAustralia ............................................\n7,25\n3,00\n07 Apr 2009\n(-0,25)\nNew Zealand ....................................\n8,00\n2,50\n30 Apr 2009\n(-0,50)\nIsrael ................................................\n4,25\n0,50\n27 Apr 2009\n(0,00)\nChina ................................................\n7,47\n5,31\n22 Dec 2008\n(-0,27)\nHong Kong........................................\n3,50\n0,50\n30 Apr 2009\n(0,00)\nIndonesia ..........................................\n9,00\n7,50\n03 Apr 2009\n(-0,25)\nMalaysia ............................................\n3,50\n2,00\n29 Apr 2009\n(0,00)\nSouth Korea ......................................\n5,25\n2,00\n12 Mar 2009\n(0,00)\nTaiwan ..............................................\n3,63\n1,25\n26 Mar 2009\n(0,00)\nThailand ............................................\n3,75\n1,25\n08 Apr 2009\n(-0,25)\nIndia ..................................................\n9,00\n4,75\n21 Apr 2009\n(-0,25)\nBrazil ................................................\n13,00\n10,25\n29 Apr 2009\n(-1,00)\nChile..................................................\n7,75\n1,75\n09 Apr 2009\n(-0,50)\nMexico ..............................................\n8,25\n6,00\n17 Apr 2009\n(-0,75)\nCzech Republic ................................\n3,50\n1,75\n26 Mar 2009\n(0,00)\nHungary ............................................\n8,50\n9,50\n20 Apr 2009\n(0,00)\nPoland ..............................................\n6,00\n3,75\n29 Apr 2009\n(0,00)\nRussia ..............................................\n11,00\n12,50\n24 Apr 2009\n(-0,50)\nTurkey ..............................................\n16,75\n9,75\n16 Apr 2009\n(-0,75)\nIceland ..............................................\n15,50\n15,50\n08 Apr 2009\n(-1,50)\nSource: National central banks\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nBox 2 Recent conventional and unconventional policy measures adopted\nby monetary authorities in response to the global financial crisis\nWith inflation concerns waning and risks to the economic outlook deepening, monetary\nauthorities in various countries have used a range of conventional and unconventional policy tools\nto support their economies and ease credit market conditions. As inflation fears have receded,\ncentral bankers in many countries have been at the forefront of attempts to sustain demand in\nthe face of severe financial disruptions. In an attempt to stabilise their financial systems,\ngovernments in many developed countries have also implemented additional policy measures. \nSouth African Reserve Bank\n11\nMonetary Policy Review May 2009\nCentral banks in some developed countries have reacted pre-emptively to the rising threat of\ndeflation. Policy rates in many countries are nearing the zero interest rate floor after having been\ncut sharply – bringing them to 0,5 per cent or less in some countries (Canada, Japan, the United\nKingdom (UK) and United States (US)) and to unprecedented lows in others (including the euro\narea and Sweden). Central banks in developed countries have attempted to maximise relief in\ndislocated markets – increasing credit availability and lowering spreads – while minimising\npossible longer-term instability. The European Central Bank (ECB) cut the margin between its\nbenchmark rate and the cost of borrowing from its standing facility from 100 to 50 basis points.\nThe margin between the benchmark rate and interest paid on banks’ deposits was also\nnarrowed to 50 basis points. Furthermore, the ECB broadened the pool of eligible collateral\nsignificantly and introduced additional longer-term central bank operations. Monetary authorities\nin some developed countries have followed multiple strategies involving continued provision of\nliquidity and extended guarantees of bank liabilities. Major banks in the US, the UK and Europe\nwere provided with new capital and guarantees against losses from holdings of legacy (formerly\nknown as ‘toxic’) assets. The Federal Deposit Insurance Corporation (FDIC) in the US announced\nprogrammes to guarantee selected liabilities of FDIC-insured depository institutions and their\nholding companies. It later also expanded its guarantees of bank liabilities temporarily to include\nunsecured obligations and non-interest-bearing transaction deposits. \nA number of central banks have introduced a range of new instruments, including purchases of\nlong-term government securities and more direct measures to support intermediation. In the US\nthe nearing zero floor has constrained room for further cutting, and lower interest rates have been\nsupported by the use of less conventional approaches, using both the size and composition of\nthe Federal Reserve’s (the Fed) balance sheet to support credit intermediation. The “credit-\neasing” strategy announced by the Fed is aimed at providing direct support to credit markets by\nproviding funding and guarantees to financial intermediaries in, for example, the US commercial\npaper and residential mortgage-backed securities markets. The Fed established new lending\nfacilities and expanded existing facilities by jointly establishing with the US Treasury the Term\nAsset-Backed Securities Loan Facility (TALF) that lends against asset-backed securities\ncollateralised by student loans, credit card and other loans. The Fed’s programmes to purchase\nup to US$300 billion in longer-term Treasury securities and a combined US$1,45 trillion in agency\nand agency-backed mortgage-backed securities are aimed at lowering key borrowing costs for\nhouseholds and companies. \nPer cent\n2004\n2005\n2006\n2007\n2008\n2009\nFOMC: Federal funds target rate\nECB: Main refinancing rate\nUK: Repo rate\nJapan: Uncollateralised overnight \ncall rate\nFigure B2.1 \nPolicy rates\n0\n1\n2\n3\n4\n5\n6\n7\nSource: National central banks\n12\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nCentral banks in the UK and Japan have also commenced purchasing long-term government\nsecurities to provide direct support to illiquid credit markets. In March 2009 the Bank of England\nannounced that it would buy £150 billion of government and corporate bonds as part of an\nunprecedented attempt to revive the UK economy. The Bank indicated that it would favour buying\nassets from institutions other than banks, and would focus on medium and long maturities. As an\nadditional step to increase the availability of corporate credit, the Bank of England had previously\nset up an asset purchase programme implemented through a specially created fund and the\nbank’s commercial paper facility had already become operational in February 2009. As some\ncentral banks have become key intermediaries in the credit process, their balance sheets have\nexpanded rapidly. For example, the Fed’s balance sheet has expanded from less than US$1 trillion\nin September 2008 to over US$2 trillion at the end of March 2009. Including TALF, the Fed’s\nbalance sheet could expand to over US$3 trillion – or more than 20 per cent of GDP in the US.\nTo put the scale of its most recently announced quantitative easing into perspective, the \nUS$1,25 trillion in agency mortgage-backed securities the Fed now plans to purchase in 2009\nrepresents about one-quarter of the market. Moreover, the US$300 billion in US Treasuries the Fed\nplans to purchase in the next six months represents nearly 10 per cent of marketable notes and\nwould bring its total ownership to roughly one-quarter of the market. The TALF programme is also\ngaining momentum and could be expanded to US$1 trillion and eventually include a wide variety\nof financial assets (possibly including legacy assets). Having already reduced the key interest rate\nthat it controls to nearly zero, the central bank has increasingly turned to alternatives such as\nbuying securities. The interventions on 18 March 2009 were the biggest to date, almost doubling\nall of the Fed’s measures in the past year. \nCentral banks in emerging economies have been confronted by the need to sustain external\nstability in the face of highly fragile financing flows. Given the current global economic outlook,\nemerging-market financing is potentially more vulnerable than in the case of advanced economies\ndue to the possibility of “sudden stops”. Emerging economies that have borrowed heavily in foreign\ncurrency are also more vulnerable to exchange rate depreciation. Governments in developing\ncountries have in general provided fiscal support on a much smaller scale than in developed\ncountries, with China and Saudi Arabia being the important exceptions. China’s central bank has\nensured sufficient liquidity to sustain economic growth by implementing a moderately loose\nmonetary policy. The government has encouraged banks to lend in support of the stimulus,\nimplemented after the global recession had led to a collapse in exports that dragged economic\ngrowth in China to the weakest pace in seven years. In November 2008 the People’s Bank of China\nannounced that it would lend Rmb100 billion (US$14,6 billion) to banks by the end of December to\nstave off a slowdown in growth. In December 2009 the central bank cut its key lending rate for the\nfifth time in three months and, once again, lowered its reserve requirement for the country’s banks.\nMany developing countries, especially in Asia and Latin America, have used policy buffers to\nalleviate pressures. In some countries exchange rates have been allowed to adjust downwards\nand in others stockpiles of reserves have been significantly depleted in an attempt to counter\nvolatile exchange rate movements. In some instances reserves have been applied to augment\nprivate credit and sustain trade finance in particular. The Fed offered bilateral currency swap\nfacilities to 14 systemically important countries and the International Monetary Fund (IMF)\nprovided assurance to markets that external funding would be available if required by countries\nthat had been implementing sound macroeconomic policies. In emerging Europe and the\nCommonwealth of Independent States countries policy responses have been complicated by\ngreater vulnerabilities and less flexible exchange regimes. Some of these countries have been\nconfronted by severe external financing shortages and mismatches on borrowers’ balance\nsheets. Authorities in these countries have tightened macroeconomic policies, and have\napproached the IMF and other official sources for external financial support. \nThe rapid, and in some instances unorthodox, policy responses in many countries to the extreme\nfinancial market conditions that arose after the collapse of Lehman Brothers in the US in\nThe US Federal Reserve (the Fed) eased its stance further in December 2008 by adopting\na target range for the federal funds rate of zero to 0,25 per cent per annum. More recently,\nit intensified its efforts to bolster the economy. Although the Fed left the federal funds target\nrate unchanged at 0–25 basis points at its most recent meeting, it still eased policy, as it\nmoved towards a quantitative easing strategy (Box 2 discusses this in more detail). On \n18 March 2009 it announced that it would inject an extra US$1 trillion into the financial\nsystem by purchasing Treasury bonds and mortgage securities. The Fed announced that\nit would further expand its balance sheet by purchasing up to an additional US$750 billion\nof agency mortgage-backed securities and up to an additional US$100 billion of agency\ndebt this year (bringing total purchases to US$1,25 trillion and US$200 billion respectively).\nIt also decided to purchase up to US$300 billion of longer-term (2- to 10-year) Treasury\nsecurities over the next six months. Finally, the Fed anticipates that the range of eligible\ncollateral for the Term Asset-Backed Securities Loan Facility (TALF) is likely to be expanded\nto include other financial assets.\nThe ECB is providing enhanced credit support and has allowed the interest rate it pays on\nits deposit facility, used by banks to place funds overnight, to become a benchmark for\nmarket rates. While the main policy rate has been cut to 1,25 per cent – the lowest ever –\nthe deposit facility rate stands at just 0,25 per cent. The Bank of England’s Monetary Policy\nCommittee cut the official Bank Rate to a record low 0,50 per cent on 5 March 2009, and\nreached consensus on the adoption of a quantitative easing programme.\nAs widely anticipated, the Bank of Japan left its key policy rate unchanged at \n0,10 per cent at its most recent meeting. However, it did increase the size of its monthly\ngovernment bond purchases (rinban operations) from ¥1,4 trillion to ¥1,8 trillion.\nMoreover, it unveiled plans to provide as much as ¥1,0 trillion of subordinated loans to\nlarge commercial banks, in order to shore up the capital bases of institutions hit by\nportfolio losses.\nExchange rate developments\nThe foreign-exchange rate of the South African rand has generally strengthened in the\nperiod since the publication of the November 2008 Monetary Policy Review (Figure 5).\nThe nominal effective exchange rate (NEER), which measures the value of the rand\nagainst a basket of 13 currencies, appreciated by 31 per cent; from a recent low of\n52,57 on 27 October 2008 to 69,06 on 30 April 2009. Over the same period, the rand\nappreciated from R11,31 to R8,43 against the US dollar, and from R14,04 to \nR11,26 against the euro.\nSouth African Reserve Bank\n13\nMonetary Policy Review May 2009\nSeptember 2008 have thus far failed in aggregate to arrest the downward spiral in global\neconomic activity. Policy responses have helped to alleviate financial market conditions, but\nfinancial markets have yet to stabilise. The additional stimulus measures announced by the G-20\nin April 2009 represent a further substantial co-ordinated attempt by policy-makers to break the\nfinancial sector’s negative feedback loop with the real economy.\nReferences\nInternational Monetary Fund. “Global Prospects and Policies”. World Economic Outlook. \n22 April 2009. \nWall Street Journal. “Bernanke: Fed Actions Help Lending”. 3 April 2009.\nNational central banks’ websites.\n14\nHowever, as is evident in Figure 5, the exchange rates of the rand have recovered\nfrom the sharp depreciation experienced in October 2008 that was largely due to\nlower commodity prices and increased global risk aversion. The risk aversion was\nmost starkly felt in October when close to R50 billion worth of domestic bonds and\nshares were sold by non-residents; this was more than double the combined sales\nof bonds and equities by non-residents in any other month in 2008. The strength-\nening in the value of the rand during April 2009 was largely fuelled by improved\ninvestor sentiment around the world.\nDemand and output \nThe South African economy contracted at an annualised rate of 1,8 per cent in the fourth\nquarter of 2008 (Table 7), the first quarterly decline in aggregate real production since\nthe third quarter of 1998. Following successive growth rates of 1,7 per cent, 5,0 per cent\nand 0,2 per cent in the preceding three quarters of 2008, this resulted in real GDP\ngrowth of 3,1 per cent in 2008, compared with 5,1 per cent in 2007. \nThe deceleration in growth in the fourth quarter of 2008 can be attributed mainly to a\nmarked deterioration in real value added by the secondary sector, particularly by\nmanufacturing. The real value added by the manufacturing sector contracted at an\nannualised rate of 21,8 per cent in the fourth quarter, having recorded a contraction of \n9,4 per cent in the third quarter. By contrast, the annualised growth in real value added by\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nIndex: 2000 = 100 (foreign currency per rand)\nRand per euro\nRand per US dollar\nFigure 5 \nExchange rates of the rand\n2007\nMar May\nMar May\nJul\nSep\nNov\nJan\n2008\n2009\nMar May\nJul\nSep Nov\nJan\nJan\n \nNominal effective exchange rate of the rand (NEER)\n \nRand per US dollar \n \nRand per euro (right-hand scale)\n50\n60\n70\n80\n90\n6\n7\n8\n9\n10\n11\n12\n7\n8\n9\n10\n11\n12\n13\n14\n15\nthe primary sector accelerated to 6,0 per cent in the final quarter of 2008 from 3,3 per cent\nin the third quarter, reflecting an improved growth performance by the mining sector and\ncontinued strong growth in the agriculture sector. The mining sector recorded annualised\ngrowth of 0,5 per cent in real value added in the fourth quarter after contracting by 8,8 per\ncent in the third quarter, while growth in real value added by the agriculture sector was \n31,6 per cent in the third quarter and 16,7 per cent in the fourth quarter. \nTable 7\nGrowth in real GDP and expenditure components\nPer cent*\n2007\n2008\nYear\n1st qr\n2nd qr\n3rd qr\n4th qr\nYear\nFinal consumption expenditure:\nHouseholds ......................................\n6,6\n3,0\n1,3\n-0,9\n-2,7\n2,3\nGeneral government ........................\n4,8\n12,3\n-2,1\n10,2\n3,6\n5,0\nGross fixed capital formation ..............\n16,3\n10,4\n5,2\n7,3\n3,0\n10,2\nChanges in inventories (R billions)** ....\n4,2\n11,1\n-4,7\n-11,2\n-21,1\n-6,5\nGross domestic expenditure..............\n6,0\n12,5\n-1,7\n0,7\n-3,9\n3,1\nExports of goods and services............\n7,5\n-30,1\n42,5\n4,0\n-16,4\n1,7\nImports of goods and services............\n10,0\n3,9\n7,9\n4,7\n-19,0\n2,2\nGross domestic product ....................\n5,1\n1,7\n5,0\n0,2\n-1,8\n3,1\n*\nQuarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data \n**\nConstant 2000 prices\nReal gross domestic expenditure declined at an annualised rate of 3,9 per cent in the\nfinal quarter of 2008, after increasing by a modest 0,7 per cent in the third quarter. This\nperformance was the result of a contraction in final consumption expenditure by\nhouseholds over the period, a notable decline in inventory levels, and slower growth in\ngross fixed capital formation and final consumption expenditure by general government.\nFinal consumption expenditure by households declined at annualised rates of 0,9 per\ncent in the third quarter and 2,7 per cent in the final quarter of the year. The annual\ngrowth rate for final consumption expenditure by households slowed from 6,6 per cent\nin 2007 to 2,3 per cent in 2008, which was the lowest rate recorded this decade.\nIn the external sector of the economy, real exports of goods and services grew by an\nannualised 4,0 per cent in the third quarter of 2008 before declining by 16,4 per cent in\nthe final quarter. Real imports of goods and services rose by 4,7 per cent and declined\nby 19,0 per cent in the corresponding quarters, with the result that the trade deficit\nnarrowed from R36,7 billion in the third quarter of 2008 to R19,6 billion in the fourth\nquarter. This outcome was supported by a narrowing of the shortfall on the service,\nincome and current transfer account with the rest of the world in the fourth quarter of\n2008, mainly as a result of lower interest and dividend payments to non-resident\ninvestors. As a consequence of these developments, the deficit on the current account\nof the balance of payments expressed as a ratio of GDP shrank from 7,8 per cent of\nGDP in the third quarter of 2008 to 5,8 per cent in the fourth quarter. \nSouth Africa’s gross gold and other foreign reserves declined marginally from \nUS$34,4 billion at the end of September 2008 to US$34,1 billion at the end of March 2009.\nThe international liquidity position decreased from US$33,6 billion to US$33,5 billion over\nthe same period. The changes in the reserve positions were mainly the result of exchange\nrate-induced revaluation effects.\nSouth African Reserve Bank\n15\nMonetary Policy Review May 2009\n16\nReal-estate and equity prices \nThe adverse economic conditions that enveloped developed countries around the globe\nduring 2008 inevitably filtered through to developing countries such as South Africa. As\nin many other emerging markets, South African property and share markets weakened\nconsiderably from the second half of 2008. Negative and uncertain conditions in global\nmarkets, lower commodity prices and less favourable economic growth prospects\ngenerally contributed to the weaker performance of the South African share market,\nwhile the property market also extended its downward trend.\nMeasured by the Absa House Price Index (Figure 6), the year-on-year rate of change in\nnominal house prices continued to trend downwards from the high of 15,7 per cent\nreached in March 2007, reaching negative levels of growth from December 2008. This is\nthe first occurrence of a decline in the index since 1987. The year-on-year rate of increase\nin the First National Bank House Price Index also continued to move downwards,\nrecording a decline of 10,2 per cent in April 2009, while the year-on-year change in the\nStandard Bank House Price Index recovered from -3,6 per cent in January 2009 to \n-2,5 per cent in April.\nThe declining level of economic activity in the real-estate sector is also evident from the\nbuilding statistics published by Stats SA and reproduced in Table 8. While growth in the\nvalue of buildings completed decelerated during the course of 2008, the value of building\nplans passed recorded an even sharper deceleration, providing an indication that future\nconstruction activity may remain subdued. However, positive growth was displayed in\nplans passed for non-residential buildings. The real value of building plans passed for the\nresidential sector contracted by 27,2 per cent in 2008 after decreasing by 3,2 per cent in\n2007, while that for the non-residential sector expanded by 0,8 per cent in 2008 after\ncontracting by 5,9 per cent in 2007. In the first two months of 2009, year-on-year growth\nin the value of buildings completed remained positive, while the value of plans passed\ncontracted sharply for both residential and non-residential buildings.\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nPercentage change over twelve months\n2004\n2005\n2006\n2007\n2008\n2009\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n30\n35\n40\n \nAbsa House Price Index\n \nStandard Bank House Price Index\n \nFirst National Bank House Price Index\nSources: Absa, Standard Bank and First National Bank\nFigure 6 \nHouse prices \nTable 8\nReal value of building plans passed and buildings completed in \nlarger municipalities\nAnnual percentage change\n2006\n2007\n2008\n2009*\nBuilding plans passed\nTotal ..............................................................\n8,1\n-2,4\n-18,1\n-48,9\nResidential.................................................. \n2,7\n-3,2\n-27,2\n-53,4\nNon-residential .......................................... \n31,7\n-5,9\n0,8\n-41,4\nAdditions and alterations .......................... \n5,0\n1,9\n-12,7\n-46,4\nBuildings completed\nTotal ..............................................................\n21,5\n9,5\n1,2\n10,2\nResidential ..............................................\n16,7\n1,2\n-8,8\n0,2\nNon-residential ........................................\n30,6\n48,6\n18,5\n26,6\nAdditions and alterations..........................\n34,0\n6,1\n15,6\n19,6\n*\nFigures for January and February 2009 compared with the corresponding months of 2008\nSource: Statistics South Africa\nShare prices on the JSE Limited (JSE) trended downwards during the second half of\n2008, effectively mirroring developments in international markets. As Figure 7 shows, the\nFTSE/JSE All-Share Index (Alsi) declined by 46 per cent from a record high on 22 May\n2008 to 20 November, led by a steep fall in resources shares which lost more than half\ntheir value after the commodity boom had come to an abrupt end. Similar, although\nsomewhat less pronounced, declines were recorded by industrial and financial shares\nover the same period. Financial shares have been on a downward trend since the end\nof 2007, partly as a result of investor concerns about the impact of rising domestic\ninterest rates on the profitability of these companies, and the negative perceptions\nglobally regarding banking and credit markets in general. \nSouth African Reserve Bank\n17\nMonetary Policy Review May 2009\nIndices\nR billions\n2005\n2006\n2007\n2008\n2009\nFTSE/JSE Resources Index\nFTSE/JSE Industrials Index\nNon-resident net purchases (cumulative since January 2005, right-hand scale)\nFigure 7 \nShare price indices and non-resident net purchases \n \nof shares\n10 000\n20 000\n30 000\n40 000\n50 000\n0\n50\n100\n150\n200\nFTSE/JSE All-Share Index\nFTSE/JSE Financials Index\nSource: JSE Limited\n18\nThe decline in domestic share prices during 2008 coincided with a sell-off of South\nAfrican shares by non-resident investors. Towards the end of 2007 non-residents\nreassessed their investments in the light of the turbulence in global financial markets\nand, after four consecutive years of net purchases of South African shares, substantial\nnet sales of R54 billion were recorded in 2008. However, early indications are that \nnon-residents again purchased shares to the net value of R19 billion in the first four\nmonths of 2009.\nAlthough share prices remained somewhat volatile during the first months of 2009, the\nAlsi rebounded by 16 per cent from 20 November 2008 to the end of April following a\nmodest recovery in commodity prices, the lowering of the repurchase rate and improved\nconditions on global equity markets.\nFiscal policy \nThe adverse developments in the global economy impacted markedly on the budget\npresented by the Minister of Finance on 11 February 2009 (Table 9). According to the\nBudget Review 2009, the estimated budget balance for 2008/09 is a deficit of \nR22,8 billion (or 1,0 per cent of GDP), a significant revision to the surplus of R14,3 billion\nthat was estimated at the time of the 2008 budget. As a percentage of estimated GDP,\nthe medium-term budget balances are projected to be deficits of 3,9 per cent in\n2009/10, 3,1 per cent in 2010/11 and 2,3 per cent in 2011/12. The structural budget\nbalance, which adjusts for the effects of the economic cycle, averages -3,2 per cent of\nGDP over the next three fiscal years.\nTable 9\nPublic finance data \nR billions and per cent\n2006/07\n2007/08 \n2008/09 \n2009/10 2010/11 2011/12\nFeb 2008\nRevised\nActual\nActual\nbudget\nestimates\nMedium-term estimates\nNational government\nDeficit (–)/surplus (+)........\n+11,0\n+18,3\n+14,3\n-22,8\n-95,6\n-83,3\n-67,7\nRevenue..........................\n481,2\n559,8\n625,4\n611,1\n643,0\n709,1\n781,2\nExpenditure.....................\n470,2\n541,5\n611,1\n633,9\n738,6\n792,4\n849,0\nAs a percentage of GDP\nDeficit (–)/surplus (+)........\n+0,6\n+0,9\n+0,6 \n-1,0\n-3,9\n-3,1\n-2,3\nState debt cost ...............\n2,9\n2,6\n2,2\n2,4\n2,2\n2,2\n2,3\nTotal net loan debt ..........\n26,4\n23,4\n19,7\n22,6\n25,6\n27,1\n27,4\nPSBR*.............................\n-0,3\n-0,6\n1,2\n3,9\n7,5\n6,5\n5,3\n*\nPSBR: Public-sector borrowing requirement\nSource: National Treasury Budget Review 2009\nThe weaker economic environment has resulted in a revised main budget revenue total\nof R611,1 billion for fiscal 2008/09, representing R14,3 billion less than originally\nbudgeted. Expenditure has been revised upwards by R22,8 billion to R633,9 billion for\nthe same period. Debt-service costs as a percentage of GDP are projected to decline\nslightly over the medium term, from 2,4 per cent in 2008/09 to 2,2 per cent in 2009/10\nand 2010/11, and 2,3 per cent in 2011/12. \nMonetary Policy Review May 2009\nSouth African Reserve Bank\nThe public-sector borrowing requirement (PSBR), which represents the funds needed by\nthe public sector to cover any deficit in financing its own activities, has moved from \n-0,6 per cent of GDP in 2007/08 to a revised estimate of 3,9 per cent of GDP in\n2008/09. The PSBR, bolstered by the public corporations’ and governments’ capital\nexpenditure, is projected at 7,5 per cent of GDP in 2009/10, before contracting slightly\nto reach 5,3 per cent of GDP in 2011/12.\nLabour markets\nFigure 8 shows that wage inflation, measured by the year-on-year rate of increase in the\nnominal remuneration per worker in the non-agricultural sectors, accelerated from \n7,1 per cent in the third quarter of 2007 to 13,7 per cent in the third quarter of 2008,\nbefore slowing to 12,4 per cent in the fourth quarter. The combination of these changes\nin wage inflation and generally declining labour productivity growth resulted in the growth\nin unit labour cost rising from 4,6 per cent to 12,8 per cent during the same period.\nAccording to the outcome of the Andrew Levy Wage Settlement Survey, the average\nlevel of wage settlements amounted to 10,2 per cent in the first quarter of 2009, after\nrecording 9,8 per cent in 2008 and 7,3 per cent in 2007. The settlements in the first\nquarter of 2009 ranged from 7 per cent in the metal/manufacture sector to 12,3 per cent\nin the food/agriculture sector. \nMonetary conditions\nMonetary data, and particularly growth in credit extension, continued to reflect tighter\nconditions in the period under review, affected by higher interest rates, decelerating\neconomic activity and tighter lending criteria applied by banks (Figure 9). Year-on-year\ngrowth in banks’ loans and advances to the private sector decelerated from 23,8 per\ncent in January 2008 to 14,0 per cent in December and 7,3 per cent in March 2009.\nSimilarly, growth in broad money supply (M3) decelerated from 24,5 per cent in January\n2008 to 14,8 per cent in December and further to 10,6 per cent in March 2009. \nSouth African Reserve Bank\n19\nMonetary Policy Review May 2009\nPercentage change over four quarters\n2003\n2004\n2006\n2007\n2008\n2005\nFigure 8 \nRemuneration per worker, labour productivity and \n \nunit labour cost in the formal non-agricultural sector\n \nNominal unit labour cost\n \nRemuneration per worker\n \nLabour productivity\n-2\n0\n2\n4\n6\n8\n10\n12\n14\n16\n20\nMortgage advances dominate the bank loans and advances aggregate, with more\nthan 50 per cent of outstanding loans falling in this category (Figure 10). Of the\nremaining categories, approximately one-quarter consists of general loans, while\noverdrafts (7 per cent), credit card advances (3 per cent) and instalment sales and\nleasing finance (13 per cent) make up the remainder. Growth in all the loan categories\ndecelerated during 2008 and the early months of 2009. Year-on-year growth in\nmortgage advances decelerated from, on average, 27 per cent in 2007 to 19 per cent\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nPercentage change over twelve months\n2006\n2004\n2003\n2005\n2007\n2008\n2009\nFigure 9 \nGrowth in money supply and credit extension\n5\n10\n15\n20\n25\n30\nM3\nLoans and advances to the\ndomestic private sector\nPercentage change over twelve months\nOutstanding balance in R billions\nFigure 10 Banks' loans and advances by type\n-20\n-10\n0\n10\n20\n30\n40\n50\n0\n500\n1 000\n1 500\n2 000\n \nMortgages\n \nInstalment sale and leasing finance\n \nCredit card advances\n \nGeneral advances\n \nOverdrafts\n2003\n2004\n2005\n2006\n2007\n2008\n2009\nin 2008 and 12 per cent in the first three months of 2009. Growth in other loans and\nadvances, which include general loans, overdrafts and credit card advances,\ndecelerated from 30 per cent in 2007 to 24 per cent in 2008 and 9 per cent in the first\nthree months of 2009.\nMonetary policy \nSince the publication of the previous Monetary Policy Review there have been four\nmeetings of the Monetary Policy Committee (MPC). The severe downturn in the global\neconomy in the final months of 2008, and the speed with which it spread to virtually all\nparts of the world, created new challenges for monetary policy-makers generally. It was\ndecided that, in the light of these developments, it would be appropriate for the time being\nto meet more frequently in order to assess these rapidly changing circumstances in a\ntimeous manner and to be able to act appropriately when necessary. Accordingly, the\nMPC is scheduled to meet every month, apart from July, for the remainder of 2009.\nFor much of 2008, the MPC had been concerned about the more generalised nature of\nthe inflation dynamics that were brought about primarily by the succession of supply-\nside shocks such as food and oil price increases. As outlined in this Review, the global\neconomic landscape changed dramatically in the later part of the year, and these global\ndevelopments have had a significant impact on the South African economy and on\nmonetary policy in particular. The economy has experienced a marked slowdown and a\nconsequent widening of the output gap, while pressures on inflation have subsided as a\nresult of declining demand and lower commodity prices. These developments allowed\nfor a change in the monetary policy stance. As Figure 11 shows, the repurchase rate\nwas reduced by 50 basis points in December and by a further 100 basis points at each\nof the subsequent three meetings.\nThese interest rate reductions were effected despite the fact that inflation was still\nabove the upper end of the inflation target range. As explained in previous Reviews,\ngiven the lag in the reaction of inflation to interest rate changes, the focus of\nmonetary policy is on the medium- to longer-term expected trajectory of inflation,\nSouth African Reserve Bank\n21\nMonetary Policy Review May 2009\nPer cent\n2004\n2003\n2005\n2006\n2007\n2008\n2009\nPrime overdraft rate\nRepurchase rate\nThree-month NCD rate\nFigure 11 The repurchase rate and other short-term interest rates\n6\n8\n10\n12\n14\n16\n18\n22\nrather than on the current outcomes. It is also the case that an inflation-targeting\nframework allows for flexibility in the time horizon for achieving the inflation target.\nThe MPC also has to assess the risks to the inflation outlook, as the forecast is not\nfollowed mechanistically. During the past months, the view of the committee was that\nthe balance of risks to the outlook, which for most of 2008 had been viewed as being\non the upside as a result of oil and food price developments, had changed\nsignificantly. The widening output gap was increasingly seen as a downside risk to\nthe inflation outlook. While the exchange rate was initially seen as a source of upside\nrisk, the recent appreciation of the rand reduced this risk somewhat.\nAt the December MPC meeting the inflation forecast generated by the Bank’s forecasting\nmodel showed an improvement in the inflation outlook, with inflation expected to return\nto within the target range by the third quarter of 2009. Although inflation was forecast to\nincrease again in the first quarter of 2010 as a consequence of base effects, it was\nexpected to remain within the target range for the remainder of the forecast period. The\nforecast presented to the February 2009 meeting was similar, but both these forecasts\nwere subject to heightened uncertainty as a result of the reweighting and rebasing of the\nCPI that was due to be implemented by Stats SA in January 2009. \nThe new CPI measure for January was available at the March 2009 MPC meeting and it\nrevealed that the previous forecasts had slightly overestimated the degree to which the\ninflation rate would decline. This then resulted in a near-term deterioration in the inflation\noutlook, but a more favourable trend was forecast for the medium term, with inflation\nexpected to average 5,3 per cent in the final quarter of 2010. At the April meeting, the\nforecast again deteriorated slightly, with inflation now expected to average 5,4 per cent at\nthe end of the forecast period. The most recent forecast is discussed in more detail later\non in this Review. The MPC, however, emphasised the fact that the higher levels of\nuncertainty and the pace of change of global developments made these forecasts subject\nto higher risk than was usually the case. \nInflation expectations, which had been deteriorating in the course of the year, appeared\nto have improved somewhat in the longer term in the fourth quarter of 2008. According\nto the inflation expectations survey conducted on behalf of the Bank by the Bureau for\nEconomic Research (BER) at Stellenbosch University, inflation expectations for 2009 as\nmeasured in the fourth quarter of 2008 reflected a slight deterioration when compared\nwith those measured in the previous quarter. However, expectations for 2010 improved,\nwith average expected inflation of 7,2 per cent, compared with 7,4 per cent in the\nprevious survey. In the survey conducted in the first quarter of 2009, average inflation\nexpectations for 2009 showed an improvement, but there was a marked deterioration for\n2010 with CPI inflation now expected to average 8 per cent. However, the survey was\ncharacterised by divergent views between the different groups of respondents.\nDuring the review period, international developments had an impact on the domestic\ninflation outlook. At each MPC meeting, the international economy was characterised by\nprogressively worse outcomes as the advanced economies experienced negative\ngrowth, and emerging-market economies also showed signs of slowing. The forecasts\nfor global growth were also revised downwards over time. The falling global demand and\ndeclining commodity prices meant that world inflation pressures eased, despite\nsignificant monetary and fiscal policy stimuli in many countries.\nFood and petrol prices continued to warrant special attention. At the time of the\nDecember meeting North Sea Brent crude oil was trading at around US$40 per barrel,\ncompared with a peak of almost US$150 per barrel in August 2008. A similar level was\nrecorded at the time of the February meeting, but by the April meeting international\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nprices had risen to above the US$50 per barrel level. The impact on the domestic petrol\nprice was also affected by exchange rate developments and domestic tax increases.\nWhereas domestic petrol prices declined by around R4,40 per litre between September\n2008 and February 2009, successive increases in the following months resulted in a\ncumulative increase in petrol prices of R1,37 per litre. The committee nevertheless noted\nthat under conditions of low global growth the risk posed to domestic inflation by\ninternational oil prices had subsided to a large extent.\nThe committee also concluded that the risk posed by food prices had moderated\nsomewhat. The price of a number of agricultural commodities had declined in global and\ndomestic markets, and this was reflected in price declines in some of the agricultural food\ncategories in the PPI. However, up to the April 2009 meeting food price increases at the\nconsumer price level, although declining, had remained stubbornly high and the MPC noted\nthat the expected decline in inflation might be delayed by the continued high rates of\nincrease in food prices, despite marked declines in producer price food inflation.\nThe MPC paid particular attention to the output gap that had been widening over the\npast quarters. The output gap, measured as the difference between actual and potential\noutput growth, is an important determinant of inflation. At the time of the December\nmeeting, the committee noted that the 0,2 per cent GDP growth rate recorded in the\nthird quarter of 2008 represented a significant widening of the output gap. Other high-\nfrequency data, observed at the December 2008 and February 2009 meetings,\nindicated that the fourth-quarter growth outcome was likely to be lower than that\nrecorded in the third quarter. By the March meeting the fourth-quarter contraction of \n1,8 per cent was confirmed, and the outlook for the first quarter of 2009 remained bleak\nin the light of contractions in mining, manufacturing and retail sales as observed in the\nmonthly data releases. The RMB/BER Business Confidence Index and the Investec/BER\nPurchasing Managers Index (PMI) also indicated that growth, particularly in the manu-\nfacturing sector, was likely to remain under pressure in the coming months.\nExpenditure in the economy also remained subdued over the period under review, in part\ndue to the tighter stance of monetary policy that had been adopted until the middle of\n2008, but also due to the impact of other factors related to the global financial crisis. At\nall the meetings of the MPC during this period, the sharp decline in real household\nconsumption expenditure was noted, particularly with respect to durable goods\nconsumption. In the fourth quarter of 2008, household consumption expenditure\ndeclined at an annualised rate of 2,7 per cent, mainly as a result of a 20 per cent\ncontraction in consumption of durable goods.\nThe weak trends in global and domestic demand were also seen to have an impact on\nthe current account of the balance of payments. The lower international price of oil,\nalong with declining demand for goods and services generally, allowed for a decline in\nimports in the final quarter of 2008. This trend, coupled with lower net income and\ndividend payments to non-residents, more than offset the decline in the volume and\nvalue of exports during that quarter. Consequently, the deficit on the current account of\nthe balance of payments narrowed to 5,8 per cent of GDP in the final quarter of 2008,\ncompared with a deficit of 7,8 per cent in the previous quarter.\nTrends in credit extension also exhibited a steady deceleration over the period. Credit\nextension to households continued to moderate in line with the lower levels of\nconsumption expenditure, while credit extension to firms also decelerated. The\ncommittee also noted that the downward trend in the growth of credit extension was not\nonly a result of lower demand, but also of the more stringent lending criteria applied by\nbanks. Asset prices also remained under pressure: by April the various house price\nSouth African Reserve Bank\n23\nMonetary Policy Review May 2009\n24\nindices showed that house prices were falling and equity prices on the JSE had declined\nsubstantially in the wake of the global credit crisis since September 2008. These factors\nwere seen by the committee as factors constraining a near-term increase in expenditure.\nEvidence that households were rebuilding their impaired balance sheets was also seen\nin the declines in the ratio of household debt to disposable income that were observed\nin the final two quarters of 2008. \nWhile the above factors generally contributed to the moderation in inflation and in some\ninstances were seen to impart a downside risk to the inflation outlook, a number of upside\nrisks were also observed. In particular, the behaviour of the rand exchange rate in the\nwake of the financial crisis was a cause for concern for the committee, because of the\npotential impact of the exchange rate on inflation. At the December 2008 and February\n2009 meetings, the rand was seen to pose the main upside risk to the inflation outlook.\nThe rand had been trading at levels of around R8,00 to the US dollar in early September\n2008. However, as risk aversion increased following the collapse of Lehman Brothers in\nmid-September, the rand depreciated against the US dollar along with most other\nemerging-market currencies. At the time of the December meeting, the rand was trading\nat around R10,20 to the US dollar, having reached a level of R11,80 at one stage. The\nrand remained volatile during the subsequent months, but by the March 2009 meeting it\nhad appreciated to levels of around R9,45 to the US dollar and to around R8,50 in April.\nWhile the risk to the inflation outlook emanating from the exchange rate had subsided\nsomewhat, the committee recognised that the volatile and uncertain international\nenvironment meant that the outlook for the rand remained uncertain.\nAt the March and April meetings, the main upside risks to the inflation outlook were\nidentified as emanating mainly from cost-push pressures, particularly from administered\nprices. These included possibly higher-than-expected electricity tariff increases.\nThe improved outlook for inflation, in part a result of the declining economic growth, and\nthe change in the balance of risks to the outlook have allowed for a 350 basis point\nreduction in the repurchase rate by the MPC since December 2008. Unlike in a number\nof other countries, monetary policy in South Africa has not had to focus directly on\nfinancial stability issues as the domestic banking system has remained sound. Monetary\npolicy, which continues to be conducted within a flexible inflation-targeting framework,\nhas remained focused on bringing inflation down to within the inflation target range over\na reasonable time period, while being sensitive to growth variability issues. \nThe outlook for inflation\nThe outlook and uncertainties relating to some of the international and domestic factors\nthat are considered by the MPC in setting monetary policy, including indicators of\ninflation expectations and the fan chart representation of the Bank’s forecast, are\ndiscussed below.\nInternational outlook\nThe global economy has continued to weaken significantly in recent months and the\ndecline in global demand has resulted in a marked contraction in international trade.\nThere is growing uncertainty about the depth and duration of the economic slowdown.\nThe IMF, which in January 2009 was forecasting global growth to average 0,5 per cent\nin 2009, has downgraded its outlook for the global economy for the third time in five\nmonths and now expects a contraction of 1,3 per cent in 2009 (Table 10). This would\nbe the first decline in the nearly 40-year history of the series.\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nTable 10\nIMF projections of world growth and inflation for 2009 and 2010*\nPer cent\nReal GDP\nInflation rates**\n2009\n2010\n2009\n2010\nWorld ......................................................................\n(3,0)\n-1,3\n1,9\n(4,6)\n2,5\n2,4\nAdvanced economies ............................................\n(0,5)\n-3,8\n0,0\n(2,0)\n-0,2\n0,3\nUnited States ....................................................\n(0,1)\n-2,8\n-0,1\n(1,8)\n-0,9\n-0,1\nJapan ................................................................\n(0,5)\n-6,2\n0,5\n(0,9)\n-1,0\n-0,6\nEuro area ..........................................................\n(0,2)\n-4,2\n-0,4\n(1,9)\n0,4\n0,6\nUnited Kingdom ................................................\n(-0,1)\n-4,1\n-0,4\n(2,9)\n1,5\n0,8\nOther advanced economies ..............................\n(2,5)\n-4,1\n0,6\n(3,3)\n0,6\n1,5\nOther emerging-market and developing countries....\n(6,1)\n1,6\n4,0\n(7,8)\n5,7\n4,7\nAfrica ................................................................\n(6,0)\n2,0\n3,9\n(8,3)\n9,0\n6,3\nCentral and eastern Europe ..............................\n(3,4)\n-3,7\n0,8\n(5,8)\n4,6\n4,2\nCommonwealth of Independent States..............\n(5,7)\n-5,1\n1,2\n(12,6) 12,6\n9,5\nDeveloping Asia ................................................\n(7,7)\n4,8\n6,1\n(6,2)\n2,8\n2,4\nChina ..............................................................\n(9,3)\n6,5\n7,5\n(4,3)\n0,1\n0,7\nIndia ................................................................\n(6,9)\n4,5\n5,6\n(6,7)\n6,3\n4,0\nMiddle East........................................................\n(5,9)\n2,5\n3,5\n(14,4) 11,0\n8,5\nWestern hemisphere..........................................\n(3,2)\n-1,5\n1,6\n(7,3)\n6,6\n6,2\n*\nIMF projections for 2009 as at October 2008 in parenthesis\n**\nZimbabwe excluded\nSource: IMF World Economic Outlook, April 2009\nThe IMF projects a severe 3,8 per cent contraction in the advanced economies and\nrelatively meagre growth of just 1,6 per cent in the emerging economies. Moreover, it\nprojects an anaemic recovery in 2010 with global growth of only 1,9 per cent. The IMF’s\nApril 2009 World Economic Outlook economic growth projections for all countries are\nlower than their September 2008 counterparts due to the sudden and steep declines in\nglobal production and world trade. Notwithstanding these significant downward\nrevisions to the IMF forecast, risks to the growth outlook are heavily skewed to the\ndownside. Consumer price inflation also continues to trend downwards in most\ncountries and world inflation is projected to be restrained by declining demand and lower\ncommodity prices, which are expected to remain subdued under conditions of negative\nor low growth.\nThe IMF has warned that the US recession may last into 2010 unless policy-makers can\nstabilise the financial system. For the US economy, the IMF projects contractions of 2,8 per\ncent in 2009 and 0,1 per cent in 2010. The contraction in economic activity is expected to\npush the output gap to levels reached in the early 1980s. Growth in the US is only\nexpected to turn positive in the third quarter of 2010, based on the assumptions that\nfinancial market conditions improve relatively rapidly in the second half of 2009 and that\nsustained policy support bolsters domestic demand.\nThe economy of the 16-nation euro region is expected to contract by 4,2 per cent in\n2009, worse than the 2 per cent slump that the IMF forecast in its January 2009 update.\nRecord declines in exports and production in the first half of this year are expected to\nshrink the economy significantly and a further marginal contraction of 0,4 per cent is\nprojected for the region in 2010. The projected decline in economic activity in 2009\nreflects the significant contraction in external demand, the corrections in housing\nmarkets in certain member states and increasing financing constraints.\nSouth African Reserve Bank\n25\nMonetary Policy Review May 2009\n26\nJapan is expected to experience the sharpest contraction among the G-7 economies in\n2009, with real GDP projected to fall by no less than 6,2 per cent as net exports,\nbusiness investment and private consumption weaken simultaneously. The financial\nsector in Japan has also begun to weigh on growth prospects.\nIn Africa regional growth is expected to slow sharply to 2,0 per cent this year, less than\nhalf the rate of the past five years, but the IMF warns that the projection may be too\noptimistic. Even though the crisis has been slow in reaching Africa’s shores, the IMF\nexpects the combined impact of economic and financial shocks to be severe. Financial\nflows have become scarce, trade financing even scarcer and more expensive, and\nforeign investment in Africa’s stock and bond markets has fallen. As growth around the\nworld declines, demand for Africa’s products is expected to fall significantly further and\ncommodity export prices to remain lacklustre. Tourism revenue is also expected to\ndecline further as consumers around the world tighten their belts.\nAmong major emerging economies, China appears to be best positioned to weather the\nglobal slowdown. Although export growth has weakened substantially, China has a large\nbudget surplus that gives the government considerable flexibility to boost consumer and\nbusiness spending. China’s financial system has a limited connection to foreign banks and\nthe country’s foreign-exchange reserves are approaching US$2 trillion. India’s banking\nsystem is also relatively insulated from international financial turmoil and the country’s\neconomic growth has generally relied more on domestic demand than on exports. \nThe IMF warns that a further deterioration in the financial markets in advanced\neconomies could lead to a deeper and longer downturn, and that the deflation risk in\nadvanced economies could reinforce such an outcome. Emerging economies may also\nfind it increasingly difficult to secure external financing, and the spectre of trade and\nfinancial protectionism is also a concern for the overall global economic outlook.\nHowever, the global growth outlook could improve significantly once the monetary and\nfiscal policy measures announced in various countries begin to bear fruit, especially if\npolicy measures are strengthened credibly.\nThe composite leading indicator compiled by the Organisation for Economic \nCo-operation and Development (OECD) projects a continuing slowdown in economic\nactivity in the major OECD countries (Figure 12). The OECD composite leading\nindicator continued to fall, recording a decline of 9,7 per cent in February 2009\ncompared with the same month of the previous year. The percentage change over\ntwelve months in the OECD industrial production index declined further to a negative\n15,4 per cent in January 2008, compared with a decline of 12,0 per cent recorded\non the same basis for the previous month. Although the JPMorgan global\nmanufacturing PMI increased for a third straight month to 37,2 in March 2009 from\n33,7 in December 2008, it is still at a level that is indicative of continued broad\ncontraction in global manufacturing.\nWhereas inflation is expected to remain subdued due to lower commodity prices and\nweakening economic growth, deflation risks have arisen in some of the advanced\ncountries. Headline inflation in the advanced economies fell below 1 per cent in\nFebruary 2009. Inflation has also moderated significantly across the emerging\neconomies, although in some cases falling exchange rates have dampened the\ndownward momentum. Sustained deleveraging and tight credit availability are likely to\ncontinue to weigh heavily on the global economy in 2009. The world economy is\ntherefore expected to stagnate for most of 2009, with a slow recovery commencing\nonly during 2010.\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nThe magnitude of the global slowdown in 2009 will, to a large degree, depend on the\nseverity of the financial crisis and the effectiveness of government policy initiatives\naround the world. Considerable time could pass before financial institutions’ losses are\nfully recognised, leverage is reduced and market confidence recovers. A decisive\ncommitment to multilateral concerted and co-ordinated efforts is therefore deemed\ncrucial by the IMF to achieving a nearer-term global recovery. The colossal global\nstimulus package has continued to expand in recent months and President Obama’s US\nprogramme began taking effect in April 2009. The US Congressional Budget Office\nestimates that the programme will add up to 4 percentage points to US real GDP growth\nrates in the second and third quarters of 2009. Stimulus programmes are also expected\nto bolster a number of other major economies across the world. However, overall, the\nglobal economic situation for 2009 remains extremely uncertain and significant\ndownside risks remain a palpable threat to the global growth outlook.\nOutlook for domestic demand and supply\nThere is a general expectation that domestic growth will be quite disappointing in the\nfirst two to three quarters of 2009 due to weaker domestic and international economic\nconditions, before improving moderately in 2010 and 2011. Although annual growth in\nfinal consumption expenditure by government remained relatively unchanged, growth in\ngross final expenditure by households and in gross fixed capital formation decelerated\nbetween 2007 and 2008. In particular, growth in households’ real disposable income,\nwhich fell from a seasonally adjusted and annualised rate of -0,8 per cent in the third\nquarter of 2008 to -1,9 per cent in the fourth quarter, is expected to remain subdued,\nwith recovery only expected later in 2009. The main source of growth in 2009/10 from\nthe demand side is likely to be the increased public-sector investment in infrastructure\nthat will be supported by a deficit of 3,8 per cent deficit of GDP, as announced in the\nNational Treasury’s 2009 Budget Review.\nAccording to the latest Reuters consensus forecasts surveyed in March 2009, the South\nAfrican economy is expected to contract by 0,3 per cent in 2009, with the second\nSouth African Reserve Bank\n27\nMonetary Policy Review May 2009\nPercentage change over twelve months \nIndex points\n30\n35\n40\n45\n50\n55\n60\n \nOECD composite leading indicator\n \nOECD industrial production index\n \nJPMorgan global manufacturing PMI (right-hand scale) \nSources: OECD and JPMorgan\nFigure 12 Selected indicators of global economic activity\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n1999\n2001\n2003\n2005\n2007\n2009\n28\nquarter of the year expected to show an annualised contraction of 0,8 per cent, followed\nby positive growth of 0,7 per cent in the third quarter and 1,8 per cent in the fourth\nquarter. Growth in 2010 and 2011 is expected to recover to 2,7 per cent and 3,9 per\ncent respectively. \nAs far as the quarterly analysis of manufacturing activity is concerned, the first-quarter\n2009 BER survey revealed that the net majority of respondents rating current business\nconditions worse than those of a year ago increased from 50 per cent to 56 per cent.\nOn the supply side, production volumes have declined sharply due to declining sales\nvolumes and high levels of finished goods inventories. In addition, the net majority of\nrespondents expecting a deterioration in business conditions in the coming twelve\nmonths increased from 28 per cent to 34 per cent. On the demand side, net majorities\nof 41 per cent reported declines in domestic order volumes and 25 per cent reported\ndeclines in export order volumes. \nSurveys of consumer and business confidence indicate that confidence levels in the\neconomy remain at low levels. Consumer confidence, measured by the First National\nBank/Bureau for Economic Research (FNB/BER) Consumer Confidence Index (CCI) as\nthe percentage of respondents expecting an improvement in conditions less the\npercentage expecting deterioration, rose from -4 in the fourth quarter of 2008 to \n+1 during the first quarter of 2009. Improvement in the consumer confidence was\nsupported by, among other factors, significant declines in petrol and diesel prices\nbetween November 2008 and February 2009, a 150 basis point cut in official interest\nrates up to the time the survey was conducted, the easing of CPI inflation, and a positive\nresponse to the national budget announced in the 2009 Budget Review. \nThe level of business confidence, measured in terms of the Rand Merchant\nBank/Bureau for Economic Research (RMB/BER) Business Confidence Index, declined\nto its lowest level in a decade, registering 27 index points in the first quarter of 2009,\nwhich was preceded by 33 points in the fourth quarter of 2008 (Figure 13). The index\nmeasures business confidence on a scale of 0 to 100, with 0 indicating an extreme lack\nof confidence, 50 neutrality and 100 extreme confidence. The decline in business\nconfidence occurred in the midst of the deteriorating global landscape. Manufacturers’\nconfidence declined from 31 to 16 index points on the back of declining domestic and\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nPercentage\n1980\n82\n84\n86\n88\n90\n92\n94\n96\n98 2000 02\n04\n06\n08\n0\n25\n50\n75\n100\nSources: Rand Merchant Bank and Bureau for Economic Research\nFigure 13 RMB/BER Business Confidence Index\nNet positive\nNet negative\nexport orders, and of slow-moving inventories. Wholesaler confidence registered 31 index\npoints, following 44 index points registered in the fourth quarter of 2008. Building\ncontractor confidence declined from 42 to 33 index points due to a sharp contraction in\nbuilding activity. Retailers’ confidence rose marginally from 49 to 52 index points on the\nback of strong sales of non-durable goods such as food and beverages. However, the\nhigh confidence among retailers was limited to dealers in non-durable goods.\nThe Investec/BER PMI, a barometer of manufacturing activity, registered a historical\nlow of 35,6 index points in April 2009, marginally down from 36,0 index points in\nMarch. On a seasonally adjusted basis, the inventories index fell to 28,7 points in April,\nand the purchasing commitments index declined to a record low of 29,9 points. The\nbusiness activity index showed a slight improvement in April to 32,8 from 31,2 points\nin March, and new sales orders increased to 33,7 from 32,6 points. Business\nexpectations regarding economic conditions six months ahead adjusted upwards\nfrom 46,6 index points in March 2009 to 48,3 points in April. Since the index is still\nbelow 50, this indicates that the manufacturing sector continues to expect\nunfavourable conditions in the short term due to the weak domestic and global\neconomy, but that some improvement is expected in the second half of the year.\nThe FNB Building Confidence Index, which measures the business confidence of the\nmajor role players and suppliers involved in the building industry, dropped from an index\nvalue of 40 in the last quarter of 2008 to 28 in the first quarter of 2009. All sub-\ncomponents of the index showed significant generalised deterioration in the first quarter\nof 2009. The business confidence of residential contractors slipped from an index value\nof 34 in the fourth quarter of 2008 to an index value of 26 in first quarter of 2009. The\nbusiness confidence of non-residential building contractors dropped from an index value\nof 59 in the fourth quarter of 2008 to 51 in the first quarter of 2009.\nIndicators of inflation expectations\nEstimates of inflation expectations for the forecast period from 2009 to 2011 obtained\nfrom the BER survey conducted during the first quarter of 2009 show that average\nannual CPI inflation expectations are expected to decline over the forecast years,\nalthough they are expected to remain above the upper limit of 6 per cent of the CPI\ninflation target. As depicted in Table 11, average CPI inflation expectations for 2009 are\n8,3 per cent, followed by 8,0 per cent for 2010, and 7,8 per cent for 2011. Among the\ngroups surveyed, only the financial analysts expect CPI inflation to fall within the target\nrange during 2010 and 2011. By contrast, business and labour expect CPI inflation to\nexceed the upper end of the target range by a considerable margin. \nTable 11\nBER survey of CPI inflation expectations: First quarter 2009\nPer cent\n2009\n2010\n2011\n1. Financial analysts ...................................................\n6,1\n5,4\n5,5\n2. Business ................................................................\n9,2\n8,6\n8,3\n3. Trade unions ..........................................................\n9,7\n10,1\n9,6\nAverage 1–3 ................................................................\n8,3\n8,0\n7,8\nSource: Bureau for Economic Research, Stellenbosch University\nThe March 2009 Reuter’s survey of long-term forecasts for the South African economy,\nwhich surveys a group of financial market analysts, reports that targeted CPI inflation is\nSouth African Reserve Bank\n29\nMonetary Policy Review May 2009\n30\nexpected to fall within the official target range of 3 to 6 per cent from the third quarter\nof 2009 and is expected to stay within the target range until the end of the forecast\nperiod in 2011 (Table 12). It is expected that CPI inflation will average 6,7 per cent in\n2009, decline to 5,6 per cent in 2010, and reach 5,3 per cent in 2011. \nTable 12\nReuters survey of CPI forecasts: March 2009*\nPer cent\n2009\n2010\n2011\n1. Mean....................................................................\n(6,4)\n6,7\n(5,7)\n5,6\n(5,5)\n5,3\n2. Median ................................................................\n(6,5)\n6,7\n(5,7)\n5,7\n(5,5)\n5,5 \n3. Highest ................................................................\n(7,0)\n7,4\n(6,5)\n6,6\n(6,7)\n6,8\n4. Lowest ................................................................\n(5,5)\n6,0\n(4,7)\n4,0\n(4,3)\n4,1\nNumber of forecasters..............................................\n(21)\n20\n(21)\n20\n(15)\n14\n*\nFebruary 2009 survey results in parentheses\nSource: Reuters\nExpectations derived from break-even inflation rates, measured as the difference\nbetween the yields on South African CPI inflation-linked bonds and conventional nominal\nbonds of similar maturity, suggest that inflation expectations trended downward from the\nbeginning of July 2008 until the end of the year (Figure 14). In 2009 break-even inflation\nrates obtained from the R189 inflation-linked bond maturing in 2013 show that short-\nterm market inflation expectations initially fell below longer-term break-even rates\nassociated with the R197 bond maturing in 2023. In the second week of March 2009\nthe R189 spread was around 4,2 per cent, down from a high of 9,0 per cent at the\nbeginning of July 2008. During the same period the R197 break-even rate was 5,0 per\ncent, down from 8,3 per cent in the first week of July 2008. \nMore recently, break-even inflation rates have again moved higher. This is partly the result\nof the rally in the inflation-linked bond market, particularly the shorter-term inflation-linked\nbonds, which resulted from the windfall effect of the revised base index values (Figure 15).\nBox 3 provides more detail regarding this. On 30 April 2009 break-even inflation \nMonetary Policy Review May 2009\nSouth African Reserve Bank\nPercentage points\n2006\n2007\nFigure 14 Break-even inflation rates\n3\n4\n5\n6\n7\n8\n9\n10\n \nSpread between R189 and R206 bonds (4-year maturity)\n \nSpread between R197 and R186 bonds (14-year maturity)\n2008\n2009\nat the four-year maturity had risen to 5,8 per cent, a level similar to that at the fourteen-\nyear maturity.\nSouth African Reserve Bank\n31\nMonetary Policy Review May 2009\nBox 3 The South African inflation-linked bond market and break-even\ninflation rates\nInflation-linked bonds are bonds that have their redemption value and coupon payments linked\nto a price index. They provide investors with an inflation hedge, while reducing uncertainty about\nthe real cost of borrowing. In South Africa, inflation-linked bonds were first issued by the South\nAfrican government during March 2000, when the R189 bond with a coupon rate of 6,250 per\ncent maturing in March 2013 was launched. In the subsequent years government issued\ninflation-linked bonds of various maturities with the intention of developing a yield curve of\ninflation-linked bonds of up to 30 years. There are currently four inflation-linked government\nbonds in issue, varying from the R189 to the R202, with a coupon rate of 3,450 per cent and\nmaturing in December 2033. As at the end of 2008, the total value outstanding of government\ninflation-linked bonds comprised approximately 15 per cent of the overall government bond\nmarket. In recent years inflation-linked bonds have also been issued by various public and\nprivate-sector institutions (mostly banks).\nPrices of inflation-linked financial securities are often used to infer market-based measures of\nexpectations of future inflation and attitudes to inflation risk. The difference in the yield between\nconventional and index-linked bonds of similar maturity, referred to as the ‘break-even inflation\nrate’, provides information about market participants’ views regarding average expected inflation\nfor the reference price index over the period to maturity of the bonds. This measure is a useful\nsupplement to surveys and econometric forecasts of future inflation. However, as is regularly\nnoted in this Review, movements in break-even inflation rates may be affected by factors such\nas inflation risk premiums, the liquidity of the bonds, the demand and supply balance, and other\nmarket developments. Since these factors may influence their reliability, break-even rates should\nbe used cautiously in the assessment of capital market players’ inflation expectations. This box\nprovides information about the South African inflation-linked bonds market that facilitates the\ninterpretation of break-even inflation rates. \nLiquidity\nSouth African inflation-linked bonds are generally not very liquid instruments, as they are traditionally\nbought as long-term investments by investors. As a ratio of the nominal value of inflation-linked\nPer cent\n2006\n2007\n2008\n2009\nR206 – conventional government bond yield\nBreak-even inflation R206/R189 \nR189 – inflation-linked government bond yield\nFigure 15 Nominal, inflation-linked and break-even yields\n0\n2\n4\n6\n8\n10\n12\n32\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nbonds in issue, the turnover in the secondary market for inflation-linked bonds is far lower than\nthat of conventional bonds. In 2008 the annualised liquidity ratio of all listed bonds on the Bond\nExchange of South Africa (BESA) averaged around 24, that is, in a year bonds generally traded\n24 times their amount in issue. By comparison, inflation-linked bonds traded at an average ratio\nof only twice their amount in issue. In the first three months of 2009 the annualised liquidity ratio\nof all bonds came to 19, while that of inflation-linked bonds came to 1.\nOf the different inflation-linked bonds in issue, the R210, issued in 2007 and expiring in 2028,\nhas been the most liquid inflation-linked bond since 2007, trading at around three times per year\nits nominal value in issue. Prior to that, the R198 was the most liquid of the inflation-linked\nRatio\nFigure B3.2 \nLiquidity of inflation-linked government bonds \n \nin issue\n \nR198: 2008-03-31\n \nR197: 2023-12-07\n \nR202: 2033-12-07\n \n \n* January to March, annualised\nSource: BESA and own calculations\n2009*\n2008\n2007\n2006\n2005\n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\nR189: 2013-03-31\nR210: 2028-03-31\nRatio\n2005\n2006\n2007\n2008\n2009\nAll bonds\nInflation-linked government bonds\nFigure B3.1 \nLiquidity ratios (annualised)\n0\n5\n10\n15\n20\n25\n30\nSource: BESA and own calculations\nSouth African Reserve Bank\n33\nMonetary Policy Review May 2009\nbonds in issue, before it expired in 2008. In recent years the liquidity of the longer-term \nR202 bond, first issued in 2003, has dwindled.\nFigure B3.3 indicates the more active participants in secondary market trading of inflation-\nlinked bonds. The South African Reserve Bank (the Bank), acting as an agent on behalf of the\nNational Treasury, is generally the net supplier or seller of inflation-linked bonds. The main\nbuyers are banks and other financial institutions. The Public Investment Corporation (PIC) is\nalso usually a net buyer, while insurers and pension funds, who generally buy to hold, are less\nactive participants in the secondary market. To try and promote greater liquidity in inflation-\nlinked bonds, the National Treasury initiated a Reverse Repurchase Agreement Transactions\nFacility, operated by the Bank, from 31 August 2006. However, thus far this measure has had\na very limited impact on liquidity.\nDemand and supply\nNew issuances of inflation-linked government bonds declined from around R22 billion in 2005\nand R17 billion in 2006, to around R8 billion and less in 2007 and 2008. This coincided with a\ngeneral decline in goverment bond issuance as well as a decline in demand as the bid-to-cover\nratio4 declined from, on average, four times the amounts auctioned in 2005 to twice the amounts\nauctioned in 2007 and 2008. However, this ratio has since improved in the early part of 2009.\nHolders of inflation-linked bonds in issue\nA substantial portion of inflation-linked bonds in issue is held by the PIC, which acts as the asset\nmanager for the government pension funds. As at the end of 2008, the PIC held more than 80 per\ncent of the inflation-linked government bonds in issue. The retirement funds managed by the PIC\nwould, understandably, show a preference for holding long-term inflation-hedged instruments. \nThe impact of the new headline CPI\nThe reference inflation measure used for South African inflation-linked bonds is the headline\nCPI. This was the CPI for metropolitan areas until January 2009, when it became the CPI for\nR billions\nFigure B3.3 \n Net purchases and sales on BESA by sector\n \n2005\n \n2007\n \n \nSource: BESA and own calculations\nOther\nNon-\nfinancial\nprivate\nsector\nOther\nfinancial\ninstitutions\nUnit\ntrusts\nInsurers\nand\npension\nfunds\nPIC\nBanks\nMonetary\nauthority\nNon-\nresidents\n-15\n-10\n-5\n0\n5\n10\n2006\n2008\n4\nThe ratio of the number\nof bids received in a security\nauction compared to the\nnumber of accepted bids.\n34\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nall urban areas as a result of the changes implemented by Statistics South Africa. On \n20 March 2009 the National Treasury clarified the pricing of inflation-linked bonds based on\nthe new headline CPI for all urban areas. In essence, the holders of inflation-linked bonds may\nreceive higher returns than the official inflation rate due to base effects in the changeover to\nthe new index for 2009. This resulted in a rally in the yields in all the categories of inflation-\nlinked bonds, with sharper declines recorded in the yields on shorter-term inflation-linked\nbonds (Figure B3.4).\nIn addition to the beneficial impact of the new index values, the decline in inflation-linked bond\nyields also resulted from higher demand due to rising inflation expectations. The downward trend\nin interest rates has also improved the relative return on inflation-linked bonds compared to that\nof term bank deposits. \nThe rally in the inflation-linked bond market, which resulted from the windfall effect of the revised\nbase index values, exaggerated the upward movement in break-even rates towards the end of\nMarch 2009. At the same time the short-term break-even rate realigned itself with movements\nin longer-term rates. On 30 April 2009 break-even inflation in the four-year maturity range had\nrisen to 5,76 per cent, while that over fourteen years indicated expectations of 5,77 per cent.\nThe break-even rate for the nineteen-year maturity range stood at 5,87 per cent, while that of\nthe twenty-four-year-maturity range, at 6,07 per cent, exceeded the upper band of the inflation\ntarget range. It is possible that break-even rates over the different categories would have been\nsignificantly lower, were it not for the recent revision in the base index values that followed from\nthe implementation of the new headline CPI. \nReferences\nMageza, M. Room for Continued Real Yield Rally. Research by ABSA Capital, affiliated with\nBarclays Capital, 24 March 2009.\nNational Treasury. 2000 to 2009. Various press releases.\nScholtes, C. On Market-based Measures of Inflation Expectations. Bank of England Quarterly\nBulletin, Spring 2002.\nPer cent\n2005\n2006\n2007\n2008\n2009\nR189\nR210\nFigure B3.4 \nYields on inflation-linked government bonds\n1,5\n2,0\n2,5\n3,0\n3,5\n4,0\nR197\nR202\n20 March: National \nTreasury announces \nnew base index \nvalues\nThe South African Reserve Bank inflation forecast\nThe most recent projections of the Bank’s quarterly inflation forecasting model,\npresented to the MPC meeting on 29 and 30 April 2009 are reproduced in the form of\na fan chart in Figure 16. According to these projections, the inflation outlook for 2009\nhas deteriorated since the forecast presented to the previous MPC meeting, largely as\na result of a higher administered price inflation outlook and the higher-than-anticipated\nFebruary inflation outcome, but the forecast for 2010 remains fundamentally the same. \nThe central projection, conditional on an unchanged repurchase rate, is for the average\nquarterly CPI inflation rate to decelerate further to 6,2 per cent in the third quarter of\n2009. Thereafter inflation is expected to increase marginally to 6,4 per cent in the first\nquarter of 2009, before resuming its downward trajectory to reach 5,4 per cent by the\nend of the forecast period in the fourth quarter of 2010. \nThe heightened levels of uncertainty and the rate of change in global developments make\nrecent forecasts subject to higher risk than is usually the case. Alternative scenarios for\nmovements in the foreign-exchange rate of the rand and oil prices generate more optimistic\nor pessimistic outcomes than the central projection. Larger-than-anticipated electricity price\nincreases and their second-round effects pose an upside risk to the forecast, as do higher-\nthan-expected salary and wage settlements. Conversely, the risks arising from the\npossibilities of a deeper and more prolonged global slowdown or a more significant\nmoderation in domestic growth generally tend to exert a downward bias on the forecast.\nSouth African Reserve Bank\n35\nMonetary Policy Review May 2009\nPer cent\n2005\n2004\n2006\n2007\n2008\n2009\n2010\nFigure 16 Targeted inflation* forecast\n0\n2\n4\n6\n8\n10\n12\n14\n* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban\n areas thereafter\nNote:\nThe fan chart uses confidence bands to depict varying degrees of\ncertainty. The darkest band of the fan chart covers the most likely 10 per\ncent of probable outcomes foreseen for inflation, including the central\nprojection. Each successive band, shaded slightly lighter and added on\neither side of the central band, adds a further 10 per cent to the probability,\nuntil the whole shaded area depicts a 90 per cent confidence interval (see\nBox 4 “Understanding the fan chart” on p. 27 of the March 2001 Monetary\nPolicy Review).\n36\nAssessment and conclusion\nThe turmoil that erupted in the financial markets in the later part of 2008 has had a\nprofound impact on the growth prospects in many countries. Most economies are either\ncontracting or slowing significantly and these adverse conditions are likely to persist for\nsome time. Financial markets are likely to remain volatile as risk aversion and optimism\nabout growth prospects fluctuate in response to emerging data and conflicting signals.\nThe uncertainty created by these developments makes it a difficult environment for\nmonetary policy-making. Most countries have responded to the banking and real-sector\ncrisis with monetary and fiscal policy stimuli, in order to offset the decline in demand and\nencourage new demand. \nThe South African economy has also been impacted by these developments and in the\nfinal quarter of 2008 the economy experienced its first quarter of negative growth since\n1998. Recent indicators suggest that the economy, and the manufacturing sector in\nparticular, is likely to remain under pressure for some time. While the prospects for \nthe economy are linked to global developments, the infrastructural expenditure\nprogramme that is currently under way will go some way towards underpinning\ninvestment expenditure.\nThe global and domestic economic slowdown has had a significant moderating impact\non the inflation outlook. The widening output gap, weak domestic demand and lower\ncommodity prices have all contributed to the revised outlook, although administered\nprice developments and, to a lesser extent, uncertainties relating to the exchange rate\nprovided some countervailing pressure. Nevertheless, the improvement in the overall\ninflation outlook and the perceived downside risk to the medium-term inflation outlook\nhas allowed for a more accommodative stance, and the repurchase rate has been\nreduced by 350 basis points since December 2008. The continued stability of the\ndomestic banking system meant that the MPC could maintain its focus on its mandate\nto achieve price stability within a flexible inflation-targeting framework.\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n11 December 2008\nIssued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting\nof the Monetary Policy Committee (MPC) in Pretoria\nIntroduction\nSince the previous meeting of the MPC, domestic inflation has moderated and is\nexpected to decline further over the coming months. At the same time, the South African\neconomy has been affected by the significant global slowdown that has intensified\nrecently. The domestic economy experienced negligible growth in the third quarter, while\na number of sectors contracted. Moreover, while there has been some improvement in\nthe inflation outlook, risks posed by uncertainty with regard to the exchange rate, in\nparticular, remain.\nThe data releases over the past weeks have shown that the international economy is\nslowing down faster than previously expected and that global inflation pressures are\nsubsiding. This has resulted in the recent global interventions by policy-makers.\nDomestic monetary policy remains guided by local conditions. Monetary policy always\ntakes into consideration the possible impacts of global developments on the South\nAfrican economy, in general, and on inflation, in particular.\nRecent developments in inflation\nCPIX inflation (headline inflation excluding mortgage interest cost) measured 13,6 per\ncent in August 2008 and subsequently declined to year-on-year increases of 13,0 per\ncent and 12,4 per cent in September and October respectively. Food, petrol and\nelectricity prices were the main contributors to the inflation outcomes, despite the petrol\nprice reductions in September and October. Food prices increased at a year-on-year\nrate of 17,2 per cent in October, while petrol and electricity prices increased by 31 per\ncent over the same period. If food and petrol were excluded, CPIX inflation would have\nmeasured 8,4 per cent in October, compared with 8,5 per cent in September. \nProducer price inflation also showed signs of moderating in the past two months despite\nsignificant electricity price increases. Producer price inflation increased at a year-on-year\nrate of 19,1 per cent in August, but moderated to 14,5 per cent in October. Agricultural\nfood prices declined for the third successive month in October when the year-on-year\nrate declined to 10,4 per cent. Manufactured food prices increased by 15,6 per cent in\nOctober, compared with 20,5 per cent in August.\nThe outlook for inflation\nThe most recent central forecast of the South African Reserve Bank (the Bank) shows a\nfurther improvement in the inflation outlook since the previous MPC meeting. With an\nunchanged stance of monetary policy, inflation is expected to continue its downward\ntrajectory and to return to within the inflation target range in the third quarter of 2009.\nInflation is then expected to breach the upper end of the target range marginally in the\nfirst quarter of 2010 as a result of technical base effects associated with the decline in\npetrol prices at the end of 2008. However, the downward inflation trend is forecast to\ncontinue thereafter.\nInflation is expected to average 6,2 per cent and 5,6 per cent in 2009 and 2010\nrespectively, and to average 5,3 per cent in the final quarter of 2010. The forecasts are\nsubject to a greater degree of uncertainty than usual, given the highly volatile global\nSouth African Reserve Bank\n37\nMonetary Policy Review May 2009\n38\nenvironment, and the uncertainty related to the impact of the rebasing and reweighting\nof the CPI basket to be introduced by Statistics South Africa in January 2009.\nInflation expectations as measured by the yield differential between conventional\ngovernment bonds and inflation-linked bonds declined from just over 9 per cent in \nJuly 2008 to around 5,1 per cent in early December. The yield curve has remained\ninverted at the longer end and has declined since the previous meeting, particularly in\nthe one-to-five year maturity range.\nInflation expectations as reflected in the inflation expectations survey conducted on\nbehalf of the Bank by the Bureau for Economic Research (BER) at Stellenbosch\nUniversity deteriorated marginally for 2009, but then improved slightly for 2010. Average\ninflation expectations for 2009 measured 8,2 per cent compared with 8,1 per cent in the\nprevious quarter, while inflation expectations for 2010 measured 7,2 per cent compared\nwith 7,4 per cent in the previous survey. This was the first time since the first quarter of\n2006 that expectations for any forecast year had declined. \nUnit labour cost in the third quarter of 2008 increased by 12,5 per cent compared with\nthe same quarter last year. However, the improved inflation expectations, coupled with\nthe lower actual trend in inflation, may have a moderating impact on unit labour costs,\nwhich will most likely be influenced by the weaker state of the economy. \nThe exchange rate remains the most significant upside risk to the inflation outlook. Since\nthe previous meeting of the MPC, the rand exchange rate has depreciated against the\nUS dollar by about 11 per cent. At the time of the previous meeting, the rand was at a\nlevel of R9,15 to the United States (US) dollar. The currency subsequently depreciated to\na level of R11,80 but recovered soon after, and for the past few weeks has traded in a\nrelatively narrow range of between R10,00 and R10,50. On a trade-weighted basis, the\nrand has depreciated by around 7,6 per cent since the previous meeting. The rand, along\nwith other emerging-market currencies, is influenced by the risk aversion prevailing in the\nuncertain global environment.\nInternational crude oil prices have declined further. North Sea Brent crude oil is currently\ntrading at around US$40 per barrel, compared with US$83 per barrel at the time of the\nprevious meeting of the MPC. The lower international oil price has resulted in a\ncumulative decline in domestic petrol prices of R3,35 per litre since August, and by\nR2,06 since the previous MPC meeting. If current levels of international oil prices and\nexchange rates persist, a further sizeable decline in the domestic petrol price can be\nexpected in January.\nThe trend in international food prices has also followed that of other commodities, and\nsince June 2008 there has been a 30 per cent decline in the Economist Food Price Index.\nThese developments have contributed to the year-on-year declines in the agricultural food\ncomponent of the producer price index mentioned above, and to the significant fall in\ndomestic spot prices of maize and wheat, despite the depreciation of the rand over the\npast weeks. Food price increases at the consumer price level remain elevated, but the\nspot price developments are expected to impact on these prices in the coming months.\nSouth Africa’s economic growth rate also declined significantly in the third quarter of 2008\nwhen real gross domestic product (GDP) increased at an annualised rate of 0,2 per cent.\nThis represented a significant widening of the output gap. The slowdown was a result of\ncontractions in mining, manufacturing and the retail and wholesale trade sectors.\nManufacturing output declined further in October. The Bank’s leading indicator of\neconomic activity has been trending downward for some time, and more recently the\ncoincident indicator has followed this trend. The Investec/BER Purchasing Managers’\nIndex declined to its lowest level since its inception to reach a level of 39,5 – a level similar\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nto that prevailing in a number of other countries. The RMB/BER Business Confidence\nIndex also reflects a negative outlook.\nGross fixed capital formation held up relatively well in the third quarter when it grew at a\nrate of 10,0 per cent, mainly as a result of investment by public corporations and general\ngovernment. However, growth in private-sector gross fixed capital formation declined to\n2,6 per cent. This was particularly the case in investment in private residential buildings\nwhere the real value of residential and non-residential building plans continued to decline.\nHousehold consumption expenditure contracted in the third quarter for the first time\nsince 1998. Consumption of durable goods in particular declined by almost 10 per cent,\nwhile non-durable goods consumption also contracted. Motor vehicle sales continued\nto decline in October and November, while real retail trade sales declined further in\nOctober. The FNB/BER Consumer Confidence Index showed a further deterioration in\nthe fourth quarter of 2008. \nThe rate of growth of credit extension to the private sector continued to moderate. Year-\non-year growth in total loans and advances to the private sector declined to 17,1 per\ncent in October, while growth in mortgage advances and instalment sale credit and\nleasing financed decline to 16,1 per cent and 10,5 per cent respectively. There are also\nindications of tighter credit standards being applied by banks to both households and\nthe corporate sector. The lower rate of credit extension to households contributed to the\nfurther moderation of household indebtedness. Household debt as a percentage of\ndisposable income measured 75,3 per cent in the third quarter, compared with 78,5 per\ncent in the first quarter of 2008.\nThe current-account deficit, which measured 7,9 per cent of GDP in the third quarter of\n2008, is likely to moderate in the coming months as a result of the lower international oil\nprice and lower dividend payments to non-residents, among other factors.\nThe turmoil in the international financial markets has also been reflected as well in\ndomestic asset prices. The all-share index on the JSE Limited has followed global equity\nmarket trends and has exhibited a high degree of volatility over the past months. Since\nthe previous meeting, the index has declined by about 1,5 per cent, but at one stage it\nhad declined by about 15 per cent. The housing market remains subdued, with prices\nfalling in real terms, and in some instances in nominal terms as well. These negative\nwealth effects are likely to weigh on household expenditure in the coming months.\nGlobal developments are also expected to contribute to downward inflation pressures.\nApart from sharply declining commodity prices, the decline in the volume of world trade\nhas also lowered transport costs significantly. Growth forecasts have been revised down\nsignificantly, particularly in the advanced economies, and the expected protracted\nslowdown is likely to lower prices of other goods as well, as the pricing power of firms\ndissipates. The possible stimulus to growth provided by more accommodative monetary\npolicies and fiscal stimuli are likely to take some time to filter through, given the fragile state\nof the banking systems and the marked declines in business and consumer sentiment.\nMonetary policy stance\nThe Monetary Policy Committee considered recent developments in the South African\neconomy and the risks to the inflation outlook against the backdrop of conditions\nprevailing in the global economy and international financial markets. The MPC has noted\nimprovements in the inflation outlook in South Africa since its previous meeting in October\n2008. However, risks to the inflation outlook remain and will be monitored closely. The\nMPC has therefore decided to reduce the repurchase rate by 50 basis points to 11,5 per\ncent per annum with effect from 12 December 2008.\nSouth African Reserve Bank\n39\nMonetary Policy Review May 2009\n40\nStatement of the Monetary Policy Committee\n5 February 2009\nIssued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting\nof the Monetary Policy Committee (MPC) in Pretoria\nIntroduction\nSince the previous meeting of the MPC, domestic inflation has continued on its\ndownward trend. A further decline is expected in the January data when the reweighting\nand rebasing of the consumer price index (CPI) implemented by Statistics South Africa\n(Stats SA) comes into effect. With respect to economic growth, the domestic economy\nis being adversely affected by the continuing turbulence in the global economy. The\nwidening domestic output gap and declining international commodity prices are\nexpected to exert further downward pressure on inflation going forward. Nevertheless,\nsome risks to the inflation outlook remain and the MPC had to assess these conflicting\nrisks against the backdrop of a highly uncertain and volatile international environment.\nRecent developments in inflation\nCPIX inflation (headline inflation excluding mortgage interest cost) has been moderating\nconsistently since August 2008 when it measured 13,6 per cent. In November and\nDecember 2008 inflation had declined to 12,1 per cent and 10,3 per cent respectively.\nElectricity, food, and clothing and footwear prices were the main contributors to the\ninflation outcomes in these months, having increased at year-on-year rates in excess of\n15 per cent. Petrol prices increased by 25,8 per cent in November, but declined by \n1,8 per cent in December. If food and petrol were excluded, CPIX inflation would have\nmeasured 8,7 per cent in December. \nProducer price inflation also moderated in the past two months, declining to a year-on-\nyear rate of 11,0 per cent in December. Food price increases continued to moderate:\nagricultural product prices were unchanged in December, while manufactured food price\ninflation declined to a year-on-year rate of 12,8 per cent in the same month. \nThe outlook for inflation\nThe most recent central forecast of the South African Reserve Bank (the Bank) is similar to\nthat presented to the MPC in December. Partly as a result of the reweighting and rebasing\nof the new targeted inflation index, CPI inflation is expected to decline further and average\n7,5 per cent in the first quarter of 2009, and to decline to below the upper end of the\ninflation target range during the third quarter of the year when it is expected to average \n5,2 per cent. Inflation is then forecast to increase again and to breach the upper end of the\ntarget range in the first quarter of 2010, mainly as a result of technical base effects.\nThereafter, inflation is expected to return to within the target range and remain there until\nthe end the forecast period when it is expected to average 5,5 per cent. The simulation\nresults of the model make provision for the most recent trends of actual and preliminary\ndata that have become available from Stats SA since the previous MPC meeting.\nMarket indicators also reflect a moderation in expected inflation. Inflation expectations\nas measured by the yield differential between conventional government bonds and\ninflation-linked bonds have remained within the inflation target range. The Reuters\nconsensus survey conducted in December indicates that analysts expect inflation to\naverage 6,4 per cent in 2009 and 5,8 per cent in 2010. \nMonetary Policy Review May 2009\nSouth African Reserve Bank\nThe volatile exchange rate of the rand continues to pose the main upside risk to the\ninflation outlook. The rand is currently trading against the United States (US) dollar at levels\nsimilar to those prevailing at the time of the previous MPC meeting. During December 2008\nthe rand appreciated against the US dollar and reached a level of R9,30 in the first week\nof January. This move was mainly a result of a weaker US dollar, which depreciated to\nUS$1,47 against the euro. Renewed risk aversion in international markets and a stronger\nUS dollar in January resulted in the rand returning to current levels of around R10,00. The\nrand has appreciated marginally on a trade-weighted basis since the previous meeting.\nThe risks to the inflation outlook posed by oil and food prices appear to have subsided\nsomewhat. Food prices continued to moderate at the production price level, but these\nfavourable developments have not yet been seen at the consumer price level. Spot and\nfutures prices of maize and wheat remained well below the average price level in 2008\nand some relief at the consumer price level is expected in the coming months.\nThe price of Brent crude oil, which reached a low of US$34 per barrel during December\n2008, averaged around US$41 for the month. This, along with the termination of the\nslate levy, allowed for a further reduction in domestic petrol prices of R1,34 per litre in\nJanuary. However, international oil prices recovered somewhat in January and\naveraged almost US$45 per barrel during that month. As a consequence, the domestic\nprice of petrol was increased by 61 cents per litre in February. The outlook for oil prices\nremains uncertain, but prices are expected to remain relatively subdued as a result of\nweakening global growth.\nThe domestic economy continues to show signs of slowing, following the 0,2 per cent\nannualised growth recorded in the third quarter of 2008. The composite leading and\ncoincident business cycle indicators of the Bank point to a continuation of this trend. Other\nhigh-frequency indicators are consistent with this outlook. The physical volume of manu-\nfacturing production declined at a year-on-year rate of 4,4 per cent in November 2008,\nwhile the latest Investec/BER Purchasing Managers Index indicates that the outlook for\nthe manufacturing sector remains negative. The utilisation of production capacity in\nmanufacturing declined by 3,4 percentage points in the fourth quarter of 2008 to 82 per\ncent. Mining output contracted by 6,1 per cent in November compared with the previous\nyear, while the real value of total building plans approved declined by 25,3 per cent over\nthe same period.\nHousehold consumption expenditure also remains under pressure. Real wholesale trade\nsales increased slightly in the year to November 2008, but real retail sales declined by \n4 per cent over the same period. Motor vehicle sales contracted at a year-on-year rate\nof 35,4 per cent in January, with commercial vehicle sales declining by 41 per cent.\nMotor vehicle exports, which remained strong in 2008, also moderated and the industry\nexpects larger declines in the coming months. Exports in general are expected to remain\nunder pressure, given the adverse global conditions. However, preliminary data indicates\nthat the deficit on the trade account of the balance of payments probably contracted\nduring the final quarter of 2008.\nHousehold consumption expenditure may also be affected by remuneration trends and\nemployment growth. According to Andrew Levy Employment Publications, the level of\nwage settlements for the year 2008 amounted to 9,8 per cent, compared with an\naverage inflation rate of 11,3 per cent. Nominal unit labour cost increases in the third\nquarter of 2008 measured 12,4 per cent. Employment growth has also been impacted\nby the slowing economy. In the third quarter of 2008 non-agricultural employment\nincreased by one per cent, compared with 3,9 per cent in the first quarter of that year.\nPrivate-sector employment contracted in the second and third quarters.\nSouth African Reserve Bank\n41\nMonetary Policy Review May 2009\n42\nThe subdued trend in household consumption expenditure and the stricter credit criteria\napplied by banks to both households and corporates have been reflected in a further\nmoderation in the growth of credit extension to the private sector. Growth over 12 months\nin total loans and advances by banks to the private sector declined to 14,4 per cent in\nDecember 2008. Most categories of loans have exhibited declines in growth.\nHigh consumption expenditure is expected to remain under pressure from negative\nwealth effects resulting from adverse asset price developments. The all-share index on\nthe JSE Limited remained volatile in line with global market turbulence. The housing\nmarket has also remained subdued, with the various house price indices indicating real\nprice declines.\nThe outlook for the world economy has deteriorated further as a result of the continued\ndifficulties being experienced by the global financial system. The International Monetary\nFund significantly downgraded its forecast for global growth in 2009 to 0,5 per cent.\nMany of the advanced economies are expected to experience negative growth rates in\nthe coming months, while growth prospects of emerging market and developing\neconomies have also deteriorated. As a result of these widening output gaps and\ndeclining commodity prices, world inflation pressures have subsided. \nMonetary policy stance\nThe MPC has decided to reduce the repurchase rate by 100 basis points to 10,5 per\ncent per annum with effect from 6 February 2009. The MPC will continue to monitor\ndomestic and global developments in order to decide on the most appropriate\nmonetary policy stance going forward.\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n24 March 2009\nIssued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting\nof the Monetary Policy Committee (MPC) in Pretoria\nIntroduction\nThe global economy has continued to weaken significantly in recent months as a result\nof the turmoil in the financial markets. There is growing uncertainty regarding the depth\nand duration of the economic slowdown. The South African economy has not escaped\nthe impact of these developments, and domestic production has contracted as a result\nof weak domestic demand and a significant decline in export demand. Against this\nbackdrop of widening domestic and global output gaps, the balance of risks to the\ninflation outlook has changed somewhat. \nRecent developments in inflation\nInflation as measured by the reweighted and reconstituted consumer price index (CPI) for\nall urban areas (which is the new target measure) measured 8,1 per cent in January 2009.\nFood and non-alcoholic beverages prices, which increased at year-on-year rates of\n15,7 per cent in January, contributed 2,4 percentage points to total inflation. The\nhousing and utilities category contributed 2,1 percentage points, and together with\nfood accounted for more than half of the measured inflation increase. The transport\ncomponent had a minimal impact on the overall CPI as a result of the 20,3 per cent\nreduction in petrol prices during January. Producer price inflation, which reached 19,1 per\ncent in August 2008, continued its downward trend, measuring 9,2 per cent in January\n2009. Despite the depreciation of the rand during 2008, producer prices of imported\ngoods declined at a year-on-year rate of 5 per cent in January.\nThe outlook for inflation\nThe most recent central forecast of the Bank shows a near-term deterioration in the\ninflation outlook, but a more favourable trend is forecast for the medium term, which is\nthe relevant time frame for monetary policy. Consumer price inflation is expected to\naverage 8,1 per cent in the first quarter of 2009 and then to decline to below 6 per cent\nin the third quarter of the year. As a result of technical base effects, inflation is then\nexpected marginally to exceed the upper end of the inflation target range, before returning\nback to within the range in the second quarter of 2010 and to remain there until the end\nof the forecast period in the fourth quarter of 2010, when it is expected to average \n5,3 per cent. The heightened levels of uncertainty and the rate of change of global\ndevelopments make these forecasts subject to higher risk than is usually the case. \nExpectations by analysts are similar to those of the Bank, with the Reuters consensus\nforecast showing a moderate upward revision of inflation in 2009 and a relatively\nunchanged forecast in 2010, when inflation is expected to average 5,5 per cent in the final\nquarter. Most forecasters expect inflation to have increased moderately in February 2009\nbefore resuming its downward trend. Inflation expectations, as reflected in the yield\ndifferential between inflation-linked bonds and conventional government bonds, have\nincreased slightly since the previous meeting of the MPC, but remain within the inflation\ntarget range.\nThe inflation outlook has been dominated by the continued weakening of the global\neconomy and financial markets, notwithstanding significant monetary and fiscal\nmeasures introduced by central banks and governments. The decline in global demand\nSouth African Reserve Bank\n43\nMonetary Policy Review May 2009\n44\nhas resulted in a marked contraction in international trade. The International Monetary\nFund, which in January was forecasting global growth to average 0,5 per cent in 2009,\nnow expects the global economy to contract by up to 1 per cent in 2009. Numerous\nindustrialised and developing countries are already experiencing negative growth. World\ninflation is being restrained by declining demand and lower commodity prices, which are\nexpected to remain subdued under these conditions of negative or low growth. \nThe weak global demand has been reflected in the export performance of the South\nAfrican economy. However, the decline in the value of exports in the final quarter of\n2008 was more than offset by a lower value of imports, mainly due to declining\ninternational oil prices. Combined with a narrowing of the deficit on the services,\nincome and current transfer account of the balance of payments, this resulted in a\nnarrowing of the deficit on the current account from 7,8 per cent of GDP in the third\nquarter of 2008 to 5,8 per cent in the final quarter. However, the published January\ntrade data, which showed a further considerable decline in the value of merchandise\nexports, suggest that the improvement in the trade deficit may not be sustained to the\nsame extent seen in the fourth quarter. The deficit on the current account of the\nbalance of payments measured 7,4 per cent of GDP for the 2008 calendar year.\nDomestic demand conditions have also deteriorated further. In the fourth quarter of\n2008, gross domestic expenditure and domestic final demand contracted by 3,9 per\ncent and 0,4 per cent respectively. Final consumption expenditure by households\ndeclined by 2,7 per cent, mainly as a result of a 20 per cent contraction in\nconsumption of durable goods. The growth in gross fixed capital formation moderated\nfurther, recording an annualised growth rate of 3 per cent. Motor vehicle sales, which\nhave been under pressure for some time, declined at a year-on-year rate of 35,6 per\ncent in February. In January real retail sales increased at a year-on-year rate of 1,7 per\ncent – the first year-on-year increase in 9 months – while wholesale trade sales\ndeclined by 4,5 per cent over the same period. \nDomestic demand conditions are expected to remain under pressure as a result of\ndeclining disposable incomes, tighter credit conditions and negative wealth effects.\nCredit extension to the private sector has continued its downward trend as a result of\nlower demand and more stringent lending criteria being applied by banks. In January\n2009 growth in total loans and advances to the private sector measured 11,4 per cent.\nThe slower rate of credit extension has resulted in a further moderation of the ratio of\nhousehold debt to disposable income to 76,4 per cent in the fourth quarter of 2008,\ncompared with a peak of 78,2 per cent in the first quarter of that year. \nDomestic output has been impacted appreciably by these external and domestic\ndemand developments, resulting in a further widening of the domestic output gap. In the\nfinal quarter of 2008 GDP contracted at an annualised rate of 1,8 per cent, mainly due\nto a 22 per cent decline in manufacturing-sector output. The high frequency data\nindicate that these adverse conditions may have persisted in the first quarter of 2009.\nManufacturing and mining output contracted at year-on-year rates of 11,1 cent and \n8,7 per cent respectively in January, while the Investec/Bureau for Economic Research\n(BER) Purchasing Managers Index reached a new low in February, reflecting continued\nstrain on the manufacturing sector. The latest BER manufacturing survey indicates\nextreme and broad-based weakness in this sector in the first quarter of 2009. The\nRMB/BER Business Confidence Index surveyed in the first quarter of 2009 reached its\nlowest level since 1999, particularly in the manufacturing, wholesale and construction\nsectors. The confidence of retailers of non-durable goods increased somewhat.\nMonetary Policy Review May 2009\nSouth African Reserve Bank\nOn a trade-weighted basis, the rand has been relatively stable since the beginning the\nyear and has appreciated by about 2,5 per cent since the previous meeting.\nMovements in the rand exchange rate in recent weeks have been mainly reflecting\nvolatile international currency developments. After the previous meeting of the MPC,\nthe rand first depreciated to around R10,60 against the US dollar, as the dollar\nstrengthened against most currencies. Since then the US dollar has weakened\nsomewhat and the rand is currently trading at levels of around R9,45 per US dollar. \nThe upside risks to the inflation outlook emanate primarily from cost-push pressures,\nparticularly from administered prices. These include possible higher-than-expected\nelectricity tariff increases. The decline in inflation may also be delayed by continued high\nrates of increases in food prices, despite marked declines in producer price food\ninflation. \nMonetary policy stance\nAgainst the background of a slowing global and domestic economy and an improved\nmedium-term outlook for inflation, the MPC has decided to reduce the repurchase rate\nby 100 basis points to 9,5 per cent per annum with effect from 25 March 2009. \nSouth African Reserve Bank\n45\nMonetary Policy Review May 2009\n46\nStatement of the Monetary Policy Committee\n30 April 2009\nIssued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting\nof the Monetary Policy Committee (MPC) in Pretoria\nIntroduction\nThe global economy continues to be in the midst of a severe synchronised downturn\nwith a number of countries already experiencing recession. The G-20 countries,\nincluding South Africa, have committed themselves to a programme of action in order\nto contribute towards the earliest possible global economic recovery. Despite a\ngenerally positive response to the G-20 summit in April, it has become increasingly\naccepted that the slowdown is likely to be severe and protracted, and that the global\nrecovery is likely to be gradual. \nDomestic output and expenditure growth are declining or negative, and the growth\noutlook is dependent to a significant extent on a broader global recovery. Despite the\nwidening domestic output gap, inflation remains sticky, but is expected to continue on\nits downward path. \nRecent developments in inflation\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all\nurban areas increased to 8,6 per cent in February 2009 and then moderated to 8,5 per\ncent in March. Food price inflation continued its downward trend, increasing at a year-\non-year rate of 14,7 per cent in March, compared with 15,8 per cent in the previous\nmonth. Food prices remained the largest contributor to the inflation outcome,\ncontributing 2,3 percentage points. The largest price increase was recorded by\nelectricity and other fuels, which increased by 30,1 per cent. Significant increases were\nalso recorded in the prices of tobacco, housing maintenance and repairs, health,\nrecreation and culture, and education. Countervailing pressure came from petrol prices,\nwhich declined by 14,9 per cent, despite the petrol price increase of 45 cents per litre\nin March.\nProducer price inflation, which reached 19,1 per cent in August 2008, continued its\ndownward trend, measuring 7,3 per cent and 5,3 per cent in February and March 2009\nrespectively. Prices of agricultural food products declined at a year-on-year rate of 2,1 per\ncent in March, while manufactured food price inflation moderated to 9,4 per cent.\nThe outlook for inflation\nThe most recent central forecast of the Bank shows a near-term deterioration in the\ninflation outlook, but inflation is expected to follow a downward trend and to average\n5,4 per cent at the end of the forecast period in the final quarter of 2010. The slightly\nhigher expected trend is a result of revised assumptions about administered prices and\nthe higher-than-anticipated inflation outcome for February.\nInflation expectations show a mixed picture. The inflation expectations survey, which is\nconducted on behalf of the Bank by the Bureau for Economic Research (BER) at\nStellenbosch University, reflects somewhat divergent inflation expectations between\nthe different groups of respondents. In the survey conducted in the first quarter of\n2009, average CPI inflation expectations for 2009 declined from 8,6 per cent to 8,3 per\ncent. Expectations ranged from 6,1 per cent for analysts, to 9,7 per cent for trade\nunionists. Inflation is expected to average 8,0 per cent in 2010, up from the 7,5 per\nMonetary Policy Review May 2009\nSouth African Reserve Bank\ncent measured in the previous survey. While analysts expect inflation to average 5,4 per\ncent in 2010, business executives and trade union officials expect inflation to average\n8,6 per cent and 10,1 per cent respectively. Inflation is expected to moderate to 7,8 per\ncent in 2011. \nWage settlements, which generally follow inflation trends with a lag, have also edged\nup slightly. According to Andrew Levy Employment Publications, the level of wage\nsettlements increased by 10,2 per cent in the first quarter of 2009, compared to the\n2008 average of 9,8 per cent. Nominal unit labour cost increased over four quarters by\n12,8 per cent in the final quarter of 2008. Nominal wage settlements are expected to\nmoderate somewhat as the inflation rate declines. According to the Quarterly\nEmployment Statistics Survey conducted by Statistics South Africa, in the fourth\nquarter of 2008 employment levels showed their first decline in four years. \nThe risks to the inflation outlook as assessed by the MPC have remained relatively\nunchanged since the previous meeting of the committee, although the recent\nappreciation of the rand exchange rate, if sustained, may have reduced the degree of\nthe upside risk to the inflation outlook. The rand exchange rate remains affected by\nchanges in global risk aversion, but there has been a decline in the degree of volatility.\nSince the positive market reaction to the G-20 summit in early April, sentiment towards\nemerging-market economies in general has improved and most emerging market\ncurrencies have appreciated against the US dollar. \nAs noted earlier, the global economy remains under pressure despite fiscal and\nmonetary stimuli in many countries. In January 2009 the International Monetary Fund\n(IMF) forecasted global growth of 0,5 per cent and 3,0 per cent for 2009 and 2010\nrespectively. The IMF now expects global output to contract by 1,3 per cent in 2009,\nbefore recovering gradually to 1,9 per cent in 2010. The advanced economies are\nexpected to contract by 3,8 per cent, while the emerging and developing economies\nare expected to experience positive growth of 1,6 per cent, with China and India\nexpected to grow by 6,5 per cent and 4,5 per cent respectively. The growth forecast\nfor Africa has been reduced from 3,4 per cent to 2,0 per cent. The risks to these\nforecasts are seen to be on the downside, given the current heightened levels of\nuncertainty. World trade has also declined and is expected to contract by a further \n9,5 per cent in 2009.\nWorld inflation is expected to remain subdued as a result of these growth trends and\nlower commodity prices. World inflation is expected to average 2,5 per cent in 2009\nand 2,4 per cent in 2010. Although a number of commodity prices have recovered\nsomewhat from their lows in the fourth quarter of 2008, they are expected to be\nrestrained by the weak global demand. The price of North Sea Brent crude oil declined\nto around US$35 per barrel in late December 2008, but has been trading at around the\nUS$50 per barrel level for most of April 2009. During this month, the higher international\noil product prices have been more or less offset by the appreciation of the rand against\nthe US dollar, and the domestic price of petrol is expected to remain relatively\nunchanged in May.\nThe outlook for domestic economic growth remains subdued, with no indications of a\nquick recovery. The high-frequency data continue to suggest that the negative\nconditions recorded in the final quarter of 2008 persisted in the first quarter of 2009.\nThe physical volume of manufacturing production declined at a year-on-year rate of\n15,0 per cent in February, following an 11,1 per cent contraction in the previous month.\nThe outlook for manufacturing remains negative, with the Investec/BER Purchasing\nManagers Index declining further in March. Total mining production declined at a year-\non-year rate of 12,8 per cent in February, while the real value of building plans approved\ndeclined by 42,7 per cent over the same period.\nSouth African Reserve Bank\n47\nMonetary Policy Review May 2009\n48\nThe sluggish domestic demand conditions also appear to have persisted. Wholesale\ntrade sales declined at a year-on-year rate of 8,9 per cent in February, while retail sales\ndeclined by 4,5 per cent following a modest increase in January. Total new vehicle sales\ndeclined by 30,3 per cent in March, reflecting the continued weak demand for durable\ngoods. However, the FNB/BER Consumer Confidence Index, while still at low levels,\nshowed an increase in the first quarter of 2009. Falling house prices and weak asset\nmarkets are also expected to restrain consumption expenditure. \nDomestic credit extension continues to reflect the declining trend in domestic\nexpenditure, as well as more stringent credit criteria being applied by banks with\nrespect to loans to both households and companies. Year-on-year growth in total loans\nand advances to the private sector declined to 10,2 per cent in February and 7,3 per\ncent in March 2009. The quarterly growth declined from 6,2 per cent in the fourth\nquarter of 2008 to 0,1 per cent in the first quarter of 2009. Instalment sale credit and\nleasing finance reflected the weak demand for durable goods, with increases of 3,1 per\ncent in February and 1,6 per cent in March. \nIn line with the previous MPC statement, the committee assesses the main risks to the\ninflation outlook to emanate from cost-push pressures, particularly administered prices,\nwhich include the risk of higher-than-expected electricity tariff increases. Food price\ninflation at the consumer price level, which has remained relatively unresponsive to\nlower inflation at the producer price level, appears to show signs of moderation. Should\nthis downward trend accelerate, it could have a significant downward impact on the\ninflation trajectory. \nMonetary policy stance\nThe MPC considered the severe synchronised downturn in international and domestic\neconomic conditions and noted their potential future downward impact on inflation,\nnotwithstanding the higher-than-expected recent domestic inflation outcomes. The\ncommittee is of the view that the adverse economic conditions continue to tilt the\nbalance of risks to the inflation outlook to the downside over the medium term and has\ntherefore decided to reduce the repurchase rate by 100 basis points to 8,5 per cent\nper annum with effect from 4 May 2009.\nMonetary Policy Review May 2009\nSouth African Reserve Bank", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/mprmay09.pdf"}
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