diff --git "a/clean/cb_requests/32e6e375070d95fee4564eed68452933.json" "b/clean/cb_requests/32e6e375070d95fee4564eed68452933.json"
new file mode 100644--- /dev/null
+++ "b/clean/cb_requests/32e6e375070d95fee4564eed68452933.json"
@@ -0,0 +1 @@
+{"doc_id": "32e6e375070d95fee4564eed68452933", "text": "Monetary Policy\nReview\n \n \n November 2009\nMonetary Policy\nReview\nNovember 2009\nSouth African Reserve Bank\nMonetary Policy Review November 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\nProduced by the Publishing Section\nSouth African Reserve Bank\nMonetary Policy Review November 2009\nContents\nMonetary Policy Review\nIntroduction...........................................................................................................................\n1\nRecent developments in inflation...........................................................................................\n1\nThe evolution of indicators of inflation..............................................................................\n1\nFactors affecting inflation.................................................................................................\n6\nMonetary policy.....................................................................................................................\n24\nThe outlook for inflation.........................................................................................................\n28\nInternational outlook........................................................................................................\n28\nOutlook for domestic demand and supply ......................................................................\n32\nIndicators of inflation expectations ..................................................................................\n36\nThe South African Reserve Bank inflation forecast ..........................................................\n38\nAssessment and conclusion..................................................................................................\n39\nStatements issued by Mr T T Mboweni, Governor of the South African Reserve Bank\nStatement of the Monetary Policy Committee\n28 May 2009 ........................................................................................................................\n40\nStatement of the Monetary Policy Committee\n25 June 2009 .......................................................................................................................\n43\nStatement of the Monetary Policy Committee\n13 August 2009 ....................................................................................................................\n46\nStatement of the Monetary Policy Committee\n22 September 2009..............................................................................................................\n49\nStatement of the Monetary Policy Committee\n22 October 2009 ..................................................................................................................\n52\nStatement issued by Ms G Marcus, Governor of the South African Reserve Bank\nStatement of the Monetary Policy Committee\n17 November 2009...............................................................................................................\n55\nAbbreviations......................................................................................................................\n58\nBoxes\n1\nAnalysis of banks’ deposit and lending rates over the inflation-targeting period ..........\n18\n2\nAsset-backed securitisation by South African banks...................................................\n22\n3\nThe composite leading business cycle indicator..........................................................\n32\nFigures\n1\nConsumer price inflation: Targeted inflation ................................................................\n2\n2\nComparison of monthly petrol prices for 2008 and 2009 ............................................\n3\n3\nTargeted inflation and food inflation.............................................................................\n3\n4\nPPI for domestic output and imported commodities...................................................\n5\n5\nFood prices in the PPI and CPI...................................................................................\n6\nSouth African Reserve Bank\nMonetary Policy Review November 2009\n6\nPrice of Brent crude oil ...............................................................................................\n9\n7\nExchange rates of the rand.........................................................................................\n11\n8\nRemuneration per worker, labour productivity and unit labour cost in the formal \nnon-agricultural sector ................................................................................................\n12\n9\nAverage annual inflation and wage settlements...........................................................\n12\n10\nHouse prices...............................................................................................................\n14\n11\nShare price indices .....................................................................................................\n16\n12\nBanks’ loans and advances by type ...........................................................................\n17\nB1.1 Calculated average funding cost and the repurchase rate...........................................\n18\nB1.2 Deposit categories: Calculated average yields ............................................................\n19\nB1.3 Client categories: Average 0–1-year fixed-deposit rates (top five banks).....................\n19\nB1.4 Calculated average interest rate on total loans and advances, and the repurchase rate...\n20\nB1.5 Calculated average interest rates on categories of loans and advances compared to \nthe repurchase and prime rates ..................................................................................\n20\nB1.6 Average lending rates (top five banks).........................................................................\n21\n13\nGrowth in monetary aggregates..................................................................................\n22\nB2.1 Asset-backed securitisations by private-sector banks – new issues ...........................\n23\n14\nThe repurchase rate and other short-term interest rates .............................................\n24\n15\nIMF forecasts for real GDP: G-20 countries.................................................................\n28\n16\nSelected indicators of global economic activity ...........................................................\n31\nB3.1 Composite leading business cycle indicator................................................................\n34\n17\nRMB/BER Business Confidence Index........................................................................\n35\n18\nBER surveys of headline CPI inflation expectations.....................................................\n36\n19\nBreak-even inflation rates............................................................................................\n37\n20\nTargeted inflation forecast ...........................................................................................\n38 \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 ...............................................................................\n5\n4 \nAdministered prices ....................................................................................................\n5\n5\nAnnual percentage change in real GDP and consumer prices.....................................\n7\n6\nSelected central bank interest rates ............................................................................\n10\n7\nGrowth in real GDP and expenditure components ......................................................\n13\n8\nReal value of building plans passed and buildings completed in larger municipalities...\n15\n9\nPublic finance data .....................................................................................................\n17\n10\nIMF projections of world growth and inflation for 2009 and 2010................................\n29\nB3.1 Component series of the composite leading business cycle indicator and their \ncontribution to the August 2009 data point.................................................................\n33\nB3.2 Timing relationship between the composite leading indicator and the reference \nturning points of the business cycle............................................................................\n33\n11\nReuters survey of CPI forecasts: September 2009......................................................\n37\nSouth African Reserve Bank\n1\nMonetary Policy Review November 2009\nMonetary Policy Review\nIntroduction\nThere are signs that the global economic recovery is under way, although indications\nare that the initial pace of recovery is likely to be slow and distributed unevenly across\ncountries. The severe global recession saw a synchronised contraction of advanced\neconomies and a significant slowdown in the growth of developing economies.\nHowever, recent forecasts suggest a turnaround in the second quarter of 2009, and\nstronger growth prospects for the second half of the year and for 2010. Nevertheless,\nactivity levels are likely to remain well below pre-crisis levels and important policy\nchallenges will need to be faced. Macroeconomic policies are expected to continue to\nfocus on restoring financial sector health and supporting the recovery until it is well\nestablished, while preparing to exit the period of eased monetary conditions adopted\nin response to the crisis. \nThe domestic economy was not spared the effects of the global recession. In the second\nquarter of 2009 the economy recorded a third successive quarterly contraction, although\nthe rate of contraction slowed relative to that of the previous quarter. Consistent with\nglobal growth developments, domestic economic growth is expected to improve in the\ncoming quarters. Domestic inflation has continued to trend downwards, reaching a level\njust above the inflation target range in September 2009.\nIn this Monetary Policy Review the latest developments in inflation and the factors that\nimpact on inflation are analysed. Recent monetary policy developments are reviewed,\nand the outlook for inflation and the inflation forecast are presented. In addition, three\nissues are examined in boxes. The first box examines the degree of pass-through and\nthe speed of adjustment in banks’ deposit and lending rates in response to changes\nin the benchmark repurchase rate in South Africa during the period since the\nintroduction of the inflation-targeting monetary policy framework. The second box\ndiscusses asset-backed securitisation by South African banks, and the final box\ndiscusses the compilation and characteristics of the composite leading business cycle\nindicator for South Africa.\nRecent developments in inflation\nThis section analyses recent trends in the main inflation indices and reviews\ndevelopments in the main determinants of inflation in the South African economy.\nThe evolution of indicators of inflation\nThe measure of inflation targeted by the South African Reserve Bank (Bank), the year-\non-year percentage change in the headline consumer price index (CPI) for all urban\nareas, has declined continuously since April 2009 to marginally above the inflation\ntarget range of 3 to 6 per cent. After recording 8,4 per cent in April, the inflation rate\ndecreased to 6,1 per cent in September (Figure 1), largely as a result of falling food\nprice inflation and lower petrol prices.\n2\nFood and non-alcoholic beverages, housing and utilities, and miscellaneous goods and\nservices have remained the highest contributing categories to the inflation rate over the\nperiod since April 2009 (Table 1). The contribution of food and non-alcoholic beverage\nprices decreased from 2,1 percentage points to the overall inflation rate of 8,4 per cent\nin April 2009, to 0,9 percentage points in September 2009 when overall inflation was \n6,1 per cent. This was due to a decrease in the prices of most food categories. Except\nfor a temporary decrease of 0,2 percentage points in June 2009 that was reversed by\nJuly, the contribution of the housing and utilities category to inflation remained at \n1,8 percentage points until September, when it recorded 1,7 percentage points.\nElectricity prices remain a significant contributor to this category. The transport\ncategory has contributed to the fall in the inflation rate since April 2009, largely as a\nresult of a lower petrol price. The contribution of transport to inflation declined from \n0,2 percentage points in April to -0,7 percentage points in July before moderating to \n-0,2 percentage points in September. \nTable 1\nContributions to CPI inflation\nPercentage change over 12 months* and percentage points\n2009\nMar\nApr\nMay\nJun\nJul\nAug\nSep\nTotal*.................................................\n8,5\n8,4\n8,0\n6,9\n6,7\n6,4\n6,1\nOf which:\nFood and non-alcoholic beverages....\n2,3\n2,1\n1,9\n1,6\n1,3\n1,1\n0,9\nAlcoholic beverages and tobacco......\n0,6\n0,6\n0,6\n0,6\n0,6\n0,7\n0,7\nHousing and utilities ..........................\n1,8\n1,8\n1,8\n1,6\n1,8\n1,8\n1,7\nHealth................................................\n0,2\n0,2\n0,2\n0,2\n0,2\n0,2\n0,2\nTransport...........................................\n0,2\n0,2\n0,1\n-0,4\n-0,7\n-0,5\n-0,2\nEducation..........................................\n0,2\n0,2\n0,2\n0,2\n0,2\n0,2\n0,2\nMiscellaneous goods and services ....\n1,6\n1,6\n1,6\n1,6\n1,7\n1,7\n1,6\nOther.................................................\n1,6\n1,7\n1,6\n1,5\n1,6\n1,2\n1,0\nSource: Statistics South Africa\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPercentage change over 12 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 \n areas thereafter\nSource: Statistics South Africa\nThe reason for the negative contribution of the petrol price to the inflation rate is evident\nfrom Figure 2. The year-on-year inflation rate calculates the change in the price of a good\ncompared to the price of the good in the same month of the previous year. Despite the\nfact that the petrol price has only decreased on four occasions in the past 11 months,\nthe petrol price in 2009 has been consistently lower than in the corresponding months\nof 2008 and has, therefore, contributed negatively to the year-on-year inflation rate. \nTotal food price inflation has fallen significantly from its peak in August 2008, when it\nrecorded 19,2 per cent, to 4,9 per cent in September 2009. Figure 3 shows that the food\nitems contributing to this continued decline include bread and cereals (for which the\nSouth African Reserve Bank\n3\nMonetary Policy Review November 2009\nCents per litre\nApr\nJan\nFeb\nMar\nMay\nJun\nJul\nAug\nSep\nOct\nNov\nDec\nFigure 2 \nComparison of monthly petrol prices for 2008 and 2009\n500\n600\n700\n800\n900\n1 000\n1 100\n \n2008\n \n2009\nPercentage change over 12 months\n2003\n2006\n2004\n2005\n2007\n2008\n2009\nFigure 3 \nTargeted inflation* and food inflation\nAll food items\nMeat\nVegetables\nBread and cereals\nMilk, cheese and eggs\nTargeted inflation measure\n-10\n0\n10\n20\n30\n40\n* CPIX for metropolitan and other urban areas until the end of 2008, CPI for all urban \n areas thereafter\nSource: Statistics South Africa\n4\ninflation rate has fallen from 17,7 per cent in April 2009 to -2,0 per cent in September\n2009) and meat (for which inflation declined from 10,5 per cent to 4,1 per cent over the\nsame period). Inflation rates for vegetable prices and for milk, cheese and egg prices have\nremained above that of overall food prices. Vegetable price inflation increased in\nSeptember for the first time since February 2009, although milk, cheese and eggs price\ninflation has continued to decline. \nTable 2 considers the effect of excluding a number of categories from the CPI inflation\nrate in the period since April 2009. If petrol prices were excluded, the inflation rate for the\nremaining items in the CPI would have been higher than the headline rate throughout the\nperiod under review. In September 2009 the inflation rate for CPI excluding petrol prices\nwas 7,1 per cent, compared with 6,1 per cent for the headline rate. By contrast, food and\nnon-alcoholic beverage prices exerted upward pressure on the headline CPI inflation rate\nuntil August. However, for September, excluding this category results in a CPI inflation\nrate of 6,4 per cent, above the headline rate. If petrol prices, and food and non-alcoholic\nbeverage prices are excluded from the CPI, the inflation rate for the remaining items was\n7,5 per cent in September. Finally, if energy were also excluded, the inflation rate would\nhave been lower at 7,1 per cent in September; this can be explained by the recent large\nyear-on-year increases in the price of electricity which have placed upward pressure on\nthe CPI inflation rate.\nTable 2\nThe effect of food, petrol and electricity prices on headline inflation\nPercentage change over 12 months\n2009\nMar\nApr\nMay\nJun\nJul\nAug\nSep\nHeadline CPI ....................................\n8,5\n8,4\n8,0\n6,9\n6,7\n6,4\n6,1\nCPI excluding petrol prices................\n9,5\n9,4\n9,2\n8,3\n8,2\n8,0\n7,1\nCPI excluding food and NAB* prices...\n7,5\n7,3\n7,2\n6,2\n6,3\n6,3\n6,4\nCPI excluding food, NAB and \npetrol prices ......................................\n8,6\n8,6\n8,7\n8,0\n8,2\n8,2\n7,5\nCPI excluding food, NAB, petrol \nand energy prices..............................\n8,0\n8,1\n8,3\n7,5\n7,7\n7,6\n7,1\n*\nNAB: Non-alcoholic beverage\nSource: Statistics South Africa\nGoods inflation fell to within the inflation target range in July 2009 and continued to\ndecline, recording a 12-month rate of 4,9 per cent in September (Table 3). This was\nlargely due to the significant decreases in non-durable goods price inflation over the\nperiod. The inflation rates for durable and semi-durable goods have oscillated at\nrelatively low levels since April 2009. Services inflation has remained high and has shown\nsigns of price stickiness. It declined to 7,6 per cent in June 2009, rose to 8,1 per cent\nin August and then decreased once more to 7,8 per cent in September. \nOverall administered price increases have remained subdued in 2009 (Table 4). The year-\non-year changes in total administered prices appear to have bottomed in June 2009 \n(-1,2 per cent) and subsequently rose to 3,2 per cent in September 2009. Although the\nregulated component of administered prices has recorded significant negative inflation\nrates since April, mainly due to lower petrol prices, inflation for the unregulated\ncomponent rose from 6,9 per cent in June to 9,3 per cent in July and 9,8 per cent in\nSeptember. This was largely the result of an increase in the inflation rate of assessment\nrates, which doubled over the period. \nMonetary Policy Review November 2009\nSouth African Reserve Bank\nTable 3\nCPI: Goods and services inflation\nPercentage change over 12 months\n2009\nMar\nApr\nMay\nJun\nJul\nAug\nSep\nHeadline CPI ....................................\n8,5\n8,4\n8,0\n6,9\n6,7\n6,4\n6,1\nGoods inflation ..................................\n8,7\n8,3\n7,6\n6,2\n5,5\n5,0\n4,9\nDurable goods ...............................\n2,9\n3,7\n4,9\n4,1\n3,3\n3,5\n2,5\nSemi-durable goods ......................\n6,6\n5,9\n5,2\n4,7\n5,1\n4,5\n4,6\nNon-durable goods........................\n11,8\n10,9\n9,2\n7,6\n6,5\n5,7\n6,1\nServices inflation................................\n8,4\n8,4\n8,4\n7,6\n8,0\n8,1\n7,8\nSource: Statistics South Africa\nTable 4\nAdministered prices\nPercentage change over 12 months\n2009\nMar\nApr\nMay\nJun\nJul\nAug\nSep\nTotal ..................................................\n2,8\n1,7\n0,0\n-1,2\n-0,4\n0,2\n3,2\nRegulated..........................................\n0,6\n-1,0\n-3,6\n-5,3\n-5,0\n-4,5\n-0,3\nUnregulated.......................................\n6,8\n6,9\n6,9\n6,9\n9,3\n9,8\n9,8\nSource: Statistics South Africa\nThe year-on-year rate of inflation of domestic output measured by the producer price\nindex (PPI) continued to decline in 2009, decreasing from 2,9 per cent in April to \n-3,7 per cent in September (Figure 4). The rate of decline in the PPI has been moderated\nSouth African Reserve Bank\n5\nMonetary Policy Review November 2009\nPercentage change over 12 months\n2007\n2008\n2009\nDetails regarding changes to the PPI in this period are documented in Statistical Release \nP0142.1, February 2008, by Statistics South Africa\nSource: Statistics South Africa\nFigure 4 \nPPI for domestic output and imported commodities\n-30\n-20\n-10\n0\n10\n20\n30\n40\nDomestic output: Manufacturing\nDomestic output: Electrical energy\nDomestic output\nImported commodities\n6\nsomewhat by large year-on-year increases in the price of electricity, which rose by \n27,4 per cent in July and 28,1 per cent in September. The PPI for imported commodities\ninflation rate has been negative since the beginning of 2009, mainly as a result of\ndevelopments in the foreign-exchange rate of the rand during this period. \nThe rate of change in food prices in the PPI, measured at both the agricultural and\nmanufacturing levels, has remained below the rate of food price changes recorded in the\nCPI (Figure 5). The year-on-year inflation rate for food prices in the CPI was 4,9 per cent\nin September, compared to PPI food price inflation of -1,8 per cent at the manufacturing\nlevel and -5,8 per cent at the agricultural level.\nFactors affecting inflation\nMonetary policy decisions are made on the basis of current and expected developments\nin the wider macroeconomy. Recent developments in some of the main variables\ninfluencing inflation in South Africa are reviewed in this section, while the outlook for\nthese variables and their likely impact on inflation are discussed in a later section.\nInternational economic developments\nThe most recent International Monetary Fund (IMF) data show that global growth fell from\n3,0 per cent in 2008 to a projected -1,1 per cent in 2009, the first outright contraction in\nthe world economy since the IMF began collecting real gross domestic product (GDP)\ndata in 1970 (Table 5). The data reflect a synchronised contraction of advanced\neconomies and a significant slowing of the growth rates of developing economies. \nThe financial shocks of September and October 2008 and their aftermath clearly illustrated\nthe effects of financial stress on real economic activity in the global economy. The United\nStates (US) alone has lost more than 7 million jobs since the recession began in December\n2007, and the unemployment rate reached a 26-year high in September 2009. Potential\noutput growth rates were impacted negatively in all the advanced economies, and activity\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPercentage change over 12 months\n2007\n2008\n2009\nSource: Statistics South Africa\nFigure 5 \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\nin the housing and financial sectors slumped. Weaker demand resulted in a noticeable\nincrease in excess capacity that is projected to keep inflation in advanced economies\nclose to 0 per cent in 2009. In the emerging economies, stronger disinflationary forces\nin some regions also prompted modest reductions in October of the IMF’s April\nprojections for inflation, notwithstanding the upward revisions to output growth for these\ncountries. The IMF forecasts that the pace of world inflation will slow markedly in 2009\nto 2,5 per cent from 6,0 per cent in 2008.\nTable 5\nAnnual percentage change in real GDP and consumer prices \nReal GDP\nConsumer prices*\n2008\n2009\n2008\n2009\n(estimate)\n(estimate)\nWorld ............................................................\n3,0\n-1,1\n6,0\n2,5\nAdvanced economies....................................\n0,6\n-3,4\n3,4\n0,1\nUnited States ..........................................\n0,4\n-2,7\n3,8\n-0,4\nJapan ......................................................\n-0,7\n-5,4\n1,4\n-1,1\nEuro area ..................................................\n0,7\n-4,2\n3,3\n0,3\nUnited Kingdom........................................\n0,7\n-4,4\n3,6\n1,9\nOther advanced economies......................\n1,6\n-2,1\n4,3\n1,3\nOther emerging-market and \ndeveloping countries ....................................\n6,0\n1,7\n9,3\n5,5\nAfrica ........................................................\n5,2\n1,7\n10,3\n9,0\nCentral and eastern Europe ......................\n3,0\n-5,0\n8,1\n4,8\nCommonwealth of Independent States ....\n5,5\n-6,7\n15,6\n11,8\nDeveloping Asia ........................................\n7,6\n6,2\n7,5\n3,0\nChina......................................................\n9,0\n8,5\n5,9\n-0,1\nIndia ......................................................\n7,3\n5,4\n8,3\n8,7\nMiddle East ..............................................\n5,4\n2,0\n15,0\n8,3\nWestern hemisphere ................................\n4,2\n-2,5\n7,9\n6,1\n*\nZimbabwe excluded\nSource: IMF World Economic Outlook, October 2009\nAlthough real growth in the largest economies in the Group of Twenty (G-20) has been\nseverely affected during the global recession, most of them already appear to have\nembarked on a path to recovery. The rate of contraction in economic activity moderated\nin the second quarter of 2009 in the US, the euro area, Italy, Spain, the United Kingdom\n(UK) and Canada. Economic activity in some advanced economies stabilised towards\nthe middle of 2009, with positive growth resuming in either the second or third quarter.\nEconomic conditions also improved in the second quarter of 2009 in most emerging-\nmarket economies partly due to improved demand in advanced economies. However,\nthe US economy is expected to record negative growth of 2,7 per cent in 2009,\ncompared with positive growth of 0,4 per cent in 2008. The US is projected to record\ndeflation of 0,4 per cent in 2009, compared with an inflation rate of 3,8 per cent in 2008. \nIn Japan, following a dismal first quarter of 2009, there are signs that output is stabilising.\nImproved consumer confidence, progress in inventory adjustment, expansionary fiscal\npolicies, and strong performance by other Asian economies are expected to lift growth\nin the coming quarters. The IMF, nevertheless, forecasts another year of negative GDP\ngrowth in Japan of 5,4 per cent in 2009 following the decline of 0,7 per cent recorded\nin 2008. The IMF also forecasts a return to deflation of 1,1 per cent for Japan in 2009\nafter the inflation of 1,4 per cent recorded in 2008. \nSouth African Reserve Bank\n7\nMonetary Policy Review November 2009\n8\nIn addition to efforts to stabilise, restore and reform the banking sector, the European\nEconomic Recovery Plan was launched in December 2008 to restore confidence and\nbolster demand through a co-ordinated injection of purchasing power. The overall\nfiscal stimulus in the euro area, including the effects of automatic stabilisers, amounts\nto 5 per cent of GDP. Real GDP in the euro area is, nevertheless, projected to decline\nby 4,2 per cent in 2009 from the 0,7 per cent real growth recorded in 2008. Inflation\nin the euro area is projected to fall to 0,3 per cent in 2009 from the 3,3 per cent\nrecorded in 2008.\nThe IMF forecasts that the UK will record negative growth of 4,4 per cent in 2009\ncompared with positive real growth of 0,7 per cent recorded in 2008. Inflation in the UK\nis projected to decelerate from 3,6 per cent in 2008 to 1,9 per cent in 2009. \nAs global trade flows contracted, China suffered a ten-month decline in exports,\ndampening growth in the region and pulling the nationwide expansion rate down to \n6,1 per cent in the first quarter of 2009 – the slowest pace in almost a decade.\nHowever, the Chinese government is using a US$586 billion stimulus package and\nrecord bank lending to build railways, roads and power plants in the country, and the\nIMF forecasts that China will grow by 8,5 per cent in 2009 compared with 9,0 per cent\nin 2008. India is expected to record growth of 5,4 per cent in 2009 compared with \n7,3 per cent in 2008.\nThe global slowdown has had a significant impact on Africa and the continent is\nexpected to record growth of only 1,7 per cent in 2009, compared with 5,2 per cent in\n2008. The decline in global trade dampened economic expansion in all countries in \nsub-Saharan Africa as their terms of trade deteriorated. Inflation in Africa is expected to\nfall slightly from 10,3 per cent in 2008 to 9,0 per cent in 2009.\nOil prices\nAfter falling significantly in the second half of 2008 to levels below US$35 per barrel at the\nend of the year, Brent crude oil prices rose in the first two quarters of 2009 to around\nUS$70 per barrel in early June (Figure 6). Prices declined briefly in early July 2009, amid\nconcerns about weakening energy demand and excess supply, before rising to around\nUS$72 at the end of August and then fluctuating within a US$64–US$79 band in\nSeptember and October. This was against the backdrop of contradictory projections for\nthe global economy. \nThe oil market remained in contango in 2009 (where near-term oil contracts cost less\nthan those maturing further out) as relatively large stockpiles of physical oil tended to\nkeep a lid on near-term prices. In recent months there have also been indications that\nthe Organization of the Petroleum Exporting Countries (OPEC) has had difficulty in\nensuring that member countries adhere to output target cuts; these factors have\ncontributed to futures prices trending lower. Other factors weighing on the oil price\nwere the announcement in September 2009 that Russia’s oil output expanded\nbeyond 10 million barrels per day – more than that of Saudi Arabia – and in October\nmilitants in Nigeria (producer of some of the world’s most sought-after grades of\ncrude oil) appeared to accept an amnesty. However, the longer-term oil price outlook\nhas, in general, been underpinned by an improving global economic outlook and\nrising equity prices. On 4 November 2009 the futures prices for Brent crude oil to be\ndelivered in May and June 2010 were around US$82 per barrel and US$83 per \nbarrel respectively.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nInternational monetary policy developments\nFinancial market turbulence and deteriorating growth prospects prompted aggressive\nmonetary loosening in the course of the past 12 months. Decisive and concerted policy\nactions are yielding signs of early recovery, and G-20 countries have stated their commitment\nto maintaining supportive monetary, fiscal and financial sector policies until a durable recovery\nis assured. All the major central banks have cut policy interest rates to unusually\naccommodative levels to revive credit, and the IMF and the Organisation for Economic Co-\noperation and Development (OECD) do not expect a reversal of these policies until the\nsecond half of 2010. The challenge for policy-makers is to prepare for an orderly unwinding\nof the extraordinary levels of public intervention, without undermining the recovery.\nMost central banks have eased official policy rates since the onset of the global financial\ncrisis (Table 6), and a number of them have implemented unconventional monetary\npolicy measures in response to the deteriorating economic conditions and dissipating\ninflationary pressures. Since the release of the May 2009 Monetary Policy Review, official\ninterest rates have been reduced by central banks in Brazil, Canada, Chile, the Czech\nRepublic, Denmark, the euro area, Hungary, Iceland, India, Indonesia, Mexico, New\nZealand, Poland, Russia, Sweden, Thailand and Turkey. \nRecently, the interest rate cycle has been reversed in Israel, Australia and Norway. In these\ncountries the economic contraction was seen to be over and policy has become more\nfocused on inflation concerns.\nThe United States Federal Reserve (the Fed) unanimously decided to keep the target\nrate unchanged at a record low of 0 to 0,25 per cent at meetings of the Federal Open\nMarket Committee (FOMC) in August, September and November 2009, and reiterated\nat its most recent meeting that it would keep rates on hold for an “extended period”. The\nFOMC opted to extend its mortgage-backed securities (MBS) and agency debt\npurchase programmes until the end of the first quarter of 2010, and committed itself to\nreducing the pace of purchases. \nSouth African Reserve Bank\n9\nMonetary Policy Review November 2009\nFigure 6 \nPrice of Brent crude oil \n2005\n2006\n2007\n2008\n2009\n2010\nJ M M J S N\nM M J S N\nJ\nJ M M J S N\nM M J S N\nJ\nM M\nJ\nM M J S N\nJ\nUS dollar per barrel\n \nBrent crude spot price\n \nFutures prices (21 September 2009)\n \nFutures prices (21 October 2009)\n \nFutures prices (4 November 2009)\nSource: Bloomberg\n20\n40\n60\n80\n100\n120\n140\n160\n10\nTable 6\nSelected central bank interest rates\nPer cent\nLatest decision\n(change in \nCountries\n1 Sep 2008\n5 Nov 2009\npercentage points)\nUnited States ....................................\n2,00\n0,00-0,25\n04 Nov 2009\n(0,00)\nJapan................................................\n0,50\n0,10\n30 Oct 2009\n(0,00)\nEuro area ..........................................\n4,25\n1,00\n05 Nov 2009\n(0,00)\nUnited Kingdom ................................\n5,00\n0,50\n05 Nov 2009\n(0,00)\nCanada ............................................\n3,00\n0,25\n20 Oct 2009\n(0,00)\nDenmark ..........................................\n4,60\n1,25\n25 Sep 2009\n(-0,10)\nSweden ............................................\n4,50\n0,25\n28 Oct 2009\n(0,00)\nNorway..............................................\n5,75\n1,50\n29 Oct 2009\n(0,25)\nSwitzerland........................................\n2,75\n0,00-0,75\n17 Sep 2009\n(0,00)\nAustralia ............................................\n7,25\n3,50\n04 Nov 2009\n(0,25)\nNew Zealand ....................................\n8,00\n2,50\n29 Oct 2009\n(0,00)\nIsrael ................................................\n4,25\n0,75\n26 Oct 2009\n(0,00)\nChina ................................................\n7,47\n5,31\n29 Sep 2009\n(0,00)\nHong Kong........................................\n3,50\n0,50\n05 Nov 2009\n(0,00)\nIndonesia ..........................................\n9,00\n6,50\n04 Nov 2009\n(0,00)\nMalaysia ............................................\n3,50\n2,00\n28 Oct 2009\n(0,00)\nSouth Korea ......................................\n5,25\n2,00\n09 Oct 2009\n(0,00)\nTaiwan ..............................................\n3,63\n1,25\n24 Sep 2009\n(0,00)\nThailand ............................................\n3,75\n1,25\n21 Oct 2009\n(0,00)\nIndia ..................................................\n9,00\n4,75\n27 Oct 2009\n(0,00)\nBrazil ................................................\n13,00\n8,75\n21 Oct 2009\n(0,00)\nChile..................................................\n7,75\n0,50\n13 Oct 2009\n(0,00)\nMexico ..............................................\n8,25\n4,50\n16 Oct 2009\n(0,00)\nCzech Republic ................................\n3,50\n1,25\n05 Nov 2009\n(0,00)\nHungary ............................................\n8,50\n7,00\n20 Oct 2009\n(-0,50)\nPoland ..............................................\n6,00\n3,50\n28 Oct 2009\n(0,00)\nRussia ..............................................\n11,00\n9,50\n30 Oct 2009\n(-0,50)\nTurkey ..............................................\n16,75\n6,75\n16 Oct 2009\n(-0,50)\nIceland ..............................................\n15,50\n11,00\n05 Nov 2009\n(-1,00)\nSource: National central banks\nThe Governing Council of the European Central Bank (ECB) left the policy rate\nunchanged at recent meetings and affirmed that it had no precommitment on when to\nwithdraw the emergency measures introduced to fight the financial crisis, but that it\nwould take the required steps at the appropriate time. The Bank of England’s Monetary\nPolicy Committee (MPC) kept the policy rate unchanged at a record low of 0,50 per\ncent at recent meetings and increased the stock of asset purchases in terms of the Asset\nPurchase Facility. It announced in October 2009 that it would give more banks access to\nits open-market operations and deposit facilities to help smaller institutions better\nmanage their liquidity. \nCentral banks in emerging-market economies have either held policy rates steady or\nhave lowered them further since the publication of the May 2009 Monetary Policy\nReview. The Czech National Bank held the policy rate at a record low of 1,25 per cent\nat its most recent meeting on signs that the outlook for inflation remained subdued. The\ncentral bank of the Republic of Turkey lowered the policy rate by 50 basis points in\nOctober 2009 after an MPC assessment that inflation was expected to remain at low\nlevels for an extended period, and that the ongoing recovery in economic activity would\nbe gradual and protracted.\nThe People’s Bank of China announced a continued “moderately loose” monetary policy\nstance in September 2009 to cement China’s economic recovery further.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nExchange rate developments\nHaving recovered markedly in March and April 2009 as investor sentiment improved\naround the world, the nominal effective exchange rate of the rand (NEER), measured\nagainst a basket of 15 currencies, rose from 67,2 index points on 1 May to 68,6 index\npoints on 5 November 2009 (Figure 7). Over this period, the bilateral exchange rate of\nthe rand appreciated from R8,43 to R7,67 against the US dollar, and depreciated from\nR11,26 to R11,37 against the euro. \nThe strengthening of the rand against the US dollar is largely due to the relative\nweakness of the latter currency, which depreciated by approximately 12 per cent against\nthe euro over the period. Furthermore, dollar weakness has resulted in higher\ncommodity prices, which have supported the foreign exchange rate of the rand. This\nphenomenon is not unique to the rand as other commodity-based economies have\nexperienced similar currency strength against the US dollar. \nLabour markets\nIn recent months inflationary pressure emanating from the labour markets has been\nmoderating (Figure 8). Wage inflation measured in terms of the year-on-year changes in\nnominal remuneration per worker in the formal non-agricultural sector, which recorded\njust over 12 per cent in each of the quarters of 2008, slowed to 11,5 per cent in the first\nquarter and 8,7 per cent in the second quarter of 2009. Labour productivity, measured\nSouth African Reserve Bank\n11\nMonetary Policy Review November 2009\nIndex: 2000 = 100 (foreign currency per rand)\nRand per euro\nRand per US dollar\nFigure 7 \nExchange rates of the rand\n2007\nM\nM\nJ\nS\nN\nJ\n2008\nM\nM\nJ\nS\nN\nJ\n2009\nM\nM\nJ\nS\nN\nJ\n \nNominal effective exchange rate of the rand (NEER)\n \nRand per US dollar \n \nRand per euro (right-hand scale)\n45\n55\n65\n75\n85\n6\n7\n8\n9\n10\n11\n12\n7\n8\n9\n10\n11\n12\n13\n14\n15\n12\nas the ratio of real value added to employment in the formal non-agricultural sector, rose\nby 0,1 per cent in the first quarter of 2009, before declining by 0,5 per cent in the second\nquarter. Economy-wide unit labour cost inflation, measured as wage inflation adjusted for\nproductivity changes in the formal non-agricultural sector, therefore declined to 11,3 per\ncent in the first quarter of 2009 and 9,3 per cent in the second quarter, after having\nrecorded a year-on-year increase of around 12,6 per cent in the final quarter of 2008. \nThe average level of wage settlements reported for the first nine months of 2009 by the\nAndrew Levy Wage Settlement Survey was 9,4 per cent (Figure 9), suggesting that wage\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPercentage change over four quarters\n2004\n2003\n2005\n2007\n2008\n2009\n2006\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 \n \nSources: Statistics South Africa and South African Reserve Bank calculations\n-2\n0\n2\n4\n6\n8\n10\n12\n14\n16\nPer cent\n1995\n1997\n1999\n2001\n2003\n2005\n2007\n2009*\nFigure 9 \nAverage annual inflation and wage settlements\n \nCPI\n \nAverage wage settlements\n* Data for 2009 are for the first nine months of the year \n \nSources: Andrew Levy Employment Publications and Statistics South Africa\n-2\n0\n2\n4\n6\n8\n10\n12\n14\n16\nsettlements are falling slowly when compared to the 9,8 per cent recorded for the year\n2008. Settlements have ranged from 5 per cent in the paper/printing sector to 12,3 per\ncent for the food/agriculture sector over the first nine months of 2009. \nDemand and output\nReal GDP contracted by 3 per cent on an annualised basis in the second quarter of\n2009, following declines of 6,4 per cent in the first quarter of the year and 1,8 per cent\nin the final quarter of 2008. Real value added by the primary, secondary and tertiary\nsectors all continued to contract in the second quarter. The largest negative contribution\ncame from the manufacturing sector, where real value added declined by 10,2 per cent,\nfollowing a contraction of 22,1 per cent in the preceding quarter.\nReal gross domestic expenditure also contracted during the second quarter of 2009\n(Table 7). Inventory depletion, a contraction in final consumption expenditure by house-\nholds, and slowing growth in final consumption expenditure by government and in gross\nfixed capital formation resulted in real gross domestic expenditure contracting at an\nannualised rate of 14,5 per cent during the quarter.\nTable 7\nGrowth in real GDP and expenditure components\nPer cent*\n2008\n2009\n1st qr\n2nd qr\n3rd qr\n4th qr\nYear\n1st qr\n2nd qr\nFinal consumption expenditure: \nHouseholds ......................................\n3,0\n1,3\n-0,9\n-2,7\n2,3\n-4,8\n-5,8\nGeneral government ........................\n12,3\n-2,1\n10,2\n3,6\n5,0\n5,8\n0,2\nGross fixed capital formation ..............\n10,4\n5,2\n7,3\n3,0\n10,2\n12,7\n0,1\nChanges in inventories (R billions)** ....\n11,1\n-4,7\n-11,2\n-21,1\n-6,5\n-16,6\n-52,9\nGross domestic expenditure..............\n12,5\n-1,7\n0,7\n-3,9\n3,1\n2,2\n-14,5\nExports of goods and services............\n-30,1\n42,5\n4,0\n-16,4\n1,7\n-55,1\n-10,1\nImports of goods and services............\n3,9\n7,9\n4,7\n-19,0\n2,2\n-27,5\n-41,9\nGross domestic product ....................\n1,7\n5,0\n0,2\n-1,8\n3,1\n-6,4\n-3,0\n*\nQuarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data \n**\nConstant 2000 prices\nReal final consumption expenditure by households contracted by 5,8 per cent in the\nsecond quarter of 2009, following a decline of 4,8 per cent in the first quarter of the year.\nHousehold expenditure on durable goods has been particularly affected, declining by\n18,8 per cent in the second quarter of 2009 and having contracted in each of the\npreceding 6 quarters. Growth in real final consumption expenditure by general\ngovernment decelerated to 0,2 per cent in the second quarter of 2009, after having\nincreased at an annualised rate of 5,8 per cent in the first quarter. This deceleration is\nmainly attributable to lower spending on the Defence Procurement Programme.\nFollowing a revised annualised increase of 12,7 per cent in the first quarter of 2009,\ngrowth in real gross fixed capital formation slowed to 0,1 per cent in the second quarter.\nThis deceleration mainly reflected substantially slower growth in real capital outlays by\npublic corporations, while those by private business enterprises declined at a similar rate\nto that recorded in the first quarter of 2009. Real inventories declined by R52,9 billion in\nthe second quarter of 2009 compared with a decline of R16,6 billion in the first quarter.\nSouth African Reserve Bank\n13\nMonetary Policy Review November 2009\n14\nInventory depletion in the second quarter of 2009 was mainly evident in the\nmanufacturing and agricultural sectors.\nDevelopments in the external sector of the economy resulted in the ratio of the deficit on\nthe current account of the balance of payments to GDP declining from 7,0 per cent in\nthe first quarter of 2009 to 3,2 per cent in the second quarter. The decline in the volume\nof imports of goods and services outweighed a smaller decline in the volume of exports\nof goods and services, resulting in the smaller deficit on the trade account in the second\nquarter of 2009. Lower net income and other service-related payments to non-residents\nmeant that the shortfall in the country’s net services, income and current transfer\naccount with the rest of the world also narrowed significantly. \nSouth Africa’s gross international reserve position strengthened from US$35,7 billion at\nthe end of July 2009 to US$39,8 billion at the end of October, partly due to a general\nallocation of SDR 1,385 billion from the IMF in August and a special allocation of \nSDR 179,9 million in September. The international liquidity position also improved from\nUS$34,7 billion at the end of July to US$38,8 billion at the end of October.\nReal-estate and equity prices \nA general easing in risk aversion became evident during the second half of 2009 as\nfinancial markets globally displayed signs of cautious optimism regarding a recovery\nin growth. The South African share market followed the upward movement in\ninternational markets, benefiting from a recovery in commodity prices, the lowering of\ndomestic interest rates and continued non-resident interest. By contrast, the property\nmarket remained in the doldrums, although there are some indications of a return to\npositive growth.\nThe year-on-year changes in nominal house prices (Figure 10) have generally been\nnegative since the end of 2008, declining to rates last recorded more than 20 years ago.\nThe rate of change in the average price of residential property in the middle segment of\nMonetary Policy Review November 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 10 House prices \nthe market, as measured by the Absa House Price Index, reached a recent low at a\nnegative rate of 3,5 per cent in April 2009, before improving to 2,6 per cent in October.\nThis was mirrored by the First National Bank House Price Index which recorded a similar\nimprovement from a negative year-on-year rate of 8,7 per cent in June 2009 to -1,0 per\ncent in October. The change over 12 months in the Standard Bank median house price\nrecorded a decline of 4,6 per cent in October 2009. \nBuilding statistics published by Statistics South Africa, summarised in Table 8,\nindicate the deteriorating level of activity in the real-estate sector during 2009, while\nsuggesting bleak prospects for future construction activity. The real value of building\nplans passed by larger municipalities during the first eight months of 2009, which\nprovides insight into future construction activity, decreased by 29,5 per cent\ncompared with the period January to August 2008. The real value of building plans\npassed for residential buildings recorded a decline of 46,5 per cent measured on this\nbasis, with less pronounced decreases of 13,6 per cent recorded in the category for\nadditions and alterations, and 10,3 per cent in plans for non-residential buildings. \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-17,4\n-29,5\nResidential.................................................. \n2,7\n-3,2\n-26,5\n-46,5\nNon-residential .......................................... \n31,7\n-5,9\n2,0\n-10,3\nAdditions and alterations .......................... \n5,0\n1,9\n-12,5\n-13,6\nBuildings completed\nTotal ..............................................................\n21,5\n9,5\n1,8\n-11,7\nResidential ..............................................\n16,7\n1,2\n-8,2\n-25,2\nNon-residential ........................................\n30,6\n48,6\n19,4\n1,0\nAdditions and alterations..........................\n34,0\n6,1\n15,9\n10,0\n*\nData for 2009 are for the first eight months of 2009 compared with the same period of the previous year\nSource: Statistics South Africa\nThe real value of buildings reported as completed in larger municipalities during the first\neight months of 2009 decreased by 11,7 per cent when compared with the same period\na year earlier. Measured on this basis, the real value of residential buildings completed\ndeclined by 25,2 per cent, while increases of 1,0 per cent for non-residential buildings\nand 10,0 per cent for additions and alterations were reported.\nFollowing global trends share prices on the JSE Limited (JSE) recorded a notable\nrecovery during 2009 (Figure 11). From its recent low of 18 121 index points on \n3 March 2009 the FTSE/JSE All-Share Index (Alsi) increased by 43 per cent to 25 925\non 4 November 2009. The trend was consistent with international markets becoming\nincreasingly confident of a global economic recovery. Continued non-resident interest,\nimprovements in commodity prices and lower domestic interest rates ensured that the\nbuoyant share market conditions in the first ten months of 2009 were spread fairly\nwidely across the various sectors. The daily average price level of shares listed in the\nresources sector increased by 40 per cent from 3 March to 4 November 2009. Over\nthe same period the industrial index recorded a gain of 44 per cent while the financial\nSouth African Reserve Bank\n15\nMonetary Policy Review November 2009\n16\nindex rebounded by 48 per cent as the lower interest rates and the appreciating\nexchange value of the rand weighed favourably on the profitability prospects of\ncompanies in these sectors. \nFiscal policy \nThe Medium Term Budget Policy Statement (MTBPS) was presented by the Minister of\nFinance on 27 October 2009. The revised budget balance for 2009/10 is a deficit of\nR183,8 billion, which represents 7,6 per cent of GDP (Table 9). This revised budget\nbalance is twice the deficit of 3,8 per cent of GDP projected in the Budget Review 2009.\nConsolidated government revenue reflects the impact of lower earnings and reduced\nconsumption and imports on tax revenues, and is now expected to be \nR657,5 billion in 2009/10, significantly lower than the estimate of R740,4 billion made in\nFebruary. Consolidated government expenditure in 2009/10 is expected to be slightly\nhigher than projected in February, rising from R834,3 billion to R841,4 billion. In the\nmedium term, projected deficits as a percentage of GDP are 6,2 per cent for 2010/11,\ndeclining to 5,0 per cent for 2011/12, and to 4,2 per cent for 2012/13. \nThe estimated public-sector borrowing requirement (PSBR), reflecting the higher financing\nrequirements of government and the non-financial public enterprises, increased from\nR88,9 billion in 2008/09 (3,8 per cent of GDP) to a revised R284,5 billion for 2009/10 \n(11,8 per cent of GDP). The PSBR is projected to remain relatively high over the medium\nterm as a result of the infrastructure programmes of the non-financial public enterprises,\ndeclining to 11,2 per cent of GDP in 2010/11, to 9,4 per cent of GDP in 2011/12 and to\n8,4 per cent of GDP in 2012/13. Net loan debt as a share of GDP has been revised\nupwards from 25,6 per cent of GDP in the February Budget Review 2009 to 29,2 per cent,\nand is projected to increase to 41,1 per cent of GDP by 2012/13.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nIndices: 1 January 2007 = 100\n2007\n2008\n2009\nFTSE/JSE All-Share Index\nUnited States (S&P 500)\nEuro area (DJ Euro Stoxx 50)\nJapan (Nikkei 225)\nFigure 11 Share price indices\n0\n50\n100\n150\n200\n250\nBrazil (Bovespa)\nIndia (Bombay Sensitive)\nMalaysia (Kuala Lumpur Composite)\nChina (Shanghai A Share)\nSources: JSE Limited and I-Net Bridge\nTable 9\nPublic finance data \n2008/09\n2009/10\n2010/11\n2011/12\n2012/13\nRevised\nOutcome\nBudget\nestimates\nMedium-term estimates\nConsolidated \ngovernment* (R billions)\nRevenue..........................\n692,0\n740,4\n657,5\n743,5\n833,4\n921,3\nExpenditure.....................\n715,4\n834,3\n841,4\n905,6\n975,6\n1 052,8\nBudget balance...............\n-23,4\n-94,0\n-183,8\n-162,1\n-142,1\n-131,5\nAs a percentage of GDP\nBudget balance...............\n-1,0\n-3,8\n-7,6\n-6,2\n-5,0\n-4,2\nTotal net loan debt ..........\n22,6\n25,6\n29,2\n34,2\n37,8\n41,1\nPSBR** ...........................\n3,8\n8,0\n11,8\n11,2\n9,4\n8,4\n*\nIncludes national government, provinces, social security funds and selected public entities\n**\nPSBR: Public-sector borrowing requirement\nSource: National Treasury Medium Term Budget Policy Statement 2009\nMonetary conditions\nGrowth in total loans and advances extended to the private sector remained lacklustre\nin 2009, despite the cumulative effect of decreases in lending rates as monetary policy\neased in successive steps from December 2008 (Figure 12). The sluggish response in\nthe quantity of credit demanded to decreases in lending rates partly reflected the low\nlevels of consumer and business confidence associated with concerns over prospects\nfor income and employment, and impaired balance sheets on account of asset \nmarket declines. The supply of credit has also been affected by stricter lending criteria\nSouth African Reserve Bank\n17\nMonetary Policy Review November 2009\nPercentage change over twelve months\n2003\n2006\n2004\n2005\n2007\n2008\n2009\nFigure 12 Banks’ loans and advances by type\nMortgages\nInstalment sale and leasing\nCredit card advances\nGeneral advances\nOverdrafts\nTotal loans and advances\n-20\n-10\n0\n10\n20\n30\n40\n50\n60\n18\napplied by banks. Box 1 provides an analysis of banks’ deposit and lending rates over\nthe inflation targeting period.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nBox 1 Analysis of banks’ deposit and lending rates over the inflation-\ntargeting period\nCredit extension to both households and companies has been slow to react to the easier monetary\npolicy stance adopted since December 2008 as weaker macroeconomic conditions continue to\naffect the South African economy. Year-on-year growth in banks’ total loans and advances extended\nhas declined significantly from near record levels of around 25 per cent, on average, in 2007 to\nsingle-digit growth in 2009. Growth in money supply followed a similar downward trajectory due to\ndeteriorating growth in household and corporate income and declining household wealth.\nThis box briefly examines the degree of pass-through and the speed of adjustment in banks’\ndeposit and lending rates in response to changes in the benchmark repurchase rate in South Africa\nduring the period since the introduction of the inflation-targeting monetary policy framework in\n2000. The data are obtained from Banks Act BA returns (DI returns prior to 2008), submitted to\nthe Registrar of Banks.\nThe lending and deposit rates offered by banks are affected by their cost of funding which, inter\nalia, is impacted by the money-market yield curve and, ultimately, the repurchase rate. Variable\ndeposit and lending rates, therefore, fluctuate along with changes in the repurchase rate – lending\nrates at a margin above, and deposit rates at a margin below to slightly above the repurchase rate,\ndepending on maturity, risk, liquidity and prevailing economic conditions. \nDeposit rates\nAn average calculated deposit rate or funding cost is derived by analysing banks’ interest outlays\nagainst deposit liabilities1 (Figure B1.1). \nThe spread between deposit rates and the repurchase rate narrowed during the initial phases of\nthe previous and current monetary policy easing cycles, while adjustments to deposit rates also\ntended to lag during policy tightening phases. Depositors, therefore, tended to receive a relatively\nsmaller interest benefit during monetary policy tightening phases, but received a relatively larger\ninterest benefit during monetary easing cycles. A much narrower spread between banks’ deposit\nPer cent\n2001\n2000\n2002\n2003\n2004\n2005\n2006\n2007\n2008\n2009\nRepurchase rate\nSpread\nFigure B1.1 \nCalculated average funding cost and the \n \nrepurchase rate\nAverage funding cost\n-6\n-3\n0\n3\n6\n9\n12\n15\n1\nCalculated as the ratio\nof total rand-denominated\ninterest expenses to total\nrand-denominated deposits.\nSouth African Reserve Bank\n19\nMonetary Policy Review November 2009\nrates and the repurchase rate was maintained in 20082 and early 2009 as banks probably\nattempted to attract deposits during a period of decelerating real economic growth. The beneficial\nrates that banks offered are especially evident in rates on longer term deposits, such as fixed\ndeposits (Figure B1.2). \nInformation on the actual reported interest rates on existing deposits offered by banks, illustrated\nin Figure B1.3, also tends to paint a similar picture. While deposit rates vary depending on the client\nand term of deposit, the rates on fixed deposits of less than one year for different economic sectors\ndisplayed a close alignment with the repurchase rate. Interest rates on existing deposits lagged the\ndownward movement in the repurchase rate during 2009, with households receiving a somewhat\nlarger benefit relative to other client categories.\nPer cent\nRepurchase rate\nTransmission account deposits\nFigure B1.2 \nDeposit categories: Calculated average yields\nCurrent account and call deposits\nNotice and fixed deposits\n0\n3\n6\n9\n12\n15\n2001\n2000\n2002\n2003\n2004\n2005\n2006\n2007\n2008\n2009\nPer cent\nFigure B1.3 \nClient categories: Average 0–1-year fixed-deposit \n \nrates (top five banks)\n6\n7\n8\n9\n10\n11\n12\n13\n \nRepurchase rate\n \nCentral and provincial government – fixed deposits\n \nPrivate non-financial corporations – fixed deposits\n \nHousehold sector – fixed deposits\n2008\n2009\n2\nThe implementation of\nthe Basel II accounting\nframework in January 2008\nmay have influenced the\ncomparability of data over\nthe period of analysis.\n20\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nLending rates\nThe average calculated yield on banks’ total rand-denominated loans and advances was found to\nfluctuate at around 240 basis points above the repurchase rate from 2001 to 2009. Some\nnarrowing occurred during 2002 and from 2006 to 2008 during the tightening phases of monetary\npolicy, suggesting that lending rates lagged the increases in the repurchase rate. Similarly, the gap\nbetween lending rates and the repurchase rate widened when policy eased in 2003 and 2009. The\nlagged response of lending rates probably contributed to the slowdown experienced in the growth\nof credit extension in the wake of the monetary policy easing cycle. The repurchase rate and an\nimplied average lending rate3 are shown in Figure B1.4. \nFigure B1.5 shows that most of the lending rates of the different loan categories fluctuated between\nthe repurchase rate and the prime rate (benchmarked at the repurchase rate plus 350 basis\npoints). Mortgage rates, a lower risk product due to its term and collateral requirements, fluctuated\nPer cent\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\nFigure B1.4 \nCalculated average interest rate on total loans and \n \nadvances, and the repurchase rate\n \nRepurchase rate\n \nAverage lending rate\n \nSpread\n2001\n2000\n2002\n2003\n2004\n2005\n2006\n2007\n2008\n2009\nPer cent\nPrime overdraft rate\nMortgage loans\nInstalment sale and leasing finance\nFigure B1.5 \nCalculated average interest rates on categories of \n \nloans and advances compared to the repurchase \n \nand prime rates\nRepurchase rate\nCredit card debtors\nOverdrafts and loans\n5\n10\n15\n20\n25\n2001\n2000\n2002\n2003\n2004\n2005\n2006\n2007\n2008\n2009\n3\nCalculated as the ratio\nof total rand-denominated\ninterest income to total rand-\ndenominated loans and\nadvances.\nSouth African Reserve Bank\n21\nMonetary Policy Review November 2009\naround mid-way between the repurchase and prime rates, while interest rates on instalment sales\nfluctuated closer to the prime rate. Overdrafts are generally subject to greater variation in lending\nrates, while credit card debtors are charged a significantly higher premium for the privilege of\nhaving access to a more flexible credit facility. \nWhen comparing actual reported lending rates for households and companies, the interest rates\nvary according to the loan category (Figure B1.6). In the case of mortgage loans, the rates for\nhouseholds and companies appeared to be quite similar, while overdraft rates displayed a greater\nvariance between different economic sectors. Rates on overdrafts to the public sector are generally\nsubstantially lower than those available to the private and household sectors. \nConclusion\nThis analysis suggests a complete long-term pass-through for most lending rates, but incomplete\nimmediate short-term pass-through of the policy rate to bank lending rates. However, there is no\nevidence of an asymmetric response of lending rates to changes in the repurchase rate. Although\nbanks’ lending and deposit rates appear to have reacted in a broadly consistent way during the\nperiod under review, there is some evidence of heterogeneity in the adjustments across lending\ncategories. Furthermore, there is evidence of a somewhat more lagged response of banks’ interest\nrate adjustments over the most recent monetary policy cycle. While this may constrain lending\nduring an easing phase of the cycle, the relatively more favourable deposit rates that have prevailed\nin the recent period should encourage renewed growth in money supply over the longer term.\nSources\nImplied average interest rates were calculated from the aggregated information of bank returns:\nBA100 Balance sheet (DI100 prior to January 2008)\nBA120 Income statement ((DI200 prior to January 2008) \nAverage actual interest rates were extracted from: \nBA930 Interest rates on deposits, loans and advances\nPer cent\nPer cent\nFigure B1.6 \nAverage lending rates (top five banks)\n6\n9\n12\n15\n5\n10\n15\n20\n \nRepurchase rate\n \nPrivate non-financial corporate sector \nJ\nJ\nS\nN\nM\nM\n2008\nJ\nJ\nS\nN\nM\nM\n2009\nMortgage rates\nOverdraft rates\nHousehold sector\nCentral and provincial government\n22\nYear-on-year growth in banks’ total loans and advances to the private sector fell back\nfrom average growth of around 20 per cent in 2008 to a negative 0,2 per cent in\nSeptember 2009 – the slowest growth on record. Negative year-on-year rates of change\nin total loans and advances were last recorded in May 1966. Growth over 12 months in\nmortgage advances, which dominate the bank loans and advances aggregate, declined\nnotably from 24,5 per cent at the start of 2008 to 4,8 per cent in September 2009.\nGrowth in other loans and advances, which include general loans, overdrafts and credit\ncard advances, followed a similar downward trajectory, declining to negative growth\nrates from May 2009. The securitisation of loans and advances by banks, a\nphenomenon that gathered pace in South Africa before contracting sharply in the wake\nof the turmoil in international markets in 2008, is discussed in Box 2. \nSimilar to the deceleration in credit extension, the year-on-year growth in broad money\nsupply (M3) fell back from average growth of 19,0 per cent in 2008 to 4,0 per cent in\nSeptember 2009 (Figure 13). During the same period a decline of similar magnitude\nwas recorded by the narrower M2 monetary aggregate. The M1 monetary aggregate,\nwhich represents cash, cheque and other demand deposits, declined to negative\ngrowth in the first three months of 2009, before improving to year-on-year growth of\n1,2 per cent in September.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPercentage change over 12 months\n2006\n2004\n2003\n2005\n2007\n2008\n2009\nFigure 13 Growth in monetary aggregates\n-10\n-5\n0\n5\n10\n15\n20\n25\n30\n35\nM3\nM1\nM2\nBox 2 Asset-backed securitisation by South African banks\nThe United States (US) sub-prime-related credit crisis placed renewed emphasis on the issuance\nand use of financial derivatives and financing vehicles globally as securitisation of risky assets\nserved to amplify the extent of the crisis. Securitisation provides an avenue whereby non-\nmarketable loans and/or cash flows are replaced by negotiable securities issued in the capital\nmarkets. By issuing such debt instruments, future cash inflows are turned into present cash. \nInternationally, and especially in the US market, the securitisation of risky mortgage loans and the\nuse of financial derivatives and financing vehicles helped to transfer and spread the risk in an\nincreasingly leveraged global financial system. Securitisation transactions in these markets\naccelerated after 2004 when the Basel II4 Accord on international bank regulation was published.\nThe second Basel Accord opened an arbitrage opportunity for banks through its recognition of the\n4\nBasel Accord: A set of\nrecommended common\nbanking standards agreed to\nby the Basel Committee on\nBank Supervision in 1988, with\nthe focus on capital adequacy\nand risk. The second Basel\nAccord, known as Basel II,\nbecame effective from 2008. \nIt focuses on three main areas,\nnamely minimum capital\nrequirements, supervisory\nreview and market discipline.\nSouth African Reserve Bank\n23\nMonetary Policy Review November 2009\ntransfer of assets, or the risks related to them, and allowing for the exclusion of these assets from\nrisk-based calculations. This essentially enabled banks to reduce their capital requirements through\nsecuritisation and contributed towards the acceleration in off-balance-sheet activity.\nIn South Africa the scale and extent of securitisation were limited by, inter alia, market size, lack of\ndemand and prudent supervision. The first issuance in the present decade of a mortgage-backed\nsecuritisation to the value of R1 billion occurred in 2002. This was followed by the securitisation of\nvehicle receivables, and other types of collateralised loans and advances in subsequent years.\nActivity picked up from 2005 with securitisations amounting to around R10 billion for that year.\nIssuance doubled in 2006 and increased further to over R30 billion in 2007. The issuance of\nsecuritised bank assets virtually dried up in early 2008, when turmoil in international markets led to\nrisk aversion and a general tightening in credit conditions. An independent review of all\nsecuritisation schemes affecting banks was commissioned by the Bank Supervision Department of\nthe South African Reserve Bank (the Bank) during April 2008. \nFollowing the recommendations made by a large international locally based auditing firm, the\nsupervisory authority stated its intent to consider the proposals in order to ascertain the need to\nrevise the legislative framework. The report also noted that securitisation in South Africa was not\nas complicated as in the US and in European countries, and that the assets housed in South\nAfrican schemes tended to have a high level of transparency. Risks related to securitisation\nschemes were found to have been managed appropriately by the banks reviewed. Furthermore,\ntop-tier South African banks, on average, sourced only 4 per cent of their total funding from\nsecuritisation, which was significantly less than that of international banks that struggled during the\nliquidity crisis.\nReferences\nWehinger, G. 2008. “Lessons from the financial market turmoil: Challenges ahead for the financial\nindustry and policy makers”. Financial Market Trends, Vol. 2008/2, No. 95. Paris: Organisation for\nEconomic Co-operation and Development. \nSouth African Reserve Bank. 2009. Bank Supervision Department Annual Report 2008. Pretoria:\nSouth African Reserve Bank.\nR billions\nFigure B2.1 \nAsset-backed securitisations by private-sector \n \nbanks – new issues\n \nInstalment sale and leasing finance \n \nsecuritised \n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\n \nMortgage advances securitised\n \nOther loans and advances securitised\nSource: Bond Exchange of South Africa \n2005\n2006\n2007\n2008\n2009\n24\nMonetary policy\nThe global financial crisis resulted in the widespread adoption of more accommodating\nmonetary policy stances globally. South Africa’s monetary policy easing began in\nDecember 2008, and in the four MPC meetings between then and April 2009 the\nrepurchase rate was reduced by 350 basis points (Figure 14). Since then, and following\nthe publication of the previous Monetary Policy Review, there were six meetings of the\nMPC, and the repurchase rate was reduced by a further 150 basis points – by 100\nbasis points in May and a further 50 basis points in August. The repurchase rate\ndeclined to a level of 7 per cent per annum, which was the same as the low point of\nthe interest rate cycle reached in 2005, and the lowest nominal policy rate since the\nlate 1970s. However, the inflation rate in 2009 was significantly higher than that which\nprevailed in 2005.\nThe adjustment in the repurchase rate offset the 500 basis point monetary policy\ntightening implemented between June 2006 and June 2008, and was over a considerably\nshorter period. This decisive response reflected the severity of the global and domestic\ndownturn, and the consequent dissipation of inflationary pressures. However, during the\nperiod under review, it appeared that the global and domestic recessions were reaching\ntheir lower turning points, and, given the lag in the impact of monetary policy actions on\ndemand and inflation, the need for further stimulus was reduced.\nDuring this period, the inflation rate remained outside the inflation target range, but the\ninflation forecasts of the staff of the Bank consistently showed that the inflation rate was\nexpected to follow a persistent downward trend to within the target range. By the time\nof the November 2009 meeting the latest inflation outcome (September) was 6,1 per\ncent, only marginally outside the range. Although there were slight changes to the\nforecast in the various meetings, as a result of changing assumptions of the exogenous\nvariables, the pattern remained relatively stable. The forecasts consistently showed that\nCPI inflation was expected to enter the inflation target range on a sustained basis in the\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPer cent\n2004\n2003\n2005\n2006\n2007\n2008\n2009\nPrime overdraft rate\nRepurchase rate\nThree-month negotiable certificates of deposits rate\nFigure 14 The repurchase rate and other short-term interest rates\n6\n8\n10\n12\n14\n16\n18\nsecond quarter of 2010 and to remain within the target range until the end of the\nforecast period in the final quarter of 2011. However, the changing electricity price\nassumptions reversed this favourable trend somewhat in the later part of the forecast\nperiod. The most recent forecast presented to the MPC is discussed in greater detail\nlater in this review. Of concern to the committee was the fact that the central forecast\nremained close to the upper end of the target, so that relatively small shocks to inflation\ncould result in a breach of the upper end of the target. During the period under review,\nthe main changes to exogenous assumptions related to the exchange rate and\nadministered prices, particularly petrol and electricity prices. \nInflation expectations are an important determinant of inflation outcomes, as they impact\non price and wage setting. During the past period, inflation expectations have been a\nconcern for the committee, as they did not appear to reflect fully the actual decline in the\ninflation that had been taking place. According to the inflation expectations survey\nconducted by the Bureau for Economic Research (BER) at Stellenbosch University,\ninflation expectations for 2009 deteriorated during the second quarter of 2009. While a\ndownward trend for the subsequent two years remained, only the financial analysts\nexpected that inflation would be within the target range in 2010 and 2011. The survey\nconducted in the third quarter of 2009 showed some improvement, but, on average,\nremained above the upper end of the inflation target range, with inflation expected to\naverage 7,5 per cent in both 2010 and 2011. Again, only the financial analysts expected\nthat inflation would be within the target range in these years.\nThe outlook for the global economy featured prominently in the deliberations of the\ncommittee, because of the linkages to the domestic economy. Whereas in the first few\nmonths of the year the global economy was characterised by progressively worse\noutcomes, by the May 2009 MPC meeting there were tentative signs that the global\nrecession was bottoming out as financial market conditions had become less restrictive.\nDuring the subsequent months, there was greater optimism concerning the global\noutlook, but there were some doubts about the strength and the sustainability of the\nrecovery. By September forecasts were generally being revised upwards, and the risks to\nthe global growth prospects were generally assessed to be on the upside. There were,\nhowever, still concerns about the timing and extent of reversals of monetary and fiscal\npolicy stimuli, which could retard the rate of recovery. The pace of recovery was also\nexpected to be uneven across regions, with faster growth expected in emerging markets,\nparticularly those in Asia. As a result of weak demand and lower commodity prices, global\ninflation pressures remained subdued and were not expected to place significant\npressures on domestic inflation despite the generally loose monetary conditions.\nThe domestic recession and the associated widening of the domestic output gap resulted\nin downward pressure on domestic inflation. The output gap, which is calculated as the\ndifference between actual and potential output growth, is an important determinant of\ninflation. While potential output is difficult to calculate with precision and may also have\ndeclined over the past months, the output gap nevertheless remains wide. By the time of\nthe May meeting, the extent of the GDP growth contraction in the first quarter was\napparent. GDP had contracted at a quarter-on-quarter annualised rate of 6,4 per cent,\nand capacity utilisation in the manufacturing sector had declined to 79 per cent in the\nsame period. At that time it was expected that negative growth would persist into the\nsecond quarter, but the pace of contraction was expected to moderate. This was\nconfirmed by the quarter-on-quarter decline of 3,0 per cent, published in August. \nIn September 2009 the committee indicated that the lower turning point of the cycle may\nhave been reached, but that recovery in the short term would be relatively slow and\nSouth African Reserve Bank\n25\nMonetary Policy Review November 2009\n26\ntentative. The South African Reserve Bank’s composite leading indicator indicated that\nthe economy was likely to resume positive growth by the end of the year. This was\nconsistent with other high-frequency indicators, including the Kagiso/BER Purchasing\nManagers’ Index (PMI). By the October meeting, the three-month-on-three-month\ngrowth rates in manufacturing and mining had become positive, further reinforcing the\npositive growth outlook.\nThe subdued domestic expenditure was a persistent theme during the period under\nreview, and there were no signs that the easier stance of monetary policy was likely to\nhave imminent demand-led inflationary impacts. Wholesale and retail trade sales\ncontracted during this period, as did overall household consumption expenditure.\nExpenditure on durable goods was particularly weak over the period. In October the\nMPC noted that real retail trade sales had declined at a year-on-year rate of 7,0 per cent\nin August, while in the three months to August there was a 1,0 per cent decline.\nHowever, there were some signs that the negative trend of motor vehicle sales may have\nreached its lower turning point in September 2009 with zero or slightly positive rates of\nchange being recorded on a month-on-month and quarter-on-quarter basis.\nTrends in domestic credit extension reflected the weak state of domestic consumption\nexpenditure. The committee noted that supply-side developments may also have\ncontributed to these pressures, with the generally tighter credit criteria applied by banks\nto both household and corporate sector borrowers. However, in October it was noted\nthat the Ernst & Young Financial Services Index had indicated that credit standards\napplied by retail banks to loan applications continued to tighten in the third quarter of\n2009, but at significantly lower levels. \nDomestic expenditure was also constrained by negative wealth effects over the period.\nAlthough equity prices had recovered significantly since their lows in March, they were\nstill significantly below the peaks reached in 2008. House prices also declined further\nover the period, but the various house price indices indicated that there appeared to be\na moderation in the rate of decline in house prices. These factors, along with indications\nthat consumers were attempting to reduce their overall debt and repair impaired balance\nsheets, were seen to be a constraint on consumption expenditure in the near term.\nIn the early stages of the global financial crisis, the rand exchange rate had depreciated\nsignificantly, and the exchange rate was seen as one of the main upside risk factors to\ninflation. However, during the period under review, as global risk aversion subsided and\ncommodity prices recovered somewhat, the rand appreciated along with a number of\nemerging-market and commodity-producing currencies. The exchange rate, while still\nrelatively volatile, strengthened significantly and by October had appreciated since the\nbeginning of the year by about 20 per cent on a trade-weighted basis. The committee\nrecognised the vulnerability of the rand to changes in sentiment or risk aversion, and felt\nthat the risk to inflation from this source had declined over the period.\nThe risks posed to the inflation outlook by a number of other variables were also\nperceived to have moderated somewhat. For most of 2008 and the early part of 2009,\nfood prices had posed an upside risk to the inflation outlook. Although food prices at the\nproducer price level had been moderating for some time, this was not initially reflected\nat the consumer price level. At the May meeting the committee noted that although\nmanufactured food price inflation had declined to 8,4 per cent in April and agricultural\nprice inflation to 2,2 per cent, the moderation at the consumer price level was stubbornly\nslow. At that time consumer food price inflation measured almost 18 per cent. Since\nthen the rate of deceleration of consumer food price inflation has increased and by\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nSeptember it had declined to 4,9 per cent; below the average headline inflation rate of\n6,1 per cent. Inflation at the producer price level continued to indicate that this\nfavourable trend was likely to continue.\nInternational oil prices had been one of the main upside risk factors for the first part of\n2008, but this changed later in the year when the oil price declined to a low of around\nUS$35 per barrel in the wake of the global downturn. Since then oil prices have doubled,\nas global prospects improved and the US dollar depreciated, but are still well below the\npeaks reached in 2008. However, the impact on domestic petrol prices was relatively\nmodest as the higher international oil prices were largely offset by the appreciation of the\nrand exchange rate. Since May 2009 the domestic petrol price had increased by about\n30 cents per litre.\nWhile demand pressures remained benign, the committee consistently identified cost-\npush pressures as being the main threat to the inflation outlook. Of particular concern\nwere wage settlements and administered price increases. During the period, nominal\nwage increases were generally in excess of inflation. However, by October 2009 the\ncommittee noted that there was evidence that nominal wage increases had been\nmoderating. The substantial electricity tariff increases requested by Eskom were seen as\nthe main longer-term threat to the inflation outlook. The request by Eskom for a trebling\nof current electricity tariffs over the next three years will be decided upon by the National\nEnergy Regulator of South Africa (NERSA) in February 2010.\nDuring this period the MPC continued to implement monetary policy within a flexible\ninflation-targeting framework. While focusing on bringing inflation down to within the\ntarget range over a reasonable time frame, the committee remained sensitive to cyclical\ngrowth considerations. At the MPC meeting in May the risks to the inflation outlook were\nstill seen to be on the downside and the committee decided to reduce the repurchase\nrate by 100 basis points. The view of the committee was that the widening output gap\ncontributed to an improved inflation outlook despite the relatively slow pace of disinflation.\nThe committee’s assessment of the downside risks was such that the additional\nreduction in the repurchase rate would provide a stimulus to the economy without\ncreating significant additional inflationary pressures. At the subsequent meeting, in June\n2009, the repurchase rate was kept unchanged. The committee was cognisant of the fact\nthat there had been significant monetary accommodation since December 2008, and felt\nit prudent to pause and assess the impact of previous interest rate reductions.\nBy August 2009 the MPC had decided that the balance of risks to the inflation outlook\nhad tilted to the downside again as a result of the continued adverse output and\nexpenditure trends, along with favourable exchange rate and food price developments.\nAccordingly, the committee decided to reduce the repurchase rate by a further 50 basis\npoints, bringing the cumulative decrease since December 2008 to 500 basis points. \nAt the subsequent meetings in September and October 2009 the risks to the outlook\nwere seen to be more balanced than before, particularly in the light of positive indications\nthat the economy was likely to emerge from the recession later in the year. At the same\ntime, the Eskom request for further electricity tariff increases imparted additional upside\nrisk to the outlook. This rebalancing of the perceived risks prompted an unchanged\nmonetary policy stance. At the November 2009 meeting the risks were assessed as\nhaving remained more or less unchanged and so the repurchase rate was kept\nunchanged at 7 per cent per annum.\nSouth African Reserve Bank\n27\nMonetary Policy Review November 2009\n28\nThe outlook for inflation\nThe outlook, risk and uncertainties relating to some of the factors that determine the\noutlook for inflation are presented in this section. \nInternational outlook\nRecent data suggest that aggressive policy action by central banks and governments in\na large number of countries has provided the impetus for the global economy to bottom\nout and regain traction. The huge policy responses by various governments have\nenabled an incipient economic recovery, restored confidence, and allayed fears of global\nfinancial collapse and deflation. The latest projections for growth in the G-20 countries,\npublished in the IMF’s October 2009 World Economic Outlook and incorporated in\nFigure 15, show a marked turnaround in the forecasts for 2010 relative to the growth\nrates achieved in 2009.\nA similar reversal is foreseen for the global economy. After contracting by about 1,1 per cent\nin 2009, world growth is projected by the IMF to reaccelerate to 3,1 per cent in 2010 (Table\n10). This is comfortably above recent growth rates, but still well below the rates achieved\nbefore the crisis. According to the latest projections, inflation in advanced economies is\nexpected to ease to 0,1 per cent in 2009 due to the contraction of global economic activity,\nbefore accelerating to 1,1 per cent in 2010. Owing to moderation in energy and food prices,\nannual consumer price inflation continued to decelerate in emerging markets as a group\nduring 2009. Inflation in emerging-market and developing economies is projected to\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nFigure 15 IMF forecasts for real GDP: G-20 countries\n \n2009\n \n2010\nSources: IMF World Economic Outlook database, October 2009\nAnnual percentage change\nRussia\nMexico\nTurkey\nJapan\nGermany\nItaly\nUnited Kingdom\nEuropean Union\nUnited States\nArgentina\nCanada\nFrance\nSouth Africa\nSouth Korea\nSaudi Arabia\nBrazil\nAustralia\nIndonesia\nIndia\nChina\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n8\n10\ndecelerate further from 5,5 per cent in 2009 to 4,9 per cent in 2010. Despite upward\npressure from recovering commodity prices, global inflation is expected to remain subdued\nthrough 2010, held back by significant excess capacity. Risks for sustained deflation appear\nsmall, as core inflation and inflation expectations in most major economies are still holding\nin the 1 to 2 per cent range.\nTable 10\nIMF projections of world growth and inflation for 2009 and 2010*\nPer cent\nReal GDP\nConsumer prices**\n2009\n2010\n2009\n2010\nWorld ......................................................................\n(-1,3)\n-1,1\n3,1\n(2,5)\n2,5\n2,9\nAdvanced economies ............................................\n(-3,8)\n-3,4\n1,3\n(-0,2)\n0,1\n1,1\nUnited States ....................................................\n(-2,8)\n-2,7\n1,5\n(-0,9)\n-0,4\n1,7\nJapan ................................................................\n(-6,2)\n-5,4\n1,7\n(-1,0)\n-1,1\n-0,8\nEuro area ..........................................................\n(-4,2)\n-4,2\n0,3\n(0,4)\n0,3\n0,8\nUnited Kingdom ................................................\n(-4,1)\n-4,4\n0,9\n(1,5)\n1,9\n1,5\nOther advanced economies ..............................\n(-4,1)\n-2,1\n2,6\n(0,6)\n1,3\n1,7\nOther emerging-market and developing countries....\n(1,6)\n1,7\n5,1\n(5,7)\n5,5\n4,9\nAfrica ................................................................\n(2,0)\n1,7\n4,0\n(9,0)\n9,0\n6,5\nCentral and eastern Europe ..............................\n(-3,7)\n-5,0\n1,8\n(4,6)\n4,8\n4,2\nCommonwealth of Independent States..............\n(-5,1)\n-6,7\n2,1\n(12,6) 11,8\n9,4\nDeveloping Asia ................................................\n(4,8)\n6,2\n7,3\n(2,8)\n3,0\n3,4\nChina ..............................................................\n(6,5)\n8,5\n9,0\n(0,1)\n-0,1\n0,6\nIndia ................................................................\n(4,5)\n5,4\n6,4\n(6,3)\n8,7\n8,4\nMiddle East........................................................\n(2,5)\n2,0\n4,2\n(11,0)\n8,3\n6,6\nWestern hemisphere..........................................\n(-1,5)\n-2,5\n2,9\n(6,6)\n6,1\n5,2\n*\nIMF projections for 2009 as at April 2009 in parenthesis\n**\nZimbabwe excluded\nSource: IMF World Economic Outlook, October 2009\nThe US economy appears to be stabilising after contracting for four consecutive\nquarters. It expanded at a higher-than-expected 3,5 per cent seasonally adjusted and\nannualised rate in the third quarter of 2009 thanks to a recovery in consumer spending.\nFinancial markets have shown signs of improvement, and interbank lending has largely\nreturned to normal. Companies appear to be done with their cost cutting and this could\nhave laid the groundwork for economic growth in the third quarter of 2009. The \nUS$787 billion stimulus bill was also expected to have given GDP a boost in the third\nquarter. High-frequency indicators point to a diminishing rate of deterioration, and\nindustrial production may be close to bottoming out; the inventory cycle is turning; and\nbusiness and consumer confidence has improved. These developments are consistent\nwith stabilisation of output during the second half of 2009 and with a gradual recovery\nemerging in 2010. \nJapan’s economy emerged from recession by improving significantly in the second\nquarter of 2009, after a second significant double-digit rate of decline in GDP in the first\nquarter of the year. Japan’s US$275 billion stimulus package was largely credited with\nthe rebound. The plan included massive public works projects, a “cash-for-clunkers”\nprogramme to promote the replacement of old vehicles with new ones, and sending\nconsumers cheques amounting to about US$130 each. These initiatives helped drive\nconsumer spending up, but analysts have been cautious about labelling Japan’s\nSouth African Reserve Bank\n29\nMonetary Policy Review November 2009\n30\neconomic turnaround as a true recovery, as businesses cut inventories very low in prior\nquarters. The increasing rate of deflation, unemployment rising to a record high in\nSeptember and jobless rates that are projected to rise above the 6 per cent level in 2010\nare growing sources of concern. Another concern is that Japan’s fiscal stimulus has\ngrown the debt-to-GDP ratio to an all-time-high of 200 per cent.\nConsumer and business survey indicators have been recovering in the euro area, but\ndata on real activity show few signs of stabilisation and thus activity is projected to\nstrengthen more slowly than elsewhere. Macroeconomic policies are providing support,\nbut much adjustment in the labour market still needs to be done. Rising unemployment\nwill weigh on consumption and activity, as will the region’s heavy dependence on the\nbanking sector. However, the two largest economies in the euro area recorded positive\ngrowth in the second quarter of 2009. Germany rebounded from four straight quarters\nof decline to grow at an annualised pace of 1,3 per cent in the second quarter of 2009.\nA US$120 billion stimulus package, a US$25,9 billion business lending programme and\nextensions of government-subsidised labour contracts helped Germany to emerge from\nthe recession. Business confidence in Germany rose to a one-year high, and consumer\nconfidence is at a 15-month high. France’s US$37 billion economic stimulus programme\nhelped bring the French economy back to positive growth in the second quarter of 2009\nfor the first time in more than a year. However, the fiscal deficit is forecast to rise to\nbetween 7 per cent and 7,5 per cent of GDP in 2010, which is more than double the \n3 per cent limit set by the European Union.\nThe OECD expects the UK’s real GDP to fall by 4,7 per cent in 2009, having previously\nforecast it would shrink by 4,3 per cent. The UK is the only major economy for which\nthe OECD has forecast a larger contraction than previously, although the country has\nshown signs that it is beginning to recover. In August the services sector grew at the\nfastest pace in almost two years, while factory output has begun to rebound after\nsignificant declines throughout the downturn. The latest business and consumer\nconfidence surveys show a slight improvement, and the UK government announced\nplans to continue the nation’s stimulus efforts at least through next year.\nMany developing countries posted growth in their GDP during the second quarter of\n2009, benefiting from China’s strength, as well as unprecedented global stimulus and\nfollowing a sharp decline in economic activity in the first quarter of 2009. Estimates for\nmany developing economies were revised upwards by the IMF and the positive\nfeedback loop, launched by government stimulus, is expected to continue. \nChina has weathered the global downturn better than any other G-20 nation and the\nChinese economy has responded to reflationary measures. China’s GDP rebounded well\nin the second quarter of 2009 as the economy was aided by a US$586 billion stimulus\npackage, increased bank lending and government support for exports. According to a\nrecent report from the Asian Development Bank, China’s state-controlled banking\nsystem lent US$1,2 trillion more to Chinese businesses and consumers in the first seven\nmonths of 2009 than during the same period a year ago. As a result, factory output,\nconstruction and auto sales grew rapidly in the second quarter. Although the global\ndownturn resulted in a slowdown in China’s GDP growth to an annualised rate of 6,5 per\ncent in the first half of 2009, the IMF has forecasted real growth of 8,5 per cent for 2009\nand 9 per cent for 2010. \nMonetary Policy Review November 2009\nSouth African Reserve Bank\nThe IMF expects African economies to recover fairly quickly once the global economy\ngains momentum. Debt levels in most countries on the continent are not a source of\nconcern, and fiscal and monetary policies are expected to remain supportive of recovery\nin these countries. Both China and India have sharply increased trade with, and\ninvestments in, Africa, which could further aid the region’s recovery. The strength of the\nrecovery would, nevertheless, be determined by the extent of the rebound in global\ntrade, favourable commodity prices and a pick-up in worker remittances.\nImproving signs of recovery in a number of OECD countries resulted in the composite\nleading indicator compiled by the OECD recording year-on-year increases of 0,7 per cent\nin August and 3,4 per cent in September 2009 (Figure 16). These are the first positive\nchanges since November 2007. The JPMorgan Global Manufacturing PMI remained\nabove the neutral level of 50 for a third consecutive month in October 2009 at 54,4 after\na reading of 53 was recorded in September. The year-on-year rate of decline in the OECD\nindustrial production index decelerated to 11,3 per cent in August 2009. \nAmong leading advanced economies, only the UK, Italy, and Canada were still in\nrecession in the third quarter of 2009. The outlook for emerging economies is even\nbrighter, but some parts of the developing world are still experiencing difficult conditions\n– notably parts of central and eastern Europe and Africa. The re-emergence of relatively\nstrong growth in parts of Asia and Latin America means that these regions are leading\nthe West out of recession. At the G-20 Summit in the US held in September 2009 steps\nwere announced to help the global economy transition to sustained growth and G-20\nleaders gave the assurance that policy stimulus would continue until a durable recovery\nis secured. However, the first tentative signs are emerging that some central banks are\nscaling back their supportive policies and that the risks to growth are more balanced. \nSouth African Reserve Bank\n31\nMonetary Policy Review November 2009\nPercentage change over 12 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 16 Selected indicators of global economic activity\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n1999\n2001\n2003\n2005\n2007\n2009\n32\nOutlook for domestic demand and supply\nAlthough real GDP growth has been negative in the past three quarters, there is a\ngeneral expectation among economists surveyed by Reuters in October that growth\nin South Africa will improve moderately in the fourth quarter of 2009 and continue on\na positive trajectory in 2010 and 2011. With the exception of July, the Bank’s\ncomposite leading indicator (discussed in Box 3) has increased each month since\nApril 2009, pointing to a probable recovery in economic conditions towards the end\nof 2009. In August 2009 components such as average hours worked per factory\nworker in manufacturing, the volume of domestic orders in manufacturing and the\nannual percentage change in the number of new passenger vehicles sold have shown\nimprovements. In addition, commodity price and share price indices, as well as\nleading trading-partner indicators, all point to economic recovery and an improved\nexport climate.\nAccording to the latest Reuters consensus forecasts surveyed in October 2009, the\nSouth African economy is expected to contract by 1,91 per cent in 2009, with the fourth\nquarter of the year expected to show an annual increase of 1,94 per cent, followed by\npositive growth of 2,83 and 2,91 per cent in the first and second quarters of 2010.\nGrowth in 2010 is expected to recover to 2,33 per cent and to 3,50 per cent in 2011.\nIn its October 2009 Forecast of Key Economic Variables, the BER projected a calendar\nyear real economic growth rate of -1,7 per cent in 2009 and 2,7 per cent in 2010,\nfollowed by 3,7 per cent in 2011. According to the MTBPS released on 27 October\n2009, real GDP is expected to contract by 1,9 per cent in 2009. However, the growth\nrate is projected to be 1,5 per cent in 2010 and 2,7 per cent in 2011.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nBox 3 The composite leading business cycle indicator\nIn monitoring the South African economy, the Bank regularly compiles and continuously analyses\nthree composite business cycle indicators – leading, coincident and lagging. The composite\nleading business cycle indicator is a key indicator of the domestic economic outlook presented in\nthis Monetary Policy Review and this box briefly discusses the compilation and characteristics of\nthe composite leading business cycle indicator.\nThe Bank first published composite business cycle indicators in 1983. Composite business cycle\nindicators are compiled by integrating various economic indicators into a single index. Various\nfactors, such as structural changes in the economy or the identification of new economic\nindicators, necessitate the frequent reassessment of the constituent time series of the composite\nbusiness cycle indicators. For this reason the composite leading business cycle indicator was last\nrevised for in 2007. With every revision, a range of economic indicators is evaluated for possible\ninclusion and all the time series are subjected to an appraisal system that rates business cycle\nindicators according to the\n-\neconomic significance of the process represented by the indicator;\n-\nstatistical adequacy of the data;\n-\nhistorical conformity to, and timing relationship with, the business cycle;\n-\nsmoothness of the time series; and\n-\ntimeliness of the data.\nThe composite leading business cycle indicator currently comprises 12 economic indicators, which\nhave historically preceded turning points in the business cycle (Table B3.1). \nThe Bank determines the official reference turning points in South Africa’s business cycle in terms\nof the growth cycle definition of business cycles and, according to this methodology, the most\nrecently identified peak in the business cycle occurred in November 2007. Therefore, the Bank’s\nbusiness cycle chronology, published regularly in its Quarterly Bulletin, represents reference\nSouth African Reserve Bank\n33\nMonetary Policy Review November 2009\nturning-point dates that distinguish between upward phases when the pace of growth in aggregate\neconomic activity exceeds its long-term growth trend, and downward phases when aggregate\neconomic activity either contracts or increases at a slower rate than its long-term growth trend. \nTable B3.1 Component series of the composite leading business cycle \nindicator and their contribution to the August 2009 data point\nComponent series\nContribution\nBER: Average hours worked per factory worker in manufacturing (half weight)\nPositive\nJob advertisements: The Sunday Times (percentage change over 12 months)\nNegative\nBER: Volume of orders in manufacturing (half weight)\nPositive\nBER: Business confidence index\nNegative\nNumber of building plans approved: Flats, townhouses and houses larger than 80 m2\nPositive\nNumber of new passenger vehicles sold (percentage change over 12 months)\nPositive\nGross operating surplus as a percentage of GDP\nN/A\nInterest rate spread: 10-year government bonds minus 91-day Treasury bills\nNegative\nIndex of prices of all classes of shares traded on the JSE\nPositive\nReal M1 (six-month smoothed growth rate)\nNegative\nCommodity price index for South Africa��s main export commodities (US dollar based)\nPositive\nComposite leading business cycle indicator of South Africa’s major trading-partner \ncountries (percentage change over 12 months)*\nPositive\n*\nThe international business cycle indicator comprises the composite leading business cycle indicators of\neight of South Africa’s main trading-partner countries, weighted according to the value of South Africa’s\nexports to each country\nPeriodic revisions of the composite leading business cycle indicator have ensured that this indicator\nremains as reliable as possible in predicting movements in the business cycle. The leading business\ncycle indicator exhibits a lead time of about 10 months, on average, on business cycle turning\npoints. The timing relationship of the composite leading business cycle indicator is shown in Table\nB3.2 along with the reference turning points of the business cycle for the period since August 1981. \nTable B3.2 Timing relationship between the composite leading indicator and\nthe reference turning points of the business cycle*\nReference turning points\nTiming relationship in months\nPeak\nTrough\nPeak\nTrough\nAugust 1981\n-11\nMarch 1983\n-8\nJune 1984\n-1\nMarch 1986\n-13\nFebruary 1989\n-9\nMay 1993\n-9\nNovember 1996\n-23\nAugust 1999\n-10\nNovember 2007\n-8\nAverage:\n-101⁄2\n-10\nMedian:\n-9\n-91⁄2\n*\nThe minus sign means that this indicator leads the reference turning point\n34\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nAs is the case in other countries, there is a fairly large dispersion in the number of months by which\nthe leading indicator leads the reference turning points of various cycles. Although the composite\nleading and other business cycle indicators provide invaluable information in this regard, a\nreference turning point in the business cycle can only be determined accurately ex post. Various\nother macroeconomic indicators, together with significant economic events and developments\noccurring near a turning point, are subjected to comprehensive analysis to identify the reference\nturning point accurately. Figure B3.1 shows the composite leading business cycle indicator over\nthe officially identified cycle from 1980.\nThe recent relatively consistent upward trend in the composite leading business cycle indicator\nprovides significant evidence that a reference trough in the business cycle should arrive towards\nthe end of 2009 or early 2010. The declining trend in the leading indicator that has persisted since\nApril 2007 appears to have been reversed. The composite leading indicator increased significantly\nin August 2009, the fifth consecutive increase in the indicator since it reached a most recent low\nin March 2009. Seven of the eleven component time series that were available for August 2009\nincreased, while four decreased (Table B3.1).\nCountercyclical monetary and fiscal policy measures have paved the way for the domestic\neconomic recovery, but the ultimate outcome will depend in large measure on the sustainability of\nthe global recovery that is currently under way. South Africa’s business cycle has a relatively low\ncontemporaneous concordance with certain trading-partner growth cycles. However, given the\nsynchronised nature of the current global recession, the resumption of sustainable growth in the\ndomestic economy will be largely determined by a return to sustained global growth and the\nassociated strong rebound in global trade and commodity prices. Encouragingly, the International\nMonetary Fund (IMF) has forecast a reacceleration of global growth to 3,1 per cent in 2010 in the\nOctober 2009 World Economic Outlook.\nReferences\nDu Plessis, S J. 2004. “Reconsidering the business cycle and stabilisation policies in South Africa”.\nPaper prepared for the 9th Annual Conference on Econometric Modelling for Africa, held at the\nUniversity of Cape Town, 30 June – 2 July. Available online at www.sciencedirect.com.\nVenter, J C. 2007. “Revisions to the composite leading and coincident business cycle indicators”.\nQuarterly Bulletin, June. Pretoria: South African Reserve Bank.\nVenter, J C. 2009. “Business cycles in South Africa during the period 1999 to 2007”. Quarterly\nBulletin, September. Pretoria: South African Reserve Bank.\nIndex: 2000 = 100\n1980\n1985\n1990\n1995\n2000\n2005\n2009\nFigure B3.1 \nComposite leading business cycle indicator\n60\n80\n100\n120\n140\nDownward phases of business cycle\nAs far as the quarterly analysis of manufacturing activity is concerned, the third quarter\n2009 BER survey revealed that the net majority of respondents rating current business\nconditions worse than those of a year ago decreased from 70 per cent to 53 per cent, with\n20 per cent of respondents expecting business conditions to improve in 12 months’ time.\nOn the supply side, the pace of contraction in production volumes is slowing, while fixed\ninvestment is expected to increase in a year’s time. On the demand side, net majorities\nreporting lower sales and order volumes declined from 51 per cent to 47 per cent.\nThe seasonally adjusted Kagiso PMI, a barometer of domestic manufacturing activity,\nincreased from 45,9 index points in September to 47,6 index points in October 2009.\nThe October results showed continued signs of increased activity in the domestic\nmanufacturing sector, even though the index has not yet reached the break-even level\nof 50. Both the business activity and the forward-looking new sales orders indices\nincreased, reaching 48,4 and 48,9 index points respectively. After rising uninteruptedly\nfor seven months, the index for expected business conditions declined slightly from \n70,3 points in September to 67,9 index points in October. The backlog of sales orders\nindex increased from 34,4 to 41,6 points, while that of purchasing commitments rose\nfrom 44,3 to 50,0 points. The inventories index decreased moderately to 42,9 in October\nfrom 45,5 points in September 2009. \nThe level of business confidence, measured in terms of the Rand Merchant Bank\n(RMB)/BER Business Confidence Index, declined to its lowest level in a decade, registering\n23 index points in the third quarter of 2009, which was preceded by 26 points in the\nsecond quarter of 2009 (Figure 17). The index measures business confidence on a scale\nof 0 to 100, with 0 indicating an extreme lack of confidence, 50 neutrality and 100 extreme\nconfidence. The decline in business confidence occurred due to declines in all but one of\nthe retail subsectors, with overall confidence decreasing from 47 to 35 index points. On\nthe positive side, business confidence accretion in new vehicle trade occurred for three\nconsecutive quarters, climbing from 12 index points in the second quarter to 19 in the third\nquarter of 2009. By contrast, confidence among wholesalers dropped to 17 points in the\nthird quarter, down from 36 index points in the second quarter of 2009. Although still low,\nmanufacturers’ confidence rose from 11 to 22 index points due to improvements in both\ndomestic and foreign sales volumes. Building contractor confidence changed slightly,\nregistering 24 index points in the third quarter, up from 23 in the second quarter. \nSouth African Reserve Bank\n35\nMonetary Policy Review November 2009\nPercentage\n1980 82\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 17 RMB/BER Business Confidence Index\nNet positive\nNet negative\n36\nThe FNB Building Confidence Index, which measures the business confidence of all\nthe major role players and suppliers involved in the building industry, rose marginally\nfrom an index value of 30 in the second quarter to 32 in the third quarter of 2009.\nThree out of six sub-components of the index registered increases. Improvements in\nconfidence levels were recorded among building contractors (+1), manufacturers\n(+23) and retailers of building materials (+13). Declines occurred in the case of\narchitects (-7), quantity surveyors (-4) and building sub-contractors (-15). However,\nsurvey respondents do not expect business conditions to deteriorate significantly in\nthe fourth quarter of 2009.\nDuring the third quarter of 2009 all consumer confidence sub-indices of the the\nFNB/BER Consumer Confidence Index deteriorated. The economic performance sub-\ncomponent saw the largest decline, with the index falling by 6 index points to +11 during\nthe same quarter. The net percentage of consumers expecting their own finances to\nimprove declined by two index points, from +17 to +15 during the third quarter of 2009,\nwhile the net percentage of consumers rating the present as an appropriate time to buy\ndurable goods declined by two index points, from -21 to -23.\nIndicators of inflation expectations\nEstimates of inflation expectations for the forecast period from 2009 to 2011 obtained\nfrom the BER survey conducted during the third quarter of 2009 show that average\nannual CPI inflation is expected to decline over the forecast years, although it is\nexpected to remain above the upper limit of the CPI inflation target range. Inflation\nexpectations in the third quarter are lower at all horizons than those surveyed in the\npreceding quarter. As depicted in Figure 18, the average CPI inflation expectation for\n2009 is 8,2 per cent, and 7,5 per cent for 2010 and 2011. Among the groups surveyed,\nonly the financial analysts expect CPI inflation to fall within the target range during 2010\nand 2011. By contrast, business and labour expect CPI inflation to exceed the upper\nend of the target range by at least 2,2 percentage points. \nMonetary Policy Review November 2009\nSouth African Reserve Bank\nAnnual averages, per cent\n5\n6\n7\n8\n9\n10\n2009\n2010\n2011\nFigure 18 BER surveys of headline CPI inflation expectations\n8,3\n8,7\n8,2\n8,0\n8,1\n7,8\n7,9\n7,5\n7,5\nSurvey conducted during 2009:\n \n1st qr\n \n2nd qr\n \n3rd qr\nSource: Bureau for Economic Research, Stellenbosch University \nThe October 2009 Reuters survey of long-term forecasts for the South African economy,\nwhich surveys a group of financial market analysts, reports that targeted CPI inflation is\nexpected to fall within the official target range of 3 to 6 per cent from the second quarter\nof 2010 and is expected to stay within the target range until the end of the forecast\nperiod in 2011 (Table 11). It is expected that CPI inflation will average 7,2 per cent in\n2009, decline to 5,8 per cent in 2010, and record 5,9 per cent in 2011. \nTable 11\nReuters survey of CPI forecasts: October 2009*\nPer cent\n2009\n2010\n2011\n1. Mean..................................................................\n(7,2)\n7,2\n(5,7)\n5,8\n(5,6)\n5,9\n2. Median ..............................................................\n(7,2)\n7,2\n(5,8)\n5,8\n(5,5)\n5,7\n3. Highest ..............................................................\n(7,4)\n7,3\n(6,4)\n7,5\n(6,6)\n7,0\n4. Lowest ..............................................................\n(7,0)\n7,0\n(4,5)\n4,8\n(4,6)\n4,6\nNumber of forecasters..............................................\n(20)\n19\n(20)\n19\n(17)\n17\n*\nSeptember 2009 survey results in parentheses\nSource: Reuters\nInflation expectations as derived from break-even inflation rates, measured as the\ndifference between the yields on South African CPI inflation-linked bonds and\nconventional nominal bonds of similar maturity, initially trended somewhat higher from the\nmiddle of April 2009 to mid-July, rising to levels just exceeding the upper limit of the\ninflation target range. The upward momentum was mainly the result of rising yields on\nconventional bonds. Subsequently, break-even inflation over the different maturities\nconsolidated at lower levels as inflation prospects improved. On 4 November 2009 break-\neven inflation in the four-year maturity range stood at 6,24 per cent, while that over \n14 years indicated expectations of 5,77 per cent. The slight widening of the gap between\nshort- and longer-term break-even inflation rates suggests that market participants have\nslightly better inflation expectations over the long term than over the short term. \nSouth African Reserve Bank\n37\nMonetary Policy Review November 2009\nPercentage points\n2006\n2007\nFigure 19 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\n38\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 16 and 17 November 2009, are reproduced in the\nform of a fan chart in Figure 20. According to these projections, the targeted inflation\nrate is expected to continue to trend downwards, moving below the upper level of the\ninflation target range in the second quarter of 2010 and remaining within the target range\nfor the remainder of the forecast period. \nThe central projection, conditional on an unchanged repurchase rate, is for the average\nquarterly CPI inflation rate to decelerate further to 6,1 per cent in the fourth quarter of\n2009, then increase marginally in the first quarter of 2010, before moving below the\nupper level of the inflation target range in the second quarter of 2010. It is then expected\nto remain within the inflation target range, fluctuating between 5,3 per cent and 5,9 per\ncent, until the end of the forecast period in the fourth quarter of 2011. The projections\nfor 2010 and 2011 are slightly higher than those presented to the previous MPC meeting\nin October 2009. \nMovements in oil prices, commodity prices, electricity prices and the exchange rate of\nthe rand that differ from those assumed in the model will impact on the central\nprojection, with alternative scenarios for movements in these variables generating more\noptimistic or pessimistic outcomes for targeted inflation. The forecast makes provision\nfor electricity price increases of 25 per cent per annum for the next two years, which is\nbelow the 45 per cent per annum proposed by Eskom. On balance, there is deemed to\nbe a neutral risk to the forecast of targeted inflation in Figure 20.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPer cent\n2005\n2006\n2007\n2008\n2009\n2010\n2011\nFigure 20 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 chart covers the most likely 10 per cent\nof 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).\nAssessment and conclusion\nThere are positive signs that the worst of the global recession may be over. A number of\nindustrialised economies have experienced positive growth in the third quarter of 2009,\nwhile growth in some emerging market economies has been robust. The recovery is not\nexpected to be smooth and even across countries and regions, and a number of risks\nand concerns persist. While the global downturn was deep, the duration was probably\nshorter than initially feared at the height of the financial crisis. Part of the reason was the\ndecisive intervention undertaken by governments in the form of significant monetary and\nfiscal stimuli. However, these actions will have to be reversed at some point, and the\nnature and timing of these exit strategies could impact on the speed and extent of the\nrecovery. There are also concerns that while global financial markets have become less\nrestrictive, it is not clear that the financial markets and banking systems, particularly in\nthe industrialised countries, have dealt fully with the toxic assets that were at the root of\nthe crisis. Furthermore, the global recovery will be dependent to a certain extent on the\nrecovery of consumption expenditure in the advanced economies. The housing market\nin the US is still under pressure, and this may constrain consumption expenditure as\nhouseholds attempt to rebuild their impaired balance sheets.\nThe recovery in the South African economy appears to be lagging that of the global\neconomy. Nevertheless, there are convincing signs that the low point of the current\ngrowth cycle has been reached and that positive growth will resume by the fourth\nquarter of this year. The global recovery has already been reflected in an improved export\nperformance in the past months. However, the domestic recovery is expected to be\nhesitant, driven by the inventory cycle and fixed investment projects. Consumption\nexpenditure is expected to take a while longer to recover. \nThe global inflation environment remains benign. The relatively wide output gaps and\nlower commodity prices have contributed to this outcome. Domestic inflation has also\nresponded to the weak demand conditions, and the inflation rate has reached a level\nmarginally above the inflation target range. This has allowed for a significant \n500 basis point reduction in the repurchase rate since December 2008. By adopting a\nforward-looking flexible approach, the MPC was able to provide some stimulus to the\nslowing economy, while maintaining the focus on its price stability objective. Even\nthough some risks to the inflation outlook remain, the current monetary policy stance\nis deemed adequate to moderate inflation further to within the target range, while\nsimultaneously allowing for the resumption of a positive growth trajectory. \nSouth African Reserve Bank\n39\nMonetary Policy Review November 2009\n40\nStatement of the Monetary Policy Committee\n28 May 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 downturn continues to have a negative impact on the domestic economy,\nwhich experienced two consecutive quarters of contraction. The significant widening of\nthe domestic output gap has added further downside risk to the inflation outlook. The\ndownward trend in inflation is expected to continue, despite inflation being subject to\nsome inertia in the near term.\nDomestic economic developments will be influenced to a large degree by the pace and\nmagnitude of the recovery in the global economy. There are tentative signs that the\nglobal economy may have seen the worst of the downturn, but the recovery is expected\nto be slow and protracted.\nRecent developments in inflation\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all\nurban areas declined from 8,5 per cent in March 2009 to 8,4 per cent in April. The prices\nof food and non-alcoholic beverages, which increased at a year-on-year rate of 13,7 per\ncent, contributed 2,1 percentage points to the inflation outcome. Housing and utilities\ncontributed 1,8 percentage points. This category includes electricity and other fuels,\nwhich increased by 29,4 per cent. Petrol prices declined by 17,5 per cent, while public\ntransport prices increased by 15,1 per cent.\nThe producer price index continued its downward trend in April when it increased at a\nyear-on-year rate of 2,9 per cent. Food price pressures moderated further with\nmanufactured food price inflation declining to 8,4 per cent, compared with 9,4 per cent\nin March. Prices of agricultural products increased by 2,2 per cent.\nThe outlook for inflation\nThe most recent CPI inflation forecast of the Bank shows a relatively unchanged\noutcome for the near-term as compared with that presented to the previous meeting of\nthe Monetary Policy Committee. Over the longer term, there appears to be a moderate\nimprovement. This forecast is similar to the Reuters consensus forecast of private\nanalysts who expect inflation to average 6,9 per cent and 5,7 per cent in 2009 and \n2010 respectively.\nThe main upside risk to the inflation outlook comes from cost-push pressures, in particular\nfrom electricity price increases. Eskom has applied to the National Energy Regulator of\nSouth Africa (NERSA) for a 34 per cent interim increase in electricity tariffs, but there is still\nuncertainty about the final adjustment. A number of municipalities have already budgeted\nfor significant electricity price increases in anticipation of higher Eskom tariffs.\nIn line with the less-negative global outlook, there has been a moderate recovery in\ninternational oil prices. North Sea Brent crude oil has been trading at prices of around\nUS$60 per barrel during the past days, compared with an average of around US$50 per\nbarrel during April. These developments may result in a moderate increase in the\nMonetary Policy Review November 2009\nSouth African Reserve Bank\ndomestic petrol price in June. The impact of the higher international prices on domestic\npetrol prices has been partly offset by exchange rate movements during the month. \nFood price inflation remains well above average inflation, and has been lagging the\nfavourable developments at the producer price level and in the spot prices of agricultural\ncommodities. Food price inflation measured 17,9 per cent in August 2008 and has been\nmoderating persistently, but slowly, since then. \nIn the first quarter of 2009 gross domestic product (GDP) contracted at a quarter-on-\nquarter annualised rate of 6,4 per cent, with mining and quarrying declining by 32,8 per\ncent. The manufacturing sector, which contracted at an annualised rate of 22,1 per cent,\nwas the largest contributor to the negative GDP outcome. The weak manufacturing\nperformance was also reflected in the utilisation of production capacity in the\nmanufacturing sector, which declined from 82 per cent in the fourth quarter of 2008 to\n79 per cent in the first quarter of 2009. \nThe GDP contraction was broad based, with general government services, personal\nservices and construction being the only sectors that exhibited positive growth. Civil\nconstruction is expected to remain strong as the infrastructure programme proceeds.\nHowever, other parts of construction are expected to remain under pressure as the value\nof new building plans passed for both residential and non-residential construction declined\nby 13,4 per cent in the first quarter of this year compared with the preceding quarter.\nRecent high-frequency indicators suggest that the negative trend in GDP growth is likely\nto continue during the second quarter of 2009, although at a more moderate pace of\ncontraction. Most analysts expect positive, but relatively low, growth in the final half of this\nyear. The composite leading and coincident business cycle indicators of the South African\nReserve Bank (the Bank) indicate continued weakness in the economy in 2009. In March\n2009 the leading indicator declined by 15,1 per cent; the largest year-on-year decline on\nrecord. The composite indicator declined at a year-on-year rate of 9,4 per cent in February.\nThe Investec Purchasing Managers Index (PMI) declined further to 35,6 index points in\nApril. However, expectations of business conditions six months ahead showed some\nimprovement.\nDomestic demand conditions remain subdued. Real wholesale trade sales declined by\n5,9 per cent on a year-on-year basis in March 2009 and by 1,8 per cent on a month-on-\nmonth basis. Real retail sales recorded a 5,3 per cent year-on-year decline and a 1,9 per\ncent month-on-month decline in March. Total new vehicle sales declined at a year-on-\nyear rate of 44 per cent in April, with commercial vehicle sales declining by 51 per cent.\nVehicle exports were 31 per cent lower in April compared with the previous month.\nHousehold consumption expenditure is expected to remain constrained by negative\nwealth effects and tight credit conditions. The various house price indices show that\nhouse prices have been falling in recent months. Although the All-Share Index on the\nJSE Limited has recovered somewhat since its recent lows, it is still significantly lower\nthan the levels prevailing during 2008. Domestic credit extension continues to reflect\nthe lower demand for credit, as well as the wider spreads and more stringent credit\ncriteria being applied by banks with respect to loans to both households and\ncompanies. Year-on-year growth in total loans and advances to the private sector\ndeclined to 6,6 per cent in April. The rate of growth of instalment sale credit and leasing\nfinance declined by 0,1 per cent, reflecting the weak demand for durable goods.\nExtension of bank overdrafts contracted by 6,8 per cent, while credit card advances\nincreased marginally.\nSouth African Reserve Bank\n41\nMonetary Policy Review November 2009\n42\nThere are tentative signs that the downturn in the global economy may be bottoming out\nas financial market conditions appear to have become less restrictive. However, there\nare as yet few convincing indications that the recovery will be quick. At this stage it\nappears that a protracted period of slow, below-potential growth is most likely, with\nmost analysts predicting some recovery later this year or early next year. Global inflation\npressures remain subdued and have declined in a number of economies.\nSince the beginning of the year the rand has appreciated by around 13 per cent on a\ntrade-weighted basis. While the rand, along with other currencies, remains vulnerable to\nfurther possible bouts of risk aversion, the risk to the inflation outlook has been reduced\nby the relative strength of the rand.\nMonetary policy stance\nThe evidence that was presented to the MPC suggests that the output gap has widened\nfurther. This is expected to contribute to an improved inflation outlook, notwithstanding\nsome current inflation inertia. Accordingly, the MPC has decided to reduce the repurchase\nrate by 100 basis points to 7,5 per cent per annum with effect from 29 May 2009.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n25 June 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 domestic economy continues to show signs of stress in the wake of the global\neconomic downturn. Output growth remains negative, while trends in household\nconsumption expenditure have continued to deteriorate. There are, however, signs that\nthe downturn, both globally and domestically, may be nearing the lower turning point,\nbut the recovery is expected to be slow and protracted.\nThe inflation rate has continued its downward trend, which has been constrained by\nrelatively sticky services price inflation. While the widening output gap and weak\ndomestic demand pose a downside risk to the inflation outlook, these risks are\nincreasingly being offset by various cost-push and exogenous factors that are impacting\non the economy, as well as by deteriorating inflation expectations.\nRecent developments in inflation\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all\nurban areas declined from 8,4 per cent in April 2009 to 8,0 per cent in May. Food price\ninflation declined from 13,6 per cent in April to 12,1 per cent in May, but remains the\nmain contributor to the inflation outcome, having contributed 1,9 percentage points.\nHousing and utilities inflation contributed 1,8 percentage points, mainly as a result of the\n29,6 per cent increase in electricity prices and the 15,1 per cent increase in the cost of\nmaintenance and repairs. Services price inflation has remained unchanged at 8,4 per\ncent since March 2009, while goods price inflation declined from 8,7 per cent to 7,6 per\ncent over the same period.\nProducer prices declined at a year-on-year rate of 3 per cent in May 2009. Nonetheless,\nagricultural product prices increased at a year-on-year rate of 1,5 per cent, while\nmanufactured food product prices increased by 6,2 per cent.\nThe outlook for inflation\nThe most recent CPI inflation forecast by the staff of the South African Reserve Bank (the\nBank) shows that CPI inflation is still expected to continue its moderate downward trend,\nto enter the target range during the second quarter of 2010, and to remain within the\ntarget range for the rest of the forecast period ending 2011. A more favourable exchange\nrate assumption has been offset by higher-than-expected petrol price increases and\ninflation outcomes.\nCPI inflation expectations, as measured by the Bureau for Economic Research (BER) at\nStellenbosch University deteriorated during the second quarter of 2009. Average\ninflation expectations for 2009 increased from 8,3 per cent in the first quarter to 8,7 per\ncent in the second quarter, mainly as a result of upward revisions by financial analysts.\nWhile a downward trend for the subsequent two years remains, only the financial\nanalysts predict inflation to be within the inflation target range in the coming two years.\nOverall, CPI inflation is expected to average 8,1 per cent and 7,9 per cent in 2010 and\n2011 respectively.\nSouth African Reserve Bank\n43\nMonetary Policy Review November 2009\n44\nInflation expectations, as measured by the yield differential between conventional and\ninflation-linked bonds, also showed a moderate increase over the past weeks. However,\nthe break-even rate has generally remained within the inflation target range over the\nshort- to medium-term maturities.\nThe growth prospects for the economy remain a downside risk to the inflation outlook.\nThe output gap, which is the difference between actual and potential output growth, has\nwidened over the past few quarters. Following the 6,4 per cent contraction of gross\ndomestic product (GDP) in the first quarter of 2009, the most recent high frequency data\nand indicators suggest that the negative trend in GDP growth is likely to have continued\nduring the second quarter of 2009. Mining production declined at a year-on-year rate of\n10,6 per cent in April, but increased by 7,2 per cent on a month-on-month basis. Total\nmanufacturing production declined by 3,3 per cent in April 2009, compared with the\nprevious month, and by 21,6 per cent on a year-on-year basis. \nThe composite leading indicator as compiled by the staff of the Bank increased slightly\nin April. The indicator suggests that the lower turning point in the cycle could be reached\nlater in the year. The Kagiso Securities/Bureau for Economic Research Purchasing\nManagers’ Index remains at low levels, but recorded a slight increase in May, also\nindicating an expectation that the economy may be approaching its lower turning point.\nThis is consistent with the Rand Merchant Bank/Bureau for Economic Research\nBusiness Confidence Indicator, which declined further in the second quarter, but the rate\nof decline has slowed. \nThe domestic growth prospects will be determined, to an important degree, by\ninternational developments. The global downturn has resulted in a significant decline in\nSouth Africa’s exports in the first quarter of 2009, leading to a wider deficit on the current\naccount of the balance of payments compared with the previous quarter. The outlook\nfor the global economy remains uncertain, but there is a general sense of cautious\noptimism that the lower turning point of the cycle might have been reached. The general\nview appears to be that the global economy will remain under pressure for most of this\nyear before beginning a slow recovery. Global inflation remains well contained.\nGrowth in domestic expenditure has remained subdued, with real domestic final\ndemand contracting by 1,5 per cent in the first quarter of 2009. Real final consumption\nexpenditure by households declined at a quarter-on-quarter annualised rate of 4,9 per\ncent. Contractions in consumption were experienced in all broad categories of goods,\nbut there was a rebound in the growth of expenditure on services. Growth in real gross\nfixed capital formation moderated to 2,6 per cent during the same period. The main\ncontributor to the 2,2 per cent increase in gross domestic expenditure was final\nconsumption expenditure by general government, which increased by 5,9 per cent.\nHousehold consumption expenditure appears to have remained under pressure in the\nsecond quarter of 2009. In April, real retail trade sales declined by 1,1 per cent\ncompared with the previous month, and by 6,7 per cent on a year-on-year basis. Real\nwholesale trade sales increased by 0,7 per cent on a month-on-month basis, but\ndeclined by 15,1 per cent on a year-on-year basis. While new vehicle sales in May\nincreased marginally compared with the previous month, the year-on-year decline\nmeasured 32,9 per cent. \nHousehold consumption expenditure is expected to remain constrained by tighter credit\ncriteria of banks and negative wealth effects. The various house price indicators all show\nthat house prices have continued to decline. The All-Share Index on the JSE Limited has\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nrecovered somewhat from its lows in March, but is still substantially below the levels\nrecorded during the first half of 2008.\nGrowth in expenditure may also be affected negatively by the adverse trends in employment\ngrowth. According to the Quarterly Employment Survey of Statistics South Africa, 179 000\njobs were lost in the formal non-agricultural sector during the first quarter of 2009.\nThe exchange rate of the rand has fluctuated against the US dollar between a range of\nabout R7,85 and R8,25 since the previous meeting of the MPC. As global risk aversion\nhas declined, a number of emerging-market economy currencies have appreciated and\nsince the beginning of the year, the rand has appreciated by approximately 15 per cent\non a trade-weighted basis. \nAs noted above, food price inflation remains the main contributor to the inflation\noutcome, but the downward trend has continued, although at a slow pace. The spot\nprice of yellow maize has declined by about 40 per cent since June 2008, and is now\nat levels last seen in the final quarter of 2006. \nThe main upside risk to the inflation outlook comes from cost-push pressures, particularly\nfrom electricity price increases and other administered prices, as well as nominal wage\nincreases, which have generally been in excess of inflation. In the first quarter of 2009 the\nincrease in unit labour cost over four quarters amounted to 11,2 per cent. \nThe international oil price has re-emerged as a potential upside risk to the inflation outlook.\nThe price of North Sea Brent crude oil reached levels in excess of US$70 per barrel in the\npast week, before declining to current levels of around US$67 per barrel. As a result of the\nhigher international product prices, a further petrol price increase is likely in July.\nMonetary policy stance\nThe MPC has decided to keep the repurchase rate unchanged at 7,5 per cent per\nannum. This decision is based on the economic and inflation analysis provided above.\nThe committee is fully cognisant of the fact that there has been significant monetary\naccommodation since December 2008. The MPC remains fully committed to its\nmandate of achieving and maintaining price stability.\nSouth African Reserve Bank\n45\nMonetary Policy Review November 2009\n46\nStatement of the Monetary Policy Committee\n13 August 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\nThere are encouraging signs that the global slowdown may have reached its lower\nturning point, although the speed and extent of the recovery are still subject to a high\ndegree of uncertainty. The South African economy appears to be lagging behind these\ninternational developments and it is likely that the domestic economy contracted in the\nsecond quarter of this year. The domestic economy remains constrained by weak global\nand domestic demand.\nTargeted inflation declined materially in June, but is still outside the inflation target range.\nExpectations are that it will take some time before inflation returns to within the target\nrange on a sustainable basis. Cost-push pressures appear to be the main source of\nupside risk to the inflation outlook.\nRecent developments in inflation\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all\nurban areas declined from 8,0 per cent in May 2009 to 6,9 per cent in June. The main\ncontributors to the inflation outcome were food and non-alcoholic beverages, housing\nand utilities, and miscellaneous goods and services. Each of these categories\ncontributed 1,6 percentage points to CPI inflation. Petrol prices declined at a year-on-\nyear rate of 25 per cent, despite the 17 cents per litre increase in the petrol price in June.\nAdministered price inflation, excluding petrol prices, measured 9,1 per cent in June, with\nelectricity prices increasing by 28,6 per cent.\nProducer prices declined at a year-on-year rate of 4,1 per cent in June, compared with\na decline of 3,0 per cent in May. Prices of mining and chemical products were the main\ncontributors to this trend, but there was also further moderation in food price inflation.\nPrices of agricultural products declined at a year-on-year rate of 1,7 per cent, while\nprices of manufactured food products increased at a rate of 3,7 per cent, compared with\na rate of 6,2 per cent in the previous month.\nThe outlook for inflation\nThe most recent CPI inflation forecast by the staff of the South African Reserve Bank\nremained more or less unchanged compared with the previous forecast. However, CPI\ninflation is still expected to continue its moderate downward trend, to enter the target\nrange during the second quarter of 2010 and to remain within the target range for the\nrest of the forecast period ending in 2011. \nThese projections are broadly in line with the Reuters consensus survey of private-sector\nanalysts. The most recent survey for July indicates that analysts expect inflation to decline\nto within the inflation target range during the second quarter of 2010, and to average \n5,8 per cent and 5,6 per cent in 2010 and 2011 respectively. Expectations derived from\nthe yield differential between conventional government bonds and inflation-linked bonds\nhave remained within the inflation target range over the short- to medium-term maturities.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nThe outlook for the international economy appears to have improved. The cautious\noptimism that the bottom of the cycle may have been reached continues to prevail,\nalthough some analysts still doubt the strength and sustainability of this recovery. The\nrecovery is also not expected to be uniform across countries or regions. According to the\nJuly 2009 World Economic Outlook of the IMF, global output is expected to contract by\n1,4 per cent in 2009 before recovering to 2,5 per cent in 2010. The developed economies\nare expected to grow by 0,6 per cent, while growth in emerging economies is expected\nto average 4,7 per cent in 2010. At this stage, global inflation appears to be under control\ndespite the significant monetary accommodation in a number of advanced economies.\nDomestic economic conditions remain subdued amid indications that the economy\ncontracted further in the second quarter of 2009, although at a slower rate of contraction\nthan in the previous quarter. Manufacturing production declined at a year-on-year rate of\n17,1 per cent in June, and by 3 per cent in the three months to June 2009 compared\nwith the previous three months. The utilisation of production capacity in manufacturing in\nMay 2009 was 78 per cent; down from 84,4 per cent a year ago. The Kagiso/Bureau for\nEconomic Research Purchasing Managers’ Index (PMI) declined in July, indicating that the\ndifficult conditions in the manufacturing sector are likely to persist. However, according to\nthe PMI, expectations of business conditions six months ahead continued to improve.\nSimilarly, the Bank’s composite leading business cycle indicator increased for a second\nconsecutive month in May 2009, indicating the possibility of a recovery later in the year. \nHousehold consumption expenditure growth continued to contract during the past few\nmonths. New vehicle sales declined again in July, with total vehicle sales declining by \n4,5 per cent in July compared with the previous month. Total vehicle exports declined by\n12 per cent on a month-on-month basis, and by 60,3 per cent on a year-on-year basis.\nReal retail trade sales contracted at a seasonally adjusted rate of 3,6 per cent in the\nsecond quarter of 2009 compared with the first quarter. On a year-on-year basis, retail\nsales declined by 6,7 per cent in June. The First National Bank/Bureau for Economic\nResearch Consumer Confidence Index increased moderately in the second quarter of\n2009, although it is still at low levels.\nThe weak state of domestic demand is reflected in the rate of credit extension to the\nprivate sector. Year-on-year growth in total loans and advances of banks to the private\nsector declined from 6,3 per cent in April 2009 to 2,2 per cent in June. On a quarter-on-\nquarter basis, negative growth of 1,8 per cent was measured in the second quarter of\n2009. Year-on-year growth in mortgage advances moderated to 8,2 per cent in June,\nwhile instalment sales credit and leasing finance, as well as other loans and advances,\nexperienced negative year-on-year growth. These declines are due, in part, to stricter\nlending criteria being applied by banks. \nThe impact of negative wealth effects on domestic consumption expenditure may have\ndissipated somewhat with the partial recovery of equity prices in the local and global\nmarkets. Since the beginning of the year, the All-Share Index on the JSE Limited has\nincreased by about 14 per cent. However, the index is still significantly below the levels\nreached in 2008. The various house price indices all show that house prices continued\nto decline in July, but the pace of decline appears to be moderating.\nThe exchange rate of the rand has remained relatively volatile, but within a range that\nhas prevailed since May 2009 with the decline in global risk aversion. The exchange rate\nof the rand has fluctuated between approximately R7,68 to the US dollar and R8,32 to\nthe US dollar since the previous meeting of the MPC. Since the beginning of the year,\nthe nominal effective exchange rate of the rand has appreciated by about 13 per cent.\nSouth African Reserve Bank\n47\nMonetary Policy Review November 2009\n48\nAs noted above, food price developments continue to be a major factor in the overall\ninflation outcomes. After months of relative stickiness, food price inflation at the\nconsumer price level appears to be responding to the favourable trends at the producer\nprice level. In June 2009 food price inflation declined to 9,8 per cent compared with a\nrate of 16,1 per cent in January 2009. \nThe main upside risks to the inflation outlook emanate from cost-push pressures. The\ninternational oil price has continued its stronger upward trend, as the outlook for the\nglobal economy improves. The price of North Sea Brent crude oil has remained above\nUS$70 per barrel for most of the period since the previous meeting. Although domestic\npetrol prices were reduced by 21 cents per litre in July, the current under-recovery\nindicates that a further petrol price increase is likely in August. \nOther adverse cost pressures include administered price increases, particularly\nelectricity prices, and wage increases that have generally been in excess of inflation.\nAccording to Andrew Levy Employment publications, wage settlements in the first six\nmonths of 2009 averaged 9,7 per cent. In the first quarter of 2009 the increase in unit\nlabour cost over four quarters amounted to 11,2 per cent. \nMonetary policy stance\nThe MPC is of the view that, notwithstanding upside cost pressures, the adverse\neconomic conditions appear to tilt the balance of risks to the inflation outlook towards\nthe downside over the medium term. The MPC has, therefore, decided to reduce the\nrepurchase rate by 50 basis points to 7 per cent per annum with effect from \n14 August 2009.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n22 September 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\nThere are signs that the global economic recovery is under way, but the indications are\nthat the pace of recovery is likely to be slow and uneven, particularly in the industrialised\neconomies where banking sector concerns still persist. Domestic economic growth,\nwhich has been negative in each of the past three quarters, is expected to improve in\nthe coming quarters. However, the domestic recovery is likely to be influenced by global\ngrowth developments and is subject to a relatively high degree of uncertainty. Domestic\ninflation has continued its downward trend, but some risks to the outlook remain.\nRecent developments in inflation\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all\nurban areas declined to 6,4 per cent in August, compared with 6,7 per cent in July. The\nmain contributors to the inflation outcome were the categories of housing and utilities,\nand miscellaneous goods and services. Food price inflation moderated further, with food\nand alcoholic beverages increasing at a year-on-year rate of 6,8 per cent; down from \n8,3 per cent in July.\nProducer prices have continued their negative trend and declined at a year-on-year rate\nof 3,8 per cent in July, compared with a decline of 4,1 per cent in June. Food price\ninflation at the consumer level can be expected to abate as agricultural product prices\ndeclined at a year-on-year rate of 1,7 per cent, while manufactured food product prices\nincreased at a rate of 0,8 per cent. Upside pressure on producer prices came from\nelectricity prices which increased by 27,4 per cent.\nThe outlook for inflation\nThe CPI inflation forecast by the South African Reserve Bank staff continues to indicate\nthat inflation is likely to return on a sustained basis to within the inflation target range by\nthe second quarter of 2010. CPI inflation is then expected to remain within the inflation\ntarget range for the remainder of the forecast period until the end of 2011. Compared\nwith the previous forecast, the outlook is unchanged for 2009 and 2010, although there\nis a slight improvement for 2011. The exchange rate of the rand has provided downside\npressure, which has more or less offset higher oil price assumptions and higher unit\nlabour costs over the period.\nThe most recent study of inflation expectations undertaken on behalf of the Bank by the\nBureau for Economic Research (BER) at Stellenbosch University indicates that inflation\nexpectations have improved somewhat, but remain, on average, above the upper end\nof the inflation target range. Inflation is expected to average 7,5 per cent in both 2010\nand 2011. This represents declines of 0,6 per cent and 0,4 per cent in these years\nrespectively, compared with the previous survey. Only the financial analysts expect\ninflation to be within the target range in the coming two years. Since the previous\nmeeting of the MPC, the break-even inflation rates, as measured by the yield differential\nSouth African Reserve Bank\n49\nMonetary Policy Review November 2009\n50\nbetween conventional government bonds and inflation-linked bonds, declined across all\nmaturities to within the inflation target range.\nOverall, the risks to the inflation outlook appear to be fairly evenly balanced. The main\nupside risks continue to emanate from high increases in some administered prices,\nparticularly electricity prices, and increases in nominal unit labour costs well in excess of\nthe current inflation rate. Nominal unit labour cost increased over four quarters by 9,3 per\ncent in the second quarter of 2009, compared with 11,3 per cent in the previous quarter.\nInternational oil prices, which remain an upside inflation risk factor, have moderated\nslightly since the previous meeting of the MPC and appear to have stabilised around\ncurrent levels of about US$70 per barrel. Domestic petrol prices increased by 36 cents\nper litre in September, but the current over-recovery indicates that this increase may be\noffset, to a large extent, in October, as a result of lower product prices and the recent\nappreciation of the rand. \nGrowth in domestic final demand declined at an annualised rate of 3,5 per cent in the\nsecond quarter of 2009. Household consumption expenditure contracted by 5,8 per\ncent, compared with a decline of 4,8 per cent in the previous quarter. Durable goods\nconsumption was the most affected sub-category, declining by 18,8 per cent. New\nvehicle sales declined at a year-on-year rate of 23 per cent in August, but there are signs\nthat the decline is levelling out. In July real retail and wholesale trade sales contracted at\nyear-on-year rates of 3,8 per cent and 13,8 per cent respectively, although retail sales\nincreased on a month-on-month basis. \nConsumption expenditure is expected to remain constrained by negative wealth effects,\nalthough there has been a marked recovery in the equity markets, which may relieve\nthese effects somewhat. Since the beginning of the year, the all-share index on the JSE\nLimited has increased by about 20 per cent. House prices, however, have continued\ntheir downward trend. The various house price indices, while still indicating negative\nprice trends, show that prices are declining at a slower rate.\nCredit extension to the private sector continued to reflect both the weak household\nconsumption expenditure and the prevailing tighter credit criteria. Twelve-month growth\nin banks’ total loans and advances declined to 2,1 per cent in July. Mortgage advances\ndeclined to a year-on-year rate of growth of 6,4 per cent in July, while instalment sale\ncredit and leasing finance contracted by 3,2 per cent over the same period, as a result of\nsubdued demand for motor vehicles and other durable goods. Other loans and\nadvances, comprising credit card advances, bank overdrafts and general loans, declined\nby 2,0 per cent. Lower levels of credit extension have resulted in a slight decline in\nhousehold debt as a percentage of household disposable income to 76,3 per cent in the\nsecond quarter of 2009. The ratio of debt-service cost to household disposable income\ndeclined from 10,9 per cent in the first quarter to 9,5 per cent in the second quarter.\nDomestic output contracted by 3,0 per cent in the second quarter of 2009, but there\nare early indications that the lower turning point may have been reached. However the\nrecovery is expected to be slow. The South African Reserve Bank composite leading\nindicator increased for the third consecutive month in June and continues to predict a\nrecovery by the end of the year. \nThe rate of contraction in the manufacturing sector also shows signs of slowing down.\nOn a year-on-year basis, manufacturing output declined by 13,7 per cent in July, but it\nincreased at an annualised month-on-month rate of 3,0 per cent. The Kagiso/BER\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nPurchasing Managers Index (PMI) increased in July, although still at levels that indicate\nnegative growth. Mining production increased at a year-on-year rate of 4,8 per cent in\nJuly. However, the real value of all building plans passed declined by 43,2 per cent in\nJuly, with the slowdown in residential building plans being the main contributor. \nThe exchange rate of the rand continues to provide downside pressure on inflation and\nhas appreciated further since the previous meeting of the MPC when it was at a level of\naround R8,10 to the US dollar. Since the beginning of the year, the rand has appreciated\nby 26 per cent against the US dollar, and by 20 per cent on a trade-weighted basis. \nThe global economy appears to be recovering in response to concerted fiscal and\nmonetary packages that have been put in place. A number of industrialised economies\nhave experienced positive growth rates in the second quarter, while others have shown\na moderation in the rate of contraction. Many forecasts for the second half of the year\nand for 2010 have been revised upward, but remain well below pre-crisis levels.\nHowever, there are risks that the recovery may be short-lived should consumer demand\nnot improve further in the industrialised economies. While there have been some\nimprovements in financial market conditions, more still remains to be done. Global\ninflation remains relatively subdued and poses no immediate risk to the domestic\ninflation outlook.\nMonetary policy stance\nThe MPC is of the view that the risks to the inflation outlook appear to be fairly evenly\nbalanced. Given the current policy stance, inflation is expected to continue moderating\nand return to within the inflation target range during the forecast period. Accordingly, the\nMPC has decided to leave the repurchase rate unchanged at 7 per cent per annum.\nSouth African Reserve Bank\n51\nMonetary Policy Review November 2009\n52\nStatement of the Monetary Policy Committee\n22 October 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 prospects for inflation returning to within the inflation target range by the second\nquarter of 2010 remain promising. Domestic demand conditions continue to be\nsubdued and currently do not pose a significant threat to the inflation outlook. Economic\ngrowth is expected to improve in the coming months, but is likely to remain below\npotential for some time. Domestic growth prospects are dependent to an extent on the\nglobal recovery, which appears to be uneven across countries and regions. However,\nthe medium-term inflation outlook has been affected adversely by possible further\nsignificant adjustments to electricity tariffs.\nRecent developments in inflation\nThere has been no publication of consumer price index (CPI) data since the previous\nmeeting of the MPC. The most recent data showed that the year-on-year inflation rate\nas measured by the CPI for all urban areas declined to 6,4 per cent in August, compared\nwith 6,7 per cent in July. The main contributors to the inflation outcome were the\ncategories of housing and utilities, and miscellaneous goods and services. \nProducer prices declined at a year-on-year rate of 4,0 per cent in August, compared\nwith a decline of 3,8 per cent in July. Food price inflation at the producer price level\ncontinues to signal dissipating pressures on food prices at the consumer price level.\nAgricultural product prices declined at a year-on-year rate of 2,0 per cent, while\nmanufactured food product prices increased at a rate of 0,1 per cent. Upside pressure\non producer prices came from electricity prices, which increased by 28,6 per cent.\nThe outlook for inflation\nThe CPI inflation forecast by the South African Reserve Bank staff continues to indicate\nthat inflation is likely to return to within the inflation target range, on a sustained basis,\nby the second quarter of 2010. CPI inflation is then expected to stay within the inflation\ntarget range for the rest of the forecast period until the end of 2011. Compared with the\nprevious forecast, the outlook showed a slight improvement for 2010 and 2011, mainly\nas a result of the changed assumption regarding the rand exchange rate. No adjustment\nhas been made at this stage to the central forecast for possible further increases in\nelectricity tariffs over and above those that are already assumed in the baseline forecast.\nA number of domestic and global factors have contributed to the persistent downward\npressure on inflation. The global economy shows continued signs of improvement, but\nthe recovery is not uniform across regions. The pace of recovery of most of the Asian\neconomies has been higher than that achieved in the main industrialised economies.\nThe timing and speed of the withdrawal of the fiscal and monetary policy stimuli may\nhave a bearing on the nature of the recovery in these economies. Global inflation is\nexpected to be constrained by the relatively weak demand from the industrialised\ncountries, although the US dollar movements may provide some upward pressure to\ncommodity prices.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nThere are some positive indications that the rate of contraction of the domestic economy\nhas declined and that the economy may emerge from the recession by the end of 2009.\nHowever, the mixed picture from the published data shows that the recovery is likely to\nbe tentative, and the output gap is likely to remain positive for some time. The physical\nvolume of manufacturing output declined at a year-on-year rate of 15,0 per cent in\nAugust and by 2,8 per cent on a month-on-month basis. However, in the three months\nto August, compared with the previous three months, an increase of 0,8 per cent was\nrecorded. The Kagiso/Bureau for Economic Research (BER) Purchasing Managers Index\n(PMI) increased markedly from 39,3 index points in August to 48,0 index points in\nSeptember. The index shows that new sales orders have increased significantly, while\nmanufacturers’ expectations of business conditions six months ahead improved to the\nhighest level since early 2007. \nOther sectoral developments indicate that the physical volume of total mining production\nincreased in the three months to August, but contracted on a month-on-month basis,\nwhile the real value of building plans passed continued to decline. The Rand Merchant\nBank (RMB)/BER Business Confidence Indicator (BCI) declined to a ten-year low in the\nthird quarter of 2009. The tentative nature of the domestic recovery is also reflected in\nthe composite leading business cycle indicator compiled by the South African Reserve\nBank, which declined marginally in July, following three consecutive monthly increases. \nConsumption expenditure by households also remains subdued, with real retail trade\nsales declining at a year-on-year rate of 7,0 per cent in August. In the three months to\nAugust, there was a 1,0 per cent decline, compared with the previous three months.\nWholesale trade sales also declined further in August. Total new vehicle sales are also\nwell below their levels of a year ago. However, there are indications that the negative\ntrend may have reached its lower turning point with zero or slightly positive rates of\nchange being recorded on a month-on-month and quarter-on-quarter basis. The First\nNational Bank (FNB)/BER consumer confidence index declined in the third quarter of\n2009 to a relatively neutral confidence level.\nCredit extension to the private sector continued to reflect both the weak household\nconsumption expenditure and the prevailing tighter credit criteria. The Ernst & Young\nFinancial Services Index indicates that credit standards applied by retail banks to loan\napplications continued to tighten in the third quarter of 2009, but at significantly lower\nlevels. Twelve-month growth in banks’ total loans and advances declined to 0,8 per cent\nin August 2009. Mortgage advances increased by 5,6 per cent in August, while\ninstalment sale credit and leasing finance contracted by 4,2 per cent. Negative year-on-\nyear growth rates were also recorded in credit card advances, bank overdrafts and\ngeneral loans.\nThere has been some recovery in asset prices in recent months, but wealth effects do\nnot appear to be posing an immediate threat to the inflation outlook. Domestic equity\nprices have increased markedly since March, but are still significantly below the levels\nreached in May 2008. The various house price indices indicate a moderation in the rate\nof decline in house prices.\nThe exchange rate of the rand continues to provide downside pressure on inflation and\nis currently trading at levels against the US dollar, similar to those prevailing at the time\nof the previous MPC meeting. During the past month the rand traded in a range of\naround R7,20 and R7,79 against the US dollar. The exchange rate of the rand has\nappreciated by 28 per cent against the US dollar since the beginning of 2009 and by \n20 per cent on a trade-weighted basis. \nSouth African Reserve Bank\n53\nMonetary Policy Review November 2009\n54\nThe international oil price has increased in the past week, but does not pose an\nimmediate threat to the inflation outlook. Having averaged around US$70 per barrel for\na number of weeks, the price of North Sea Brent crude oil increased to current levels of\naround US$76 per barrel, mainly as a result of the weaker US dollar and improved global\ngrowth prospects. In October the domestic price of 95 octane petrol was reduced by\n40 cents per litre as a result of both lower product prices and an appreciated rand\nexchange rate. \nThe main risks to the inflation outlook emanate from cost pressures in the economy. The\ntrend of wage settlements still poses an upside risk to the inflation outlook. However,\nthere appears to be some evidence that nominal wage increases are moderating,\nalthough increases have generally been above the inflation rate. According to Andrew\nLevy Employment Publications, the average level of wage settlements amounted to \n9,4 per cent in the first nine months of 2009 compared with 9,6 per cent in the\ncorresponding period of 2008. These increases are consistent with the Quarterly\nEmployment Survey (QES) of Statistics South Africa, which reported that growth in\naverage nominal remuneration per worker in the formal non-agricultural sector of the\neconomy moderated from 11,5 per cent in the first quarter of 2009 to 8,7 per cent in\nthe second quarter. Unit labour cost increases declined from 11,3 per cent in the first\nquarter to 9,3 per cent in the second quarter.\nThe substantial electricity tariff increases requested by Eskom are seen to be the main\nlonger-term threat to the inflation outlook. Eskom has requested a trebling of the current\nelectricity tariffs over the next three years, and the National Energy Regulator of South\nAfrica (NERSA) is expected to make a decision in February 2010. \nMonetary policy stance\nThe MPC is of the view that overall the risks to the inflation outlook have not changed\nmarkedly since the previous meeting. Accordingly, the MPC has decided to leave the\nrepurchase rate unchanged at 7,0 per cent per annum. The MPC will continue to\nmonitor economic and financial developments, and will not hesitate to adjust the\nmonetary policy stance should the risks to the inflation outlook change materially.\nMonetary Policy Review November 2009\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n17 November 2009\nIssued by Ms G Marcus, Governor of the South African Reserve Bank, at a meeting\nof the Monetary Policy Committee (MPC) in Pretoria\nIntroduction\nThere are signs that the domestic economy will continue on its recovery path, but\neconomic growth is expected to remain below potential for some time and dependent\nto some extent on the pace of the global recovery, which still appears to be fragile and\nuneven across regions. Economic growth is also expected to be constrained by\nsubdued domestic consumption expenditure. The domestic outlook for inflation remains\nfavourable as a result of weak demand pressures and the main threat to the inflation\noutlook emanates from possible electricity price increases.\nRecent developments in inflation\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all\nurban areas declined from 6,4 per cent in August 2009 to 6,1 per cent in September.\nThe single biggest contributor to the inflation outcome was the category of housing and\nutilities which accounted for 1,7 percentage points. This was mainly due to the electricity\ncomponent which increased at a year-on-year rate of 29,1 per cent. Food price inflation\ncontinued to moderate and at 4,9 per cent is now exerting downward pressure on\noverall inflation. Goods price inflation measured 4,9 per cent, compared with services\nprice inflation of 7,8 per cent. \nProducer prices declined for the fifth successive month in September, with the headline\nproducer price inflation measuring -3,7 per cent. Most categories in the index exhibited\nlow or negative year-on-year rates of inflation, apart from electricity, gas and water, and\ntobacco products.\nThe outlook for inflation\nThe CPI inflation forecast by the South African Reserve Bank (the Bank) continues to indicate\nthat inflation is likely to return to within the inflation target range, on a sustained basis, by the\nsecond quarter of 2010. There may, however, be temporary declines to within the target\nrange before then. CPI inflation is expected to remain within the inflation target range until the\nend of the forecast period in the final quarter of 2011, when it is forecast to average 5,5 per\ncent. Given the current uncertainty related to Eskom’s tariff application to the National Energy\nRegulator of South Africa (NERSA), the forecast does not make provision for the higher\nincreases requested by Eskom, and electricity price increases of 25 per cent in 2010 and\n2011 are assumed. The Bank’s forecast is in line with those of private-sector analysts.\nAccording to the latest Reuters consensus forecast, inflation is expected to average 5,7 per\ncent in 2010 and 5,85 per cent in 2011.\nThere are no major demand-side pressures on inflation, and the assessment of the\nMonetary Policy Committee (MPC) is that there are no significant upside risks to the\ninflation outlook emanating from this source.\nHousehold consumption expenditure remains subdued. Real retail sales growth has\nbeen negative, but there is further evidence that motor vehicle sales may have reached\ntheir lower turning point. Although total vehicle sales in October were 12,5 per cent lower\nSouth African Reserve Bank\n55\nMonetary Policy Review November 2009\n56\nthan a year ago, when the three months to October 2009 are compared with the\npreceding three months, an increase of 1,4 per cent was recorded. The recovery has\nbeen in passenger vehicle sales and exports. Commercial vehicle sales are still declining.\nConsumption expenditure is expected to remain subdued, despite the lower interest rate\nenvironment, as a result of tighter lending conditions by banks, high levels of consumer\nindebtedness, negative wealth effects or impaired household balance sheets, and higher\nlevels of unemployment.\nCredit extension to the private sector reflects weak demand by households and the\ncorporate sector, and tight lending conditions by banks in response to higher perceived\nrisk and rising impaired advances. Twelve-month growth in banks’ total loans and\nadvances declined to -0,2 per cent in September 2009. Growth in mortgage advances\nto the private sector declined further in September, measuring 4,8 per cent. The other\nmain categories of loans and advances, namely instalment sale and leasing finance,\ncredit card advances, bank overdrafts and general loans, all contracted.\nConsumption expenditure is also constrained by high debt levels and negative wealth\neffects, although asset values have recovered somewhat from their lows earlier in the\nyear. The all-share index on the JSE Limited is currently about 50 per cent higher than\nthe most recent lowest point in March of 2009. House prices also appear to be\nrecovering, with the various house price indices reflecting either small positive growth or\nmoderate declines in October.\nLabour market developments are also likely to constrain household consumption\nexpenditure. According to the Quarterly Labour Force Survey, approximately 800 000\njobs have been lost since the beginning of the fourth quarter of 2008. The Quarterly\nEmployment Statistics show a decline of over 200 000 formal-sector jobs between the\nbeginning of the fourth quarter of 2008 and the end of the second quarter of 2009. \nDomestic output appears to be recovering and the leading business cycle indicator of\nthe Bank has continued its positive trend. There are still some doubts about the speed\nof recovery, and the output gap remains relatively wide. Most forecasts suggest that\npositive growth will have resumed by the fourth quarter of 2009, but there is less\nunanimity about the third quarter outcome. \nThe outlook is also not even across sectors. The monthly data suggests that the mining\nsector contracted further in the third quarter, but the manufacturing sector performance\non a quarter-on-quarter basis was relatively robust. According to Statistics South Africa,\nthe physical volume of mining production declined by 7,5 per cent in the three months\nto September compared with the previous three months. However, a more positive trend\nmay be expected in the fourth quarter. \nThe physical volume of manufacturing production increased by 2,6 per cent over the\nsame period. This outcome is consistent with the Kagiso/Bureau for Economic\nResearch Purchasing Managers Index which, although still reflecting a contraction in\nmanufacturing, has rebounded significantly and the forward-looking indicators in the\nindex are generally positive. There is a risk, however, that this recovery could be affected\nby low consumption expenditure growth. The outlook for the construction sector\nappears to be less favourable. The real value of building plans passed declined by \n18,5 per cent on a year-on-year basis in August, while in the three months to August,\ncompared with the previous three months, a decrease of 27,7 per cent was recorded.\nThe First National Bank Civil Construction Index also declined significantly in the third\nquarter of 2009. \nMonetary Policy Review November 2009\nSouth African Reserve Bank\nFiscal policy developments are not seen to be a threat to the inflation outlook. The\nrevised budgeted deficit of 7,6 per cent of gross domestic product announced in the\nMedium Term Budget Policy Statement is to a significant extent due to lower tax\nrevenues – a result of low economic growth – and is therefore part of the workings of\nthe automatic stabilisers. The previous fiscal prudence has provided sufficient space for\nincreased borrowing to fund the shortfall. The deficit is expected to narrow as growth\ngains momentum. \nNo significant upside risks to the inflation outlook are expected from food prices. Food\nprice inflation has declined to below 5 per cent, and this favourable trend is expected to\ncontinue. Consumer food prices tend to lag food price developments at the producer\nprice level, and the latter have been either declining or rising marginally over the past\nmonths. In October, manufactured food prices declined at a year-on-year rate of 1,8 per\ncent, while agricultural product prices declined by 2,4 per cent. The current spot and\nfuture prices of agricultural commodities indicate that no significant upward pressures\nare expected in the near future.\nFor the past year petrol prices have exerted downward pressure on inflation as a result\nof the appreciation of the rand and relatively low international product prices compared\nto the previous year. However, these favourable base effects are not expected to\ncontinue. Over the past few months the international oil prices have remained relatively\nstable, but some account is taken in the forecast of possible increases in the\ninternational oil price should the global recovery accelerate. In November the domestic\npetrol price remained unchanged and, should current trends continue, a modest\nincrease in the petrol price is possible in December.\nThe rand has remained a positive factor in the inflation outlook, notwithstanding some\nvolatility during the month. Since the previous MPC meeting, the rand has traded in a\nrange of between R7,30 and R7,90 against the US dollar. The rand’s movements have\nbeen influenced, to a large extent, by exogenous factors, in particular movements in the\ndollar, a resumption in global capital flows to emerging markets and a recovery in\ncommodity prices. Since the beginning of the year the rand has appreciated by 20 per\ncent on a trade-weighted basis.\nThe global economic recovery has been led by the emerging Asian economies. However,\nthe turnaround in the advanced economies is less certain. While there are positive signs,\nthe recent higher growth rates have been driven by a turn in the inventory cycle, and the\ncontinued weakness in consumption expenditure in the United States in particular, and\nrising levels of unemployment pose risks to the recovery. The nature and speed of exit\nstrategies from the previous stimulus packages also remain a risk to the outlook.\nThe global environment remains benign from an inflation perspective. Despite moderately\nhigher commodity prices, there are no significant risks to the global inflation outlook.\nAs in the past few meetings, the main risks to the inflation outlook are seen to emanate\nfrom electricity price increases and the possible second-round effects thereof. In addition,\nthe trend of wage settlements continues to pose an upside risk to the inflation outlook.\nMonetary policy stance\nThe MPC, having reviewed the global and domestic economic and financial\ndevelopments, has decided to maintain the current stance of monetary policy and to\nleave the repurchase rate unchanged at 7 per cent per annum.\nSouth African Reserve Bank\n57\nMonetary Policy Review November 2009\n58\nAbbreviations\nAlsi\nAll-Share Index\nBER\nBureau for Economic Research (Stellenbosch University)\nBESA\nBond Exchange of South Africa \nCPI\nconsumer price index\nCPIX\nconsumer price index excluding mortgage interest costs\nECB\nEuropean Central Bank\nFNB\nFirst National Bank\nFOMC\nFederal Open Market Committee\nG-20\nGroup of Twenty\nGDP\ngross domestic product\nIMF\nInternational Monetary Fund\nJSE\nJSE Limited\nMBS\nmortgage-backed security\nMPC\nMonetary Policy Committee\nMTBPS\nMedium Term Budget Policy Statement\nNAB\nnon-alcoholic beverage\nNCD\nnegotiable certificates of deposit\nNEER\nnominal effective exchange rate of the rand\nNERSA\nNational Energy Regulator of South Africa\nOECD\nOrganisation for Economic Co-operation and Development\nOPEC\nOrganization of the Petroleum Exporting Countries\nPMI\nPurchasing Managers Index\nPPI\nproducer price index\nPSBR\npublic-sector borrowing requirement\nRMB\nRand Merchant Bank\nStats SA\nStatistics South Africa\nthe Bank\nSouth African Reserve Bank\nthe Fed\nFederal Reserve System\nUK\nUnited Kingdom\nUS\nUnited States\nMonetary Policy Review November 2009\nSouth African Reserve Bank", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/MPRNov2009-1-.pdf"}
\ No newline at end of file