vigorous household spending and credit demand and a widening current account
deficit; and the outlook for interest rates in SA: luncheon address by Deputy
Governor of South Africa Reserve Bank Dr X P Guma, Investec
4 July 2006
1. Inflation in the world economy has declined significantly in recent years
and has remained relatively subdued over the past few years despite a
significant rise in commodity prices and strong economic growth. Chart one,
based on World Bank data illustrates the trend in world inflation, clearly
showing the peak that occurred at a rate in excess of 35 percent per annum in
the early 1990s and the rapid deceleration to rates around 5 per cent per annum
thereafter.
2. South Africaâs inflation performance began to improve during the 1990s,
as the next chart indicates; and subsequent to the adoption of the inflation
targeting framework, inflation as measured by Consumer Price Index, excluding
interest rates on mortgage bonds (CPIX) entered and has remained within the
target range since September 2003.
3. Oil prices have risen sharply since 2003, on account of various
determinants. During this year, the spot price of Brent crude oil has increased
dramatically from approximately US$59,9 per barrel in February to levels around
US$70,5 per barrel towards the end of April and an average of US$68,15 per
barrel in June.
4. Continued brisk expansion in final consumption expenditure by households
has been underpinned by a steady increase in household disposable income,
continued buoyancy in the real estate and securities markets and what some
describe as an accommodative interest rate environment. Overall household debt
as a percentage of annualised disposable income increased to a record level of
68 percent in the first quarter of 2006.
5. Robust growth in gross domestic expenditure and a concomitant strong
increase in the value of merchandise imports resulted in a sizeable deficit on
the trade account of the balance of payments in the first quarter of 2006.
Given the larger shortfall on the services and income account with the rest of
the world and the somewhat subdues performance of South Africaâs exports
notwithstanding the buoyancy of international commodity prices, the current
account of the balance of payments registered a deficit equivalent to 6,4
percent in the first quarter of 4 July 2006
6. Interestingly, as others have observed, despite the sell-off in emerging
markets since May, non-residents have remained net buyers of South African
financial assets and there have been significant investment flows into South
Africa over the past year. Non-resident investors bought a net R13 billion
worth of South African equities during May 2006 and R460 million the first half
of June 2006. Despite generally negative sentiment towards emerging
market-market assets, they continued to buy R768 million worth of bonds in May
and R4,5 billion in June.
About this there can be little argument, for all that I have done is to
summarise the facts. It is also not in dispute that the repo rate, the rate at
which the South African Reserve Bank will lend to the banks, was increased
recently, primarily on account of deteriorating risks to the outlook for
inflation.
What we can debate, and what I look forward to hearing your views about, is
the nature of the conflict regarding the outlook for interest rates in South
Africa. The South African Reserve Bank Monetary Policy Review (May 2006) states
it as follows: âOn the one hand the inflation outlook, as reflected in the
recent inflation forecasts of the Bank, has improved significantly âOn the
other hand, there a number of developments that has led the Monetary Policy
Committee (MPC) to remain vigilantâ. This was before the last meeting of the
MPC. Does a dilemma remain and how would you characterise it?
Let me have your views.
Issued by: South African Reserve Bank
4 July 2006
Source: South African Reserve Bank (http://www.resbank.co.za)
