5 February 2009
Since the previous meeting of the Monetary Policy Committee (MPC), domestic
inflation has continued on its downward trend. A further decline is expected in
the January data when the re-weighting and rebasing of the CPI index
implemented by Statistics South Africa comes into effect. With respect to
economic growth, the domestic economy is being adversely affected by the
continuing turbulence in the global economy.
The widening domestic output gap and declining international commodity
prices are expected to exert further downward pressure on inflation going
forward. Nevertheless some risks to the inflation outlook remain and the MPC
had to assess these conflicting risks against the backdrop of a highly
uncertain and volatile international environment.
Recent developments in inflation
CPIX inflation (headline inflation excluding mortgage interest cost) has
been moderating consistently since August 2008 when it measured 13,6 percent.
In November and December 2008 inflation had declined to 12,1 percent and 10,3
percent respectively. Electricity, food and clothing and footwear prices were
the main contributors to the inflation outcomes in these months, having
increased at year-on-year rates in excess of 15 percent. Petrol prices
increased by 25,8 percent in November, but declined by 1,8 percent in December.
If food and petrol were excluded, CPIX inflation would have measured 8,7
percent in December.
Producer price inflation also moderated in the past two months, declining to
a year-on-year rate of 11,0 percent in December. Food price increases continued
to moderate: agricultural product prices were unchanged in December, while
manufactured food price inflation declined to a year-on-year rate of 12,8
percent in the same month.
The outlook for inflation
The most recent central forecast of the bank is similar to that presented to
the MPC in December. Partly as a result of the re-weighting and rebasing of the
new targeted inflation index, CPI inflation is expected to decline further and
average 7,5 percent in the first quarter of 2009 and to decline to below the
upper end of the inflation target range during the third quarter of the year
when it is expected to average 5,2 percent.
Inflation is then forecast to increase again and to breach the upper end of
the target range in the first quarter of 2010, mainly as a result of technical
base effects. Thereafter inflation is expected to return to within the target
range and remain there until the end the forecast period when it is expected to
average 5,5 percent. The simulation results of the model make provision for the
most recent trends of actual and preliminary data that have become available
from Statistics South Africa since the previous MPC meeting.
Market indicators also reflect a moderation in expected inflation. Inflation
expectations as measured by the yield differential between conventional
government bonds and inflation-linked bonds have remained within the inflation
target range. The Reuters consensus survey conducted in December indicates that
analysts expect inflation to average 6,4 percent in 2009 and 5,8 percent in
2010.
The volatile exchange rate of the rand continues to pose the main upside
risk to the inflation outlook. The rand is currently trading against the US
dollar at levels similar to those prevailing at the time of the previous MPC
meeting. During December 2008 the rand appreciated against the US dollar and
reached a level of R9,30 in the first week of January. This move was mainly a
result of a weaker US dollar which depreciated to US$1,47 against the euro.
Renewed risk aversion in international markets and a stronger US dollar in
January resulted in the rand returning to current levels of around R10. The
rand has appreciated marginally on a trade-weighted basis since the previous
meeting.
The risks to the inflation outlook posed by oil and food prices appear to
have subsided somewhat. Food prices continued to moderate at the production
price level but these favourable developments have not yet been seen at the
consumer price level. Spot and futures prices of maize and wheat remain well
below the average price level in 2008 and some relief at the consumer price
level is expected in the coming months.
The price of Brent crude oil, which reached a low of US$34 per barrel during
December 2008, averaged around US$41 for the month. This, along with the
termination of the slate levy, allowed for a further reduction in domestic
petrol prices of R1,34 per litre in January. However, international oil prices
recovered somewhat in January and averaged almost US$45 per barrel during that
month. As a consequence, the domestic price of petrol was increased by 61 cents
per litre in February. The outlook for oil prices remains uncertain, but prices
are expected to remain relatively subdued as a result of weakening global
growth.
The domestic economy continues to show signs of slowing, following the 0,2
percent annualised growth recorded in the third quarter of 2008. The composite
leading and coincident business cycle indicators of the bank point to a
continuation of this trend. Other high frequency indicators are consistent with
this outlook. The physical volume of manufacturing production declined at a
year-on-year rate of 4,4 percent in November 2008, while the latest
Investec/BER Purchasing Managers Index indicates that the outlook for the
manufacturing sector remains negative. The utilisation of production capacity
in manufacturing declined by 3,4 percentage points in the fourth quarter of
2008 to 82 percent. Mining output contracted by 6,1 in November compared to the
previous year, while the real value of total building plans approved declined
by 25,3 percent over the same period.
Household consumption expenditure also remains under pressure. Real
wholesale trade sales increased slightly in the year to November 2008, but real
retail sales declined by four percent over the same period. Motor vehicle sales
contracted at a year-on-year rate of 35,4 percent in January, with commercial
vehicles sales declining by 41 percent. Motor vehicle exports, which remained
strong in 2008, also moderated and the industry expects larger declines in the
coming months. Exports in general are expected to remain under pressure given
the adverse global conditions. However preliminary data indicates that the
deficit on the trade account of the balance of payments probably contracted
during the final quarter of 2008.
Household consumption expenditure may also be affected by remuneration
trends and employment growth. According to Andrew Levy Employment Publications,
the level of wage settlements for the year 2008 amounted to 9,8 per cent,
compared to an average inflation rate of 11,3 percent. Nominal unit labour cost
increases in the third quarter of 2008 measured 12,4 percent. Employment growth
has also been impacted by the slowing economy. In the third quarter of 2008,
non-agricultural employment increased by one per cent, compared to 3,9 percent
in the first quarter of that year. Private sector employment contracted in the
second and third quarters.
The subdued trend in household consumption expenditure and the stricter
credit criteria applied by banks to both households and corporatism have been
reflected in a further moderation in the growth of credit extension to the
private sector. Growth over twelve months in total loans and advances by banks
to the private sector declined to 14,4 percent in December 2008. Most
categories of loans have exhibited declines in growth.
High consumption expenditure is expected to remain under pressure from
negative wealth effects resulting from adverse asset price developments. The
all-share index on the JSE Limited remained volatile in line with global market
turbulence. The housing market has also remained subdued, with the various
house price indices indicating real price declines.
The outlook for the world economy has deteriorated further as a result of
the continued difficulties being experienced by the global financial system.
The International Monetary Fund significantly downgraded its forecast for
global growth in 2009 to 0,5 percent. Many of the advanced economies are
expected to experience negative growth rates in the coming months, while growth
prospects of emerging market and developing economies have also deteriorated.
As a result of these widening output gaps and declining commodity prices, world
inflation pressures have subsided.
Monetary policy stance
The Monetary Policy Committee has decided to reduce the repurchase rate by
100 basis points to 10,5 percent per annum with effect from 6 February 2009.
The MPC will continue to monitor domestic and global developments in order to
decide on the most appropriate monetary policy stance going forward.
TT Mboweni
Governor
Enquiries:
Samantha Henkeman
Tel: 012 313 4669
E-mail: sam.henkeman@resbank.co.za
Issued by: South African Reserve Bank
5 February 2009
Source: South African Reserve Bank (http://www.reservebank.co.za)
