Committee
30 April 2009
1. Introduction
The global economy continues to be in the midst of a severe synchronised
downturn with a number of countries already experiencing recession. The G-20
countries, including South Africa, have committed themselves to a programme of
action in order to contribute toward the earliest possible global economic
recovery. Despite a generally positive response to the G-20 summit in April, it
has become increasingly accepted that the slowdown is likely to be severe and
protracted, and that the global recovery is likely to be gradual.
Domestic output and expenditure growth are declining or negative, and the
growth outlook is dependent to a significant extent on a broader global
recovery. Despite the widening domestic output gap, inflation remains sticky
but is expected to continue on its downward path.
2. Recent developments in inflation
2.1 The year on year inflation rate as measured by the Consumer Price Index
(CPI) for all urban areas increased to 8,6% in February 2009 and then moderated
to 8,5% in March. Food price inflation continued its downward trend, increasing
at a year on year rate of 14,7% in March, compared with 15,8% in the previous
month. Food prices remained the largest contributor to the inflation outcome,
contributing 2,3% points. The largest price increase was recorded by
electricity and other fuels which increased by 30,1%. Significant increases
were also recorded in the prices of tobacco, housing maintenance and repairs,
health, recreation and culture, and education. Countervailing pressure came
from petrol prices which declined by 14,9%, despite the petrol price increase
of 45 cents per litre in March.
2.2 Producer price inflation, which reached 19,1% in August 2008, continued
its downward trend, measuring 7,3% and 5,3% in February and March 2009
respectively. Prices of agricultural food products declined at a year on year
rate of 2,1% in March, while manufactured food price inflation moderated to
9,4%.
3. The outlook for inflation
3.1 The most recent central forecast of the bank shows a near term
deterioration in the inflation outlook but inflation is expected to follow a
downward trend and to average 5,4% at the end of the forecast period in the
final quarter of 2010. The slightly higher expected trend is a result of
revised assumptions about administered prices and the higher than anticipated
inflation outcome for February.
3.2 Inflation expectations show a mixed picture. The inflation expectations
survey which is conducted on behalf of the bank by the Bureau for Economic
Research at Stellenbosch University reflects somewhat divergent inflation
expectations between the different groups of respondents. In the survey
conducted in the first quarter of 2009, average CPI inflation expectations for
2009 declined from 8,6% to 8,3%. Expectations ranged from 6,1% for analysts, to
9,7% for trade unionists. Inflation is expected to average 8,0% in 2010, up
from the 7,5% measured in the previous survey. While analysts expect inflation
to average 5,4% in 2010, business executives and trade union officials expect
inflation to average 8,6% and 10,1% respectively. Inflation is expected to
moderate to 7,8% in 2011.
3.3 Wage settlements, which generally follow inflation trends with a lag,
have also edged up slightly. According to the Andrew Levy Employment
Publications, the level of wage settlements increased by 10,2% in the first
quarter of 2009, compared to the 2008 average of 9,8%. Nominal unit labour cost
increased over four quarters by 12,8% in the final quarter of 2008. Nominal
wage settlements are expected to moderate somewhat as the inflation rate
declines. According to the quarterly employment statistics survey by Statistics
South Africa, in the fourth quarter of 2008, employment levels showed their
first decline in four years.
3.4 The risks to the inflation outlook as assessed by the Monetary Policy
Committee (MPC) have remained relatively unchanged since the previous meeting
of the committee, although the recent appreciation of the rand exchange rate,
if sustained, may have reduced the degree of the upside risk to the inflation
outlook. The rand exchange rate remains affected by changes in global risk
aversion, but there has been a decline in the degree of volatility. Since the
positive market reaction to the G-20 summit in early April, sentiment towards
emerging market economies in general has improved and most emerging market
currencies have appreciated against the United State (US) dollar.
3.5 As noted earlier, the global economy remains under pressure despite
fiscal and monetary stimuli in many countries. In January 2009 the
International Monetary Fund (IMF) forecasted global growth of 0,5% and 3,0% for
2009 and 2010 respectively. The IMF now expects global output to contract by
1,3% in 2009, before recovering gradually to 1,9% in 2010. The advanced
economies are expected to contract by 3,8% while the emerging and developing
economies are expected to experience positive growth of 1,6%, with China and
India expected to grow by 6,5% and 4,5% respectively. The growth forecast for
Africa has been reduced from 3,4% to 2,0%. The risks to these forecasts are
seen to be on the downside, given the current heightened levels of uncertainty.
World trade has also declined and is expected to contract by a further 9,5% in
2009.
3.6 World inflation is expected to remain subdued as a result of these
growth trends and lower commodity prices. World inflation is expected to
average 2,5% in 2009 and 2,4% in 2010. Although a number of commodity prices
have recovered somewhat from their lows in the fourth quarter of 2008, they are
expected to be restrained by the weak global demand. The price of North Sea
Brent crude oil declined to around US$35 per barrel in late December 2008 but
has been trading at around the US$50 per barrel level for most of April 2009.
During this month, the higher international oil product prices have been more
or less offset by the appreciation of the rand against the US dollar, and the
domestic price of petrol is expected to remain relatively unchanged in May.
3.7 The outlook for domestic economic growth remains subdued, with no
indications of a quick recovery. The high frequency data continue to suggest
that the negative conditions recorded in the final quarter of 2008 persisted in
the first quarter of 2009. The physical volume of manufacturing production
declined at a year on year rate of 15,0% in February, following an 11,1%
contraction in the previous month. The outlook for manufacturing remains
negative, with the Investec / Bureau for Economic Research (BER) Purchasing
Managers Index declining further in March. Total mining production declined at
a year on year rate of 12,8% in February, while the real value of building
plans approved declined by 42,7% over the same period.
3.8 The sluggish domestic demand conditions also appear to have persisted.
Wholesale trade sales declined at a year on year rate of 8,9% in February while
retail sales declined by 4,5% following a modest increase in January. Total new
vehicle sales declined by 30,3% in March, reflecting the continued weak demand
for durable goods. However, the First National Bank (FNB) / BER Consumer
Confidence Index, while still at low levels, showed an increase in the first
quarter of 2009. Falling house prices and weak asset markets are also expected
to restrain consumption expenditure.
3.9 Domestic credit extension continues to reflect the declining trend in
domestic expenditure as well as more stringent credit criteria being applied by
banks with respect to loans to both households and companies. Year on year
growth in total loans and advances to the private sector declined to 10,2% in
February and 7,3% in March 2009. The quarterly growth declined from 6,2% in the
fourth quarter of 2008 to 0,1% in the first quarter of 2009. Instalment sale
credit and leasing finance reflected the weak demand for durable goods, with
increases of 3,1% in February and 1,6% in March.
3.10 In line with the previous MPC statement, the committee assesses the
main risks to the inflation outlook to emanate from cost push pressures,
particularly administered prices, which include the risk of higher
than-expected electricity tariff increases. Food price inflation at the
consumer price level, which has remained relatively unresponsive to lower
inflation at the producer price level, appears to show signs of moderation.
Should this downward trend accelerate, it could have a significant downward
impact on the inflation trajectory.
4. Monetary policy stance
4.1 The Monetary Policy Committee considered the severe synchronised
downturn in international and domestic economic conditions and noted their
potential future downward impact on inflation, notwithstanding the higher than
expected recent domestic inflation outcomes. The committee is of the view that
the adverse economic conditions continue to tilt the balance of risks to the
inflation outlook to the downside over the medium term and has therefore
decided to reduce the repurchase rate by 100 basis points to 8,5% per annum
with effect from 4 May 2009.
Contact person:
Samantha Henkeman
Tel: 012 313 4669
Sam.Henkeman@resbank.co.za
Issued by: South African Reserve Bank
30 April 2009
Source: South African Reserve Bank (http://www.reservebank.co.za)
