Monetary Policy Review
June 2013
South African Reserve Bank
Monetary Policy Review
June 2013
Monetary Policy Review June 2013
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ISSN: 1609-3194
Monetary Policy Review June 2013
Preface
The primary mandate of the South African Reserve Bank (the Bank) is to achieve and maintain
price stability in the interest of balanced and sustainable economic growth. Low inflation helps
to protect the purchasing power and living standards of all South Africans, and provides a
favourable environment for growth and employment creation. In addition, the Bank has a
complementary mandate to oversee and maintain financial stability.
Price stability is quantified by the setting of an inflation target range by government after
consultation with the Bank. The commitment is to pursue a continuous target of 3 to 6 per cent
for headline CPI inflation. The Bank conducts monetary policy within a flexible inflation-targeting
framework that allows for inflation to be temporarily outside the target range as a result of supply
shocks. The Bank’s Monetary Policy Committee (MPC) takes into account a viable medium-term
time horizon for inflation to return to within the target range, and considers the lags between
policy adjustments and economic effects. This provides for interest rate smoothing over the
cycle, and makes economic growth more sustained and consistent.
The Monetary Policy Review (MPR) is published twice a year, and is aimed at broadening the
understanding of the objectives and conduct of monetary policy. The MPR reviews domestic
and international developments that have impacted on inflation, and that motivate the monetary
policy stance. The MPR also provides an assessment of the outlook for and the factors
determining inflation, and the Bank’s forecast of the future path of inflation and economic
growth. The MPR is presented by senior officials of the Bank at Monetary Policy Forums (MPFs)
in various centres across South Africa to develop a better understanding of monetary policy
through interaction with stakeholders.
Monetary Policy Review June 2013
Contents
Monetary Policy Review


Statements issued by Gill Marcus, Governor of the South African Reserve Bank
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee
Boxes


The role of the repurchase rate and the prime rate in the transmission of


Figures


Monetary Policy Review June 2013


B1.1
B1.2
B2.1
B2.2
B2.3
B2.4


Remuneration per worker, labour productivity and unit labour cost in the


B3.1
B3.2
B3.3
B3.4


B4.1
B4.2
B4.3
B4.4


Tables
Table 1

Table 2

Table 3

Table 4

Table 5
The effect of food and petroleum product prices on headline

Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table 12
Table 13
Table 14
Table 15
Table 16
Table 17

Monetary Policy Review June 2013
Introduction
The previous MPR was published in October 2012 at a time of significant economic turmoil
and heightened uncertainty about future economic developments. Given very low interest
rates, the United States Federal Reserve (the Fed), the European Central Bank (ECB) and the
Bank of Japan (BOJ) stepped up their use of unconventional monetary policy measures to
address deteriorating conditions and financial market tensions. Growth in the fourth quarter of
2012 was widely expected to disappoint in most advanced economies and did, with the euro
area remaining in recession and momentum falling in systemically important emerging-market
economies. Consequences of this decelerating growth and recession have been a further
moderation in price pressures and a subdued outlook for global inflation.
An interim fiscal cliff arrangement in the United States (US) and subsiding sovereign debt risks
in Europe contributed to some improvement in global financial market sentiment as 2012 ended
and 2013 began. A sluggish start in 2013 gradually gained momentum, with some key economies
growing faster than expected and financial markets strengthening. A nascent recovery in the
US solidified as private demand slowly strengthened, job creation picked up, and credit and
housing markets healed. Yet events in the euro area (particularly Cyprus) and the unresolved
fiscal gridlock in the US continue to sap confidence and undermine growth prospects.
The June 2013 MPR marks a point of considerable improvement in financial conditions and
somewhat better economic outcomes in some countries, but in a global environment of
sustained uncertainty and continued economic fragility. The better outcomes early in the year
had only marginal effects on global growth forecasts for 2013. The sizeable mismatch between
financial market and real economy outcomes has raised new concerns about the efficacy of
support to global liquidity.
Some of the improvement in global conditions filtered through to South Africa early in the year
but export demand and commodity prices remained weak. In subsequent months a range
of prominent domestic factors have deteriorated, negatively impacting on the local economic
landscape. Widespread labour market instability has undermined confidence, investment and
output. Weak export demand, lower terms of trade and sustained domestic spending have
further led to a widening current-account deficit on the balance of payments, and contributed
to credit ratings downgrades. These domestic economic developments became the dominant
drivers of the depreciating trend in the exchange value of the rand, in turn helping to support
domestic inflation running against the global trend.
Despite a decent rebound in growth in the fourth quarter of 2012 from the poor outcome of the
third quarter, growth in the first quarter of 2013 has turned out worse than expected. Investment
had weakened by year-end and has slowed further in the new year. Constrained by slow growth
in disposable income, rising inflation and subdued employment creation, household spending
has remained modest.
Domestic short-term supply-side indicators suggest modest economic growth in 2013 remaining
fragile and below potential. Real gross domestic product (GDP) growth amounted to 0,9 per cent
in the first quarter of 2013. The Bank’s growth forecast for 2013, which was revised marginally
upwards at the March 2013 MPC meeting, was again lowered in May. The Bank’s forecast for
growth at the May meeting was 2,4 per cent with downside risks. With the latest data releases,
this may need to be revised down at the next meeting of the MPC.
Despite stronger inflation momentum over the short term, inflation expectations remain anchored
around the upper end of the inflation target range. Headline inflation levelled off at 5,9 per cent
from February 2013 through to April, with core inflation also remaining below 6 per cent. The
Bank’s inflation outlook for 2013 has improved slightly since the March 2013 MPC meeting.
The monetary policy stance remains accommodative, taking into account a sustained negative
output gap and inflation driven primarily by global factors, especially exchange rate movements.
Monetary Policy Review June 2013

A stronger global economic recovery is immensely desirable, despite its potential to push
up global prices. Stronger global growth would assist in reducing South Africa’s external
and domestic vulnerabilities – the current-account and fiscal deficits, and performance of
export sectors. A sustainable global recovery, however, requires currency realignments and
structural policy interventions in many economies, in addition to monetary accommodation in
advanced economies that is more effective in generating stronger real growth and job creation.
Contractionary fiscal policies will continue in debt-stressed economies, especially in peripheral
Europe. Better fiscal outcomes and more aggressive currency rebalancing would provide
much-needed signs of improved global prospects.
The MPR analyses the latest developments in and the factors affecting inflation. It reviews recent
monetary policy developments, discusses the outlook for inflation, and presents the growth and
inflation forecasts of the Bank. In addition, topical issues are discussed in boxes. The first box
reviews the changes to the consumer price index and its expected impact, while the second
box discusses the analytical value of various measures of inflation. The third box evaluates the
accuracy of the Bank’s economic growth forecasts, while the fourth box clarifies the role of the
repurchase and the prime rates in the transmission of monetary policy.
Recent developments in inflation
This section reviews recent trends in the main inflation indices and looks at the main factors
impacting on inflation in South Africa.
The evolution of inflation indicators
The upward trend in headline consumer price inflation – the targeted inflation rate – gained
momentum from 5,4 per cent in January 2013 and then levelled off at 5,9 per cent from
February through to April 2013. The moderation in food prices to March 2013 was more than
offset by upward pressure on inflation emanating from, among other factors, the impact
of higher petrol prices. Core inflation also trended upwards, though remaining contained
below 6 per cent. Underlying inflationary pressures remained subdued in the absence of
demand pressures and given a significant output gap, but the depreciation of the rand has
already affected petrol prices and poses a risk in terms of second-round inflationary effects.
Targeted inflation
The headline consumer price index (CPI) – the measure targeted by the Bank – accelerated
from a low of 4,9 per cent in July 2012 to 5,7 per cent in December. In January 2013 inflation
surprised on the downside at 5,4 per cent with the release of a reweighted, rebased and revised
basket of goods and services. (See Box 1 for a review of the changes to the consumer price
index.) In subsequent months, and with ongoing rand weakness, the rate of inflation increased
to 5,9 per cent in February and remained at this level through to April 2013 (Figure 1). April 2013
marked 12 months of CPI inflation remaining within the target band.

Monetary Policy Review June 2013
Percentage change over 12 months

Figure 1
Consumer price inflation: Targeted inflation*
* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban
areas thereafter
Source: Statistics South Africa

2012 2013
A decrease in goods price inflation was the main driver of the 0,3 percentage point decline in
overall inflation from December 2012 to January 2013 (Table 1). Goods price inflation declined to
4,8 per cent in January 2013, driven by softer durable goods prices, a decrease in non-durable
goods price inflation and the change in the weights of CPI components. Goods price inflation
then accelerated to 5,1 per cent in April 2013, as non-durable goods price increases continued to
exceed the upper band of the inflation target range. Services price inflation, which had remained
stable and within the target range at, or just below, 6,0 per cent to January 2013, increased to
6,7 per cent in February 2013, with a significant increase in medical insurance costs. Services
inflation remained stable at a high 6,6 per cent in April 2013, and upward pressure from services
on overall inflation continues as it now commands a larger weight than goods inflation.
Table 1
Targeted inflation: Goods and services inflation
Percentage change over 12 months and percentage points*

Weights* Sep
Oct
Nov
Dec
Weights* Jan
Feb
Mar
Apr

Source: Statistics South Africa
The dominant price categories contributing to targeted inflation are food and non-alcoholic
beverages (NAB), housing and utilities, and transport (Table 2). The contribution of miscellaneous
goods and services increased by 0,4 percentage points to become the second-largest
contributor to overall inflation for February 2013. This was driven by increased inflation in the
insurance category,1 which increased by 3,3 percentage points from January 2013 to 8,3 per
cent in February. Rising and then slightly lower petrol prices caused the contribution of the
transport category to increase from 0,8 percentage points in January 2013 to 1,2 percentage
points in March and the subsequent decline to 1,0 percentage points in April.
1. Medical insurance
costs are surveyed
in February of each
year. These costs
accelerated from a
12-month rate of
9,4 per cent in January
2013 to 10,5 per cent
in February.
Monetary Policy Review June 2013

Table 2
Contributions to targeted inflation
Percentage change over 12 months* and percentage points

Weights Sep
Oct
Nov
Dec
Weights Jan
Feb
Mar
Apr

Of which:
Food and non-alcoholic beverages...

Miscellaneous goods and services....

Sources: Statistics South Africa and own calculations
Food prices
As shown in Table 2, food price inflation has moderated in recent months, declining by
1,6 percentage points from a peak of 7,5 per cent in November 2012 to 5,9 per cent in
March 2013. It then increased to 6,3 in April and remains a key contributor to the CPI. A
significant slowdown in meat price inflation to February 2013, and a moderation in bread and
cereals price inflation to March weighed against accelerations in vegetable price inflation and
high milk, cheese and eggs price inflation (Figure 2). The negative year-on-year rates of
international food price inflation until March 2013 have eased pressures on domestic food
prices. The Food and Agriculture Organization (FAO) Food Price Index2 of international food
commodities remained at an elevated level, recording a year-on-year increase of 1,1 per cent
in April 2013.
Percentage change over 12 months
Figure 2
Targeted inflation* and food inflation
All food items
Vegetables
Bread and cereals
Milk, cheese and eggs
Meat
Targeted inflation measure
-10

* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban
areas thereafter
Source: Statistics South Africa

2012 2013

2. The FAO Food
Price Index is a
measure of the
international prices
of a basket of food
commodities.

Monetary Policy Review June 2013
Domestic prices of maize and wheat tracked global grain prices lower, though still at elevated
levels as shown in Figure 3. The spot price of white maize followed US export parity prices lower
as it declined by 18,9 per cent from a recent high of R2 509 in November 2012 to early
February 2013. It then increased to R2 401 in March before again declining to R2 183 on 23 May.
Wheat prices levelled off at a high level from July 2012, before declining by 6,4 per cent from
28 November 2012 to R3 515 per ton on 23 May 2013.3 Going forward, the more favourable
global food price developments could be offset in part by the depreciation of the currency.
Rand per ton
Rand per ton
Figure 3
Selected commodity prices


White maize SAFEX spot price
Wheat SAFEX spot price

Note: The top grey line is the import parity price and the bottom grey line is the export parity
price. These prices are the theoretical upper and lower bound prices for commodities.
Source: Grain South Africa
Petrol prices
Petrol price inflation moderated from 17,6 per cent in September 2012 to a low of 11,6 per cent in
January 2013. The subsequent increase to 16,4 per cent in March was followed by a moderation
to 10,4 per cent in April. This volatility was largely driven by movements in international product
prices through their effect on the basic fuel price as shown in Figure 4. The basic fuel price
per litre has fluctuated between R6,65 and R7,85 since October 2012. The price of 95 octane
unleaded petrol per litre in Gauteng Province decreased from R12,20 in October 2012 to
R11,86 in January 2013 before increasing to R13,08 in March.
3. On 2 May 2013 the
government approved
an increase in the wheat
tariff protection level to
US$294 per ton free on
board. This is effectively
an increase in the price
floor for wheat in South
Africa, which guarantees
local producers a
minimum price of
approximately R3 300
per ton compared to
the long-term average
of R2 951 per ton.
Should the three-week
moving average of the
international reference
price fall below this
level, a duty would be
imposed on imported
wheat.
Monetary Policy Review June 2013


Cents per litre
Cents per litre
Figure 4
South African petrol price

Exchange rate
Over (-)/Under (+) recovery
Movement in international product prices
Price change
Basic fuel price
Other levies
Fuel levy
Margin
Road Accident Fund
Gauteng price of 95 octane unleaded petrol

1 000
1 200
1 400
Source: Department of Energy
Contributions to the
change in the petrol price
Level
The lower, though still elevated, international oil price led to a decline in the basic fuel price
in April 2013. However, this was more than offset by the impact of the rand depreciation, the
15 cents per litre increase in the fuel levy to 212,5 cents per litre, the 8 cents per litre increase
in the Road Accident Fund levy to 96 cents per litre, and the 13,16 cents per litre increase
in other levies, inclusive of the pipeline levy set by the National Energy Regulator of South
Africa (NERSA). Consequently, in April 2013, the price of 95 octane unleaded petrol in Gauteng
Province reached an all-time high of R13,20 per litre. This was followed by a 73 cent reduction
in May, on account of the lower price of crude oil and a somewhat stronger exchange rate. At
R12,47 per litre, the price of 95 octane unleaded petrol was 2 per cent higher than a year ago.
Core inflation
Underlying inflation as measured by CPI excluding food, NAB, petrol and energy prices
accelerated gradually from 4,5 per cent in July 2012 to 5,3 per cent in February 2013 and
5,2 per cent in April (Figure 5).
Since the previous MPR, the tight dispersion between the exclusion-based measures widened
somewhat before narrowing again. The upward effect of petrol prices is evident from the
differences between the measure excluding food and NAB and measures excluding petrol.
In addition, medical insurance costs contributed to the uptick in February 2013. Core inflation
remained relatively well contained, reflecting moderate demand pressures. (See Box 2 for a
discussion of various measures of inflation.)

Monetary Policy Review June 2013
Percentage change over 12 months

* NAB: Non-alcoholic beverages
Sources: Statistics South Africa and own calculations
Figure 5
The effect of food, petrol, energy and volatile prices on

headline inflation
CPI excluding food and NAB* prices
CPI excluding food, NAB and petrol prices
Headline CPI
CPI excluding petrol prices
CPI excluding food, NAB, petrol and energy prices
Trimmed mean

Administered prices
Administered prices (with an increased weight in the CPI of 18,48 percentage points), and
regulated prices in particular (with a weight of 13,70 percentage points), are major drivers of the
upward trend in core inflation measures. The administered price index (API) has remained high
and above the upper limit of the inflation target range since the previous MPR. The 12-month
change in API moderated from 9,8 per cent in September 2012 to 8,5 per cent in January 2013,
before increasing to 8,9 per cent in April. The effect of the revised CPI weights can be seen in
Table 3 as the contributions of both electricity and petrol increased by 0,4 percentage points
from December 2012 to January 2013, despite a decline in the year-on-year rate of change in
the petrol price and no change in the inflation rate of electricity over the period.
Table 3
Contributions to administered prices
Percentage change over 12 months* and percentage points
Weights

Weights

CPI
Sep
Oct
Nov
Dec
CPI
Jan
Feb
Mar
Apr

Regulated component

Other regulated

Unregulated component

Primary and secondary

Other unregulated

Source: Statistics South Africa
Monetary Policy Review June 2013

Producer prices
Although differently constituted and not comparable to the previous data, the new producer
price index (PPI) continues to measure the price changes of goods in South Africa at the factory
gate. The first data, compiled in terms of Statistics South Africa’s (Stats SA) newly introduced
PPIs (at 2012 prices), were released in February 2013 for prices in the month of January 2013. In
the new release designated headline PPI is now the PPI for final manufactured goods, whereas
previously it was the PPI for domestic output.
The five new producer price indices and their year-on-year percentage changes are presented
in Table 4. With the exception of agriculture, forestry and fishing, the price inflation of products
produced in other sectors were either close to, or above, 6 per cent. However, headline PPI
inflation (PPI for final manufactured goods) has remained contained since January 2013,
accelerating from 5,4 per cent in February to 5,7 per cent in March. Food products, beverages
and tobacco products price inflation of 5,9 per cent in March (with a weight of 33,47 per cent),
and coke, petroleum, chemical, rubber and plastic products price inflation of 9,2 per cent (with
a weight of 17,22 per cent) respectively contributed 2,0 and 1,6 percentage points to the annual
percentage change in headline PPI inflation in March.
Table 4
Measures of producer price inflation
Percentage change over 12 months

January
February
March

Source: Statistics South Africa
Intermediate manufactured goods price inflation accelerated to 7,7 per cent in March 2013.
The already high annual electricity and water price inflation moderated to 11,4 per cent in
March, mainly driven by electricity price inflation of 12,0 per cent. Annual mining price inflation
decelerated from January to February 2013 before accelerating to 8,6 per cent in March. In
agriculture, forestry and fishing the deceleration was largely on account of easing pressures on
fruit and vegetable prices, and a notable decline in live animal prices.
Stats SA also introduced analytical PPI series, which are exclusion-based core measures. Two
of these measures, PPI for final manufactured goods excluding petroleum products and the
PPI for final manufactured goods excluding food, are shown in Table 5. The significant gap of
0,5 percentage points in March 2013 between headline PPI and that excluding petroleum
products suggests that petroleum product prices are exerting upward pressure on producer
prices. The narrow gap between headline PPI and that excluding food suggests little upward
pressure from food prices.

Monetary Policy Review June 2013
Table 5
The effect of food and petroleum product prices on headline
producer price inflation
Percentage change over 12 months

January
February
March
5,8
5,4
5,7
Excluding:

Source: Statistics South Africa
Food price inflation in headline PPI moderated from a peak of 11,1 per cent in November 2012
to 6,3 per cent in March 2013 as shown in Figure 6. This was due to a deceleration in price
increases in almost all the product categories surveyed. Annual price changes of food products
as measured in headline PPI continued to move in tandem with that of food as measured in
headline CPI.
Percentage change over 12 months

* PPI for final manufactured goods: Food products consist of the food at manufacturing component of
the PPI for domestic output until December 2012 and the PPI for final manufactured goods, food
products category, from January 2013.
Source: Statistics South Africa
Figure 6
Food prices in the PPI* and CPI
PPI for final manufactured goods: Food products
CPI: Food

-10

Monetary Policy Review June 2013

Box 1
Changes to the consumer price index1
In line with international best practice,2 Statistics South Africa (Stats SA) recently revised the
weights and made minor changes to the constituent goods and services in the consumer
price index (CPI) basket.3 Stats SA then chain-linked the CPI indices at the new price and
weight reference period, namely December 2012.4
The revisions are based on the survey of household expenditure, the Income and
Expenditure Survey (IES) 2010/2011,5 supplemented by additional data sources where
necessary. The IES 2010/11 weights are price-updated to reflect 2012 prices. The CPI
indices are rebased to December 2012 (December 2012 index values equal 100), with the
old and new indices linked in December 2012 to ensure continuity and comparability of the
new basket of items and weights.
Table B1.1 compares weights across expenditure categories, including certain within-category
groups that have incurred significant changes. With the increase in consumer spending on
services relative to goods, expenditure on services now commands a weight of 50,14 per
cent. Medical insurance costs are a major driver in the miscellaneous goods and services
category, contrasting with the lower weight of the health category which excludes health
insurance and medical aid subscriptions.
Table B1.1 Comparison of change in CPI weights*
COICOP categories

Difference**
Change
Per cent
Percentage
points
Per cent

Household contents, equipment and maintenance..

* The weights of CPI represent the proportions of consumption expenditure by households in a specific period.
** Increased/Decreased compared to 2008
Source: Statistics South Africa

Statistics South Africa, “Consumer Price Index”, The South African CPI Sources and Methods Manual,
Release v.2 (Pretoria: Stats SA, 20 February 2013).

The International Labour Organisation (ILO) recommends that CPI reweighting occurs at least every five
years. Stats SA last reweighted CPI in 2008.

Stats SA classifies all measured items according to Classification of Individual Consumption by Purpose
(COICOP) standards.

See also Box 1 in the March 2013 Quarterly Bulletin of the South African Reserve Bank for details on the
reweighted and rebased consumer price index.

Statistics South Africa, “Income and Expenditure of Households 2010/2011”, Statistical release P0100
(Pretoria: Stats SA, November 2012).

Monetary Policy Review June 2013
In total, the weight for administered prices has increased from 14,66 per cent to 18,48 per
cent, driven by significant electricity and petrol price increases (see Figure B1.1). The new
weights reflect the substantial increase in these prices, with that of electricity increasing by
146 per cent (or 2,45 percentage points) to 4,13 per cent, and that of petrol by 45 per cent
(or 1,75 percentage points) to 5,68 per cent.
Average electricity price
95 unleaded petrol price in Gauteng
Figure B1.1 Electricity and petrol prices
Cents per Kwh

1 200
1 500
Cents
Sources: Eskom, South African Reserve Bank and Department of Energy

The 2012 reweighting entailed several changes to the composition of CPI, with multiple
products added, including a newly designed seasonal fruit basket, and others excluded to
reflect current consumer behaviour. Package holidays is a new group that has been added to
the CPI, with a weight of 0,21 per cent.
On a broader level, the measurement of rural CPI has been revised to reflect prices experienced
by consumers in rural areas themselves rather than merely reflecting secondary area prices.
Prices will therefore be measured according to the place of purchase rather than the residential
area. This change should increase the accuracy of data on rural areas and the understanding
of the differential impact, if any, of inflation by geographical area.
Figure B1.2 illustrates the Bank’s baseline inflation forecast and the estimated change to the
forecast as a result of the new weights and base year through to 2014. These changes caused
forecasted inflation to increase, on average, by approximately 0,2 percentage points over
2013. Nonetheless, it is clear that the overall inflation trajectory has not been altered by these
changes. It should be noted that in Figure B1.2 both the baseline and the estimated change
are forecasts, which may be modified due to revisions of assumptions.
Percentage points
Per cent

Figure B1.2 Inflation forecast with changes to CPI

Headline CPI (2008 = 100)

Difference in percentage points (right-hand scale)

Sources: Statistics South Africa and South African Reserve Bank

Headline CPI (new weights, Dec 2012 = 100)
Monetary Policy Review June 2013

Box 2
Monetary policy and various measures of inflation
In pursuing the Bank’s primary objective, the Monetary Policy Committee (MPC) focuses
on an inflation target over the medium term in the interest of balanced and sustainable
growth. The interpretation of inflation outcomes is at times complicated by temporary or
idiosyncratic shocks. In such conditions, policy-makers can look through temporary
volatility by referencing various core measures of inflation that focus on underlying
inflationary pressures.
Core measures can be derived by means of exclusion-based and statistical trimmed mean
approaches, with the purpose of extracting the persistent component of inflation. Statistics
South Africa (Stats SA) publishes various exclusion-based measures that remove certain
items from the headline CPI. In terms of exclusions, the Bank in its analyses focuses mostly
on CPI measures that exclude administered prices and CPI measures that exclude food,
petrol and energy prices (see Figure B2.1).
Figure B2.1 Headline inflation and exclusion-based core measures
Percentage change over 12 months
-6
-3

-6
-3

Percentage change over 12 months
Source: Statistics South Africa

Headline CPI
CPI excluding food and non-alcoholic beverages (NAB)
CPI excluding petrol
CPI excluding food and NAB, and petrol
CPI excluding food and NAB, petrol and energy
Headline CPI
CPI excluding administered prices
Another inflation measure is Stats SA’s newly introduced trimmed mean inflation.
Conceptually, this measure excludes items falling in the last 5 per cent of the tail
(extremity) of the distribution of price-change observations for products and services,
thus limiting the influence of these extreme changes on the calculation of the weighted
average inflation number.1 See Figure B2.2 for a comparison of the key measures
of inflation.

Elementary indices are sorted by the size of their price change, with the cut at the 5 per cent and the
95 per cent cumulative weight points. Changes in the price of products and services surveyed less
frequently (on a quarterly, semi-annual and annual basis) will be considered in terms of a rolling average
between surveys.

Monetary Policy Review June 2013
Figure B2.2 Comparison of main inflation measures
Percentage change over 12 months

Trimmed mean

Targeted inflation
Sources: Statistics South Africa and own calculations
CPI excluding food and NAB, petrol and energy
Jan
Mar

May
Jan
Mar
May
Jul
Sep
Nov

Figure B2.3 indicates that average long-run inflation measures of the various exclusionbased core measures are not significantly different from that of headline CPI over the period
from January 2003 to April 2013. This is indicative of core measures capturing the
underlying trend component of inflation, with the price shocks dissipating over a horizon of
18 to 24 months. Furthermore, the volatility of core measures over the review period,
measured as the standard deviation2 as shown in Figure B2.3, is close to or less than the
volatility of headline CPI inflation. This indicates that the volatility of non-core items
contributes most to volatility in headline CPI.

Standard deviation and per cent
Figure B2.3 Comparison of long-run measures of inflation
Volatility
Average inflation, Jan 2003 to Apr 2013
* NAB: Non-alcoholic beverages
Sources: Statistics South Africa and own calculations
CPI excluding
administered prices
CPI excluding food and
NAB, petrol and energy
CPI excluding food
and NAB, and petrol
CPI excluding petrol
CPI excluding food
and NAB*
Headline CPI

The standard deviation is a measure of the dispersion of individual observations from the mean.
Monetary Policy Review June 2013

International economic policy developments
Monetary policy decisions are made taking into account current and expected developments in
the global economy. This section reviews medium-term developments, and assesses the nearterm outlook in terms of prospects, risks and uncertainties for inflation.
International economic developments
Although the trajectory for global economic growth in 2013 has not changed much since
October 2012, economic outcomes in key areas have started to diverge, giving rise to the
characterisation of a ‘multispeed’ recovery in global economic activity. More rapid growth
in emerging-market and developing economies (developing Asia in particular) is set against
continued, very weak outcomes in Europe and a stronger-than-expected recovery in the
US. In the absence of demand pressures, and with an expected softening of food and oil
prices, inflationary pressures are likely to remain subdued in most advanced and emerging-
market economies.
Multispeed global growth
Despite very poor economic outcomes in the fourth quarter of 2012, a trough in global growth
of 2,25 per cent was actually experienced in the second quarter of 2012. The global economy
grew by 3,2 per cent in 2012. This global growth rate masked considerable diversity in national
outcomes, underscoring the key role of a few major world economies in global outcomes and
presaging the current ‘multispeed’ trajectory. As of April 2013, the International Monetary Fund
(IMF) projects global real GDP to increase by 3,3 per cent in 2013; revised down from 3,5 per
cent in January 2013 and 3,6 per cent in October 2012. Global economic growth is expected to
be significantly higher in 2014 at 4,0 per cent.
The gap analysis (Figure B2.4) shows that the gap between headline CPI and core measures
has further analytical value as it distinguishes between transitory and more permanent
changes affecting inflation. Large gaps are indicative of short-term (transitory) price shocks.
Figure B2.4 Gap analysis
Percentage change over 12 months
Gap in percentage points

Headline CPI

Difference between headline CPI and CPI excluding food and NAB, petrol and energy (right-hand scale)

Difference between headline CPI and CPI excluding administered prices (right-hand scale)
Sources: Statistics South Africa and own calculations

2012 2013

-2

-5

Monetary Policy Review June 2013
Annual percentage change
-3
-2
-1

May
Mar
Jan
Nov
Sep
Jul
May
Mar
Jan
Figure 7
Evolution of real GDP forecasts for 2013 for the G-7 and

euro area

United States

Euro area

Italy
Source: Consensus Economics Consensus Forecasts

Japan

Germany

Canada

United Kingdom

France

Growth in advanced economies
Economic conditions in major advanced economies deteriorated in the fourth quarter of 2012,
with real GDP growth contracting by 2,3 per cent in the euro area and by 1,2 per cent in the United
Kingdom (UK). During the same quarter, Japan’s real GDP expanded marginally by 0,2 per cent
as it recovered from a mild recession, and the US economy grew by a slow 0,4 per cent.
The variable economic growth performances of advanced economies in the latter part of 2012
have continued in 2013. The US leads the recovery, supported by positive trends in the labour
and housing markets and household consumption expenditure – though somewhat countered by
an expected drag on growth from fiscal consolidation. Real GDP growth in the US is expected to
accelerate from 1,9 per cent in 2013 to 3,0 per cent in 2014.
The outlook for some of South Africa’s other major advanced-economy trading partners is less
positive. The IMF’s forecast for the euro area has been revised in January 2013 to a contraction
of 0,2 per cent and further to 0,3 per cent in April, with a gradual strengthening in the quarterly
outcome to 1,0 per cent by the fourth quarter of 2013. ECB estimates for the euro area are
similar, with growth of 1,4 per cent expected in 2014. The pace of the recovery is expected to
be considerably slower in the periphery. In April 2013 the euro area manufacturing Purchasing
Managers’ Index (PMI) remained below 50 at 46,7, while the contraction in Europe’s car market
accelerated to a 10,2 per cent year-on-year decline in March 2013.
In 2012 the German economy slowed to 0,7 per cent, with its GDP contracting by 2,7 per
cent in the fourth quarter. This was followed by weak positive growth in the first quarter of
2013, with the manufacturing PMI temporarily breaching 50 in February 2013. The ECB and the
Bundesbank project 0,4 per cent growth in real GDP for Germany in 2013 and 1,8 to 1,9 per cent
in 2014. The European Commission’s GDP growth estimate for France is a small contraction of
0,1 per cent in 2013 before improving to growth of 1,1 per cent in 2014. The recovery in the UK
is progressing slowly in the context of ongoing fiscal consolidation, with the IMF projecting the
economy to expand by 0,7 per cent in 2013 and 1,5 per cent in 2014.
Monetary Policy Review June 2013

Table 6
IMF projections of world growth and inflation for 2013 and 2014*
Per cent
Share of
global
GDP**
Real GDP growth
Consumer
price
inflation

2013 2014
100,0
(3,6)
[3,5]
3,3
(4,1)
[4,1]

[1,4]
1,2
(2,3)
[2,2]

[2,0]
1,9
(2,9)
[3,0]

[1,2]
1,6
(1,1)
[0,7]

(0,2) [-0,2] -0,3
(1,2)
[1,0]

[1,0]
0,7
(2,2)
[1,9]

[1,8]
1,5
(2,4)
[2,3]

[2,7]
2,5
(3,5)
[3,3]
3,4
2,1
2,4
Emerging-market and developing countries.
49,9
(5,6)
[5,5]
5,3
(5,9)
[5,9]

[5,8]
5,6
(5,5)
[5,7]

[2,8]
2,8
(3,9)
[4,1]

[2,4]
2,2
(3,2)
[3,1]

[3,8]
3,4
(4,2)
[4,1]

[7,1]
7,1
(7,5)
[7,5]

[8,2]
8,0
(8,5)
[8,5]

[5,9]
5,7
(6,4)
[6,4]

[3,4]
3,1
(3,8)
[3,8]

[3,6]
3,4
(4,1)
[3,9]
3,9
6,1
5,7
* IMF projections as at October 2012 ( ) and January 2013 [ ] in parenthesis
** GDP shares based on the IMF’s purchasing power parity valuation of country GDPs for 2012
Source: IMF, World Economic Outlook, various issues
Table 7
Global manufacturing PMI: Overall
Index points

Country
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr

* Italics indicate outcomes below the 50 index points neutral level, non-italics outcomes above the 50 index points neutral
level, green an increase in the level in the latest survey, red a decrease and black no change.
Source: JPMorgan
In Japan policy stimulus is expected to be significant, delivering a real GDP boost from fiscal
policy alone of about 0,6 per cent in 2013. A weaker currency and external demand-driven
rebound are expected to help the economy expand by 1,6 per cent in 2013, followed by softer
growth of 1,4 per cent in 2014.

Monetary Policy Review June 2013
For the advanced economies, a slow start in 2013 is projected to be followed by a gradual
acceleration in the second half of the year, with real GDP growing by around 2 per cent on
average. For 2013 as a whole, growth in advanced economies will be broadly the same as
in 2012 at about 1,2 per cent before increasing to 2,2 per cent in 2014. The Organisation
for Economic Co-operation and Development (OECD) composite leading indicator projects a
moderate expansion in member economies (Figure 8).
Percentage change over 12 months


Figure 8
Selected OECD indicators of global economic activity

Composite leading indicator
Source: OECD

Industrial production index

Emerging and developing economies
Decelerating demand from advanced economies helped to slow real GDP growth in emergingmarket and developing economies from 6,4 per cent in 2011 to 5,1 per cent in 2012. These
economies have subsequently gathered momentum on the back of policy adjustments, resilient
domestic consumption and investment, and improving global demand. Nonetheless, insufficient
external demand and structural constraints will weigh against more robust outcomes in the
medium term. The IMF projects that economic growth will increase to 5,3 per cent in 2013 and
5,7 per cent in 2014.
Growth in China and India slowed sharply in 2012, but these economies are expected to grow
in 2013 by 8,0 per cent and 5,7 per cent respectively. Brazil’s GDP growth rate is expected to
strengthen from 0,9 per cent in 2012 to 3,0 per cent in 2013. Russia’s real GDP is forecast to
expand in 2013 by 3,4 per cent, as in 2012.
According to the IMF, seven of the world’s ten fastest-growing economies between 2011 and
2015 will be located in sub-Saharan Africa (SSA), with economic growth in the region projected
to accelerate from 4,8 per cent in 2012 to an average of about 5,9 per cent in 2013–14.
Economic activity in both resource-rich and lower-income economies in SSA is expected to be
increasingly broad-based.
Commodity prices and global inflation
Weak demand and downwardly revised projected emerging-market growth contributed to a
general decrease in commodity prices from a recent high in September 2012. The near-term
outlook for commodity prices reflects a slight softening of oil prices on the back of improved
supply prospects.
Monetary Policy Review June 2013

Softer commodity prices and the absence of excess demand pressures in the major advanced
economies suggest that global inflationary pressures are likely to remain subdued. Global
inflation fell to about 3,6 per cent in February 2013 from 3,9 per cent in February 2012, and
is expected to remain close to this level through to 2014. In the US and euro area inflation is
expected to ease to below the 2 per cent level, while that of Japan is projected to become
slightly positive in 2013 before increasing to 3,0 per cent in 2014.
Inflation is expected to remain contained in emerging-market and developing economies, with a
slight deceleration in consumer price inflation from 5,9 per cent in 2013 to 5,6 per cent in 2014.
However, inflationary pressures are high in some emerging-market and developing countries where
output gaps are closing faster. In developing Asia inflation is expected to increase from 4,5 per cent
in 2012 to 5,0 per cent in 2013 and 2014. China’s inflation is expected to increase modestly to
3,0 per cent in 2013. In contrast, inflation in SSA is expected to decrease from 9,1 per cent in 2012
to 6,3 per cent in 2014.
Fiscal trends
With a relatively subdued economic recovery in many parts of the world, gradual fiscal consolidation
has remained a challenge due to slower economic growth and the impact of lower spending
on growth. The impact of fiscal consolidation on growth in advanced economies is expected
to rise somewhat in 2013. In the advanced economies general government deficit ratios have
declined but debt ratios continued to increase, although at a slower pace than in previous years. In
emerging-market economies debt ratios fell, while deficit ratios increased modestly, but stronger
economic growth is expected to improve these ratios going forward (Table 8).
Table 8
Fiscal balances and government debt
Per cent of GDP
Projections

Fiscal balances

General government gross debt

Source: IMF, Fiscal Monitor, April 2013
Oil price developments
Crude oil prices moderated from October to November 2012, before rising to a recent high
in February 2013, primarily in response to improved confidence in the global economic
recovery. The subsequent marked decline in crude oil prices reflected worse-than-expected
short-term economic outcomes and the Organization of the Petroleum Exporting Countries’
(OPEC’s) expectations that oil supply would continue to exceed demand for oil by about
1 million barrels per day.
Between November 2012 and February 2013, the international price of crude oil has fluctuated
between a low of US$105,82 per barrel and a high of US$119,34 per barrel. As economic
growth rates stalled and expected growth rates were marked down, the price of Brent crude

Monetary Policy Review June 2013
declined markedly to US$96,79 per barrel on 17 April 2013 – its lowest level since July 2012.
Subsequently, the price of Brent crude increased slightly to US$102,21 per barrel on 23 May
2013 (Figure 9).
Figure 9
Price of Brent crude oil

US dollar per barrel

Brent crude spot price

Futures prices (24 January 2013)

Futures prices (20 March 2013)

Futures prices (latest: 23 May 2013)
Source: Bloomberg

Futures contracts dated 23 May 2013 for delivery in the third and fourth quarters of 2013 traded
at around US$102,41 and US$101,57 per barrel respectively, as near-term futures prices for
oil caught up with concerns about slowing global economic growth. The International Energy
Agency (IEA) and OPEC have both lowered their short- and medium-term forecasts of global oil
demand for 2013. Over the longer term, supply will be shaped by more rapid economic growth
in the emerging and developing world, as well as US shale gas production, with the latter
expected to expand significantly over the next five years.
The persistently high level of the price of Brent crude oil, combined with the weaker exchange
rate of the rand, imparted both a negative income and a negative price shock to the domestic
economy. In addition to increasing inflation, these shocks have diverted households’ and firms’
spending power, and pushed up the deficit on the trade account of the balance of payments.
More recent weakness in oil prices, if maintained, could support an easing of domestic
inflationary pressures in coming months.
International monetary policy developments
Since the previous MPR, the global trend of monetary easing has continued with greater
use of quantitative easing (QE) and increased forward guidance. After a range of interest
rate reductions in 2012, most economies maintained existing monetary policy settings
in order for the full policy impact to become visible. Some emerging-market economies
continued to ease policy gradually in 2013. On balance, policies have been set to support
economic growth, which has consistently underperformed in most countries. Price
outcomes remain a key concern for all central banks, with considerable variation in
emphasis on deflation and inflation across advanced and emerging economies. Recent
weakness in global growth has again, on balance and with variation across countries,
moderated global inflation pressures.
Monetary Policy Review June 2013

Policy in advanced economies
Subdued inflationary pressures and poor growth facilitated a continuation of accommodative
monetary policy in advanced economies. This led to improved global financial market conditions
and risk appetite, along with signs of resilience in real economic activity in 2013. Policy in the US
continues to set the tone across advanced economies. The Fed has maintained the federal
funds rate at zero to 0,25 per cent since December 2008. This rate was recently linked explicitly
to unemployment remaining above 6,5 per cent, and inflation (between one and two years
ahead) no more than 0,5 percentage points above the 2 per cent longer-run goal, and with
inflation expectations remaining well anchored.4
Unsterilised purchases of securities, or QE, have also continued, with the asset purchase
programme accumulating US$40 billion of mortgage-backed securities per month. After the
completion of the maturity extension programme at the end of 2012, the Fed commenced with
the purchases of longer-term Treasury securities at an initial pace of US$45 billion per month.
These measures supported the mortgage market, exerted downward pressure on longerterm interest rates and eased financial conditions. The Fed’s balance sheet contracted by
US$20 billion in 2012 to US$2,9 trillion but is projected to expand by US$1,0 trillion in 2013.
Table 9
Central bank total assets
US$ billions


Total assets to date: Bank of England (15 May 2013), European Central Bank (17 May 2013), the United States Federal
Reserve (15 May 2013) and Bank of Japan (30 April 2013).
Sources: National central banks
Since the previous MPR, the BOJ proceeded with aggressive monetary easing by steadily
increasing the outstanding amount of the Asset Purchase Program and also announcing the
introduction of the Open-Ended Asset Purchases Method (i.e., without a set termination date) from
January 2014 at ¥13 trillion per month. Its Loan Support Program was enhanced by establishing
an unlimited Stimulating Bank Lending Facility to provide long-term funds. These measures are
intended to make financial conditions more accommodative, encourage lower long-term interest
rates and proactive credit demand, and to reduce risk premiums.
In January 2013 the BOJ changed from a medium-term inflation goal of 1 per cent to a longterm price stability target of 2 per cent. This policy adjustment was followed in early April with
the introduction of further quantitative and qualitative monetary easing to achieve an inflation
target of 2,0 per cent as soon as possible within two years. The BOJ changed the main
operating target for money-market operations from the uncollateralised overnight call rate to
the monetary base, and intends to almost double the monetary base over the next two years
by injecting about ¥60–70 trillion per year into the Japanese economy. In addition, to bring
about a further decline in interest rates across the yield curve, the BOJ will purchase Japanese
Government Bonds (JGBs) of about ¥50 trillion per annum while extending their maturity from
less than three years to about seven years. With the aim of lowering the risk premia of assets,
the BOJ will purchase exchange-traded funds and real-estate investment trusts. Collectively,
these measures are intended to overcome almost two decades of deflation, achieve sustainable
economic growth and ensure financial stability in Japan.
In response to lower inflation and rising unemployment in 2013, the ECB lowered its rate on main
refinancing operations in May to 0,50 per cent after keeping it at 0,75 per cent since July 2012.
Monetary policy in the euro area has remained accommodative, supported by various refinancing
operations, unconstrained liquidity for banks, and the Outright Monetary Transactions (OMTs)
4. The focus on
specific, quantifiable
thresholds for
unemployment and
inflation is referred to
as the ‘Evans Rule’.

Monetary Policy Review June 2013
bond-buying program. These measures are intended to repair the transmission of monetary
policy and to equalise sovereign borrowing costs across the euro area as reflected by significant
narrowing of peripheral country bond spreads.
Table 10
Selected central bank interest rates
Per cent
Countries
25 Oct 2012 23 May 2013
Real
interest rate*
Latest decision
Cumulative

5,00
5,00
-0,20
23 May 2013
(-0,50)
(0,00)
United States................ 0,00 – 0,25 0,00 – 0,25
-1,80 – -1,55
1 May 2013

22 May 2013

2 May 2013

9 May 2013

17 Apr 2013

8 Apr 2013

3 May 2013

15 May 2013

17 Apr 2013

7 May 2013

24 Apr 2013
(0,00)
(0,00)
Switzerland................... 0,00 – 0,25 0,00 – 0,25
-0,20 – 0,05
14 Mar 2013

13 May 2013

9 May 2013

16 May 2013

8 May 2013

16 May 2013

21 May 2013

22 May 2013

7 May 2013
(-7,00)
(-2,25)
*
The real interest rate is calculated as the difference between the central bank’s current nominal policy rate and one-yearahead projected inflation.
** The Bank of Japan announced a change in its monetary target from the uncollateralised overnight call rate to the monetary
base (to increase by ¥60–¥70 trillion annually) on 4 April 2013, thus the basic loan rate is now used in the table.
Sources: National central banks and Bloomberg
In the UK, the Bank of England (BoE) maintained the official bank rate paid on commercial
bank reserves at 0,5 per cent. The stock of asset purchases financed by issuance of central
bank reserves was also maintained at the £375 billion level set in July 2012 and has been
rolled out at an average rate of £1,1 billion5 per month since then. Together with the Funding
for Lending Scheme,6 which was extended until January 2015, these asset purchases are
intended to ease credit conditions in the UK. Small and medium-sized enterprises benefited
from this source of credit extension, and money-market interest rates declined to below the
policy rate.
Following the UK government review of the monetary policy framework, the Chancellor of the
Exchequer updated the remit of the BoE in March 2013. While a flexible inflation-targeting
framework and a 2 per cent inflation target are retained, the new BoE remit requires clarification
of policy trade-offs and recognises that inflation may temporarily deviate from the target to avoid
undesirable output volatility.
After leaving its cash rate unchanged at 3,0 per cent at successive policy meetings since the
last reduction in December 2012, the Reserve Bank of Australia (RBA) lowered the cash rate by
5. The monthly
average is the
outcome of both
redemptions and
inactivity over the
period 5 July 2012 to
2 May 2013.
6. The Funding for
Lending Scheme
allows banks to borrow
at a ratio of 10 to 1 for
every pound lent out to
small companies.
Monetary Policy Review June 2013

25 basis points to 2,75 per cent in May. The RBA noted that the inflation outlook afforded scope
to ease the policy rate further to encourage sustainable growth in the economy, consistent with
achieving the inflation target.
Policy in emerging-market economies
Emerging-market economies continued to deal with limited fiscal space, accelerating credit
growth and divergent inflation outlooks. As shown in Table 10, real policy rates in most emerging
markets remain positive, compared to the negative real rates in advanced economies. Within
the Brazil, Russia, India, China and South Africa group of countries (BRICS), South Africa had
the lowest nominal policy rate and the second-lowest real policy rate.
During its first quarterly meeting of 2013, the Monetary Policy Committee of the People’s Bank
of China (PBC) assessed China’s real economy as having maintained its growth momentum
and the financial sector as operating smoothly, with prices stable but with the future trend of
inflation uncertain. Despite policy rate stability, the PBC has drained liquidity of 638 billion yuan
(US$102,7 billion) for the year to date through repurchase transactions.
In order to support economic growth, the Reserve Bank of India (RBI) reduced its policy repo
rate by 25 basis points to 7,75 per cent in January 2013, followed by equivalent reductions in
March and May. The RBI indicated limited room for further monetary easing. Brazil’s Monetary
Policy Committee (COPOM) increased the Selic rate by 0,25 basis points in April 2013 in
response to higher inflation and a deteriorating forecast for inflation. The move comes in the
wake of reductions in 2012 that were intended to support the rapidly slowing economy. Since
December 2012, the Central Bank of the Republic of Turkey (CBRT) reduced policy rates twice,
by 50 basis points on each occasion. The Banco de México also lowered its policy rate by
50 basis points in March 2013 to 4,0 per cent, the first change in rates since July 2009.
Domestic economic developments
and growth outlook
Monetary policy decisions are made on the basis of current and expected domestic
developments in the wider economy. This section reviews medium-term developments, and
assesses the near-term outlook in terms of prospects, risks and uncertainties for inflation.
Exchange rate developments
The rand continues to be influenced by external developments and is highly sensitive to
changes in global risk perceptions as reflected by portfolio capital flows. Since the previous
MPR, however, domestic economic and political developments have become considerably
more important factors in rand movements. Currency volatility creates uncertainty and
currency weakness poses an increased upside risk to the inflation outlook, among other
effects. On a bilateral basis, the trend of the rand diverged from that of emerging markets,
weakening in steps since October 2012 to its lowest post-crisis level of R9,66 to the
US dollar in May 2013. On a nominal trade-weighted basis, the rand has depreciated by
7,4 per cent since the end of October 2012, with the real effective exchange rate (REER) at
its weakest level since early 2009.
The rand has exhibited a general trend depreciation since about May 2012, with both global and
domestic factors contributing to significant short-term volatility, as shown in Figures 10 and 11.
Divergence from the trend in other emerging markets started in May 2012 and has escalated
from October 2012. South Africa’s expected inclusion in the Citigroup World Government Bond
Index (WGBI) stabilised the rand somewhat in the period from June to September, before the
inclusion actually started and before mining-sector events resulted in further weakness.

Monetary Policy Review June 2013

Indices: 3 September 2012 = 100
Dec
Jan
Feb

Mar
May
Jun
Apr
Sep
Oct
Nov
Figure 10
Exchange rate performance against the US dollar

South African rand

Brazilian real

Mexican peso


Sources: Reuters and own calculations

Canadian dollar

Australian dollar
Rand per dollar
Rand per euro

Figure 11
Bilateral exchange rates of the rand

Rand per US dollar

Rand per euro (right-hand scale)
Source: Bloomberg

From November 2012 to early January 2013, the rand appreciated by 5,5 per cent against the US
dollar. With the dollar strengthening due to better economic news in late December 2012 and early
January 2013, the rand began to depreciate in a more sustained way. The crisis in Cyprus
generated further impetus to the depreciation as investors sought out safe havens, thus the US
dollar appreciated. This rise in risk aversion towards emerging markets can be seen in the
JPMorgan Emerging Markets Bond Index Plus (EMBI+) spreads,7 which, as shown in Figure 12,
reveal significant deterioration in sovereign risk in 2013 towards the end of March. The retracing of
the EMBI+ towards lower levels since March may have reflected expectations of sustained
monetary accommodation and liquidity in global markets, rather than a prelude to currency
appreciation. Subsequently, risk aversion again increased markedly during May.
7. The EMBI+ is a
US dollar emergingmarkets debt
benchmark that tracks
returns for actively
traded external
emerging-market debt.
Monetary Policy Review June 2013

Basis points

Figure 12
Sovereign risk spreads

EMBI+ spread

EMBI Mexico
Source: JPMorgan

EMBI South Africa

EMBI Brazil
Sep
Oct

Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Capital flows into rand-denominated assets shifted from bonds to equities, in particular from
December 2012. This shift reflected a pause in non-resident purchases of bonds, and supported
a moderation in share market volatility (VIX®).8 As from March 2013 net purchases again favoured
bonds. Cumulative net purchases of bonds amounted to R22,3 billion in 2013 up to 23 May
compared with R88,6 billion in the whole of 2012. Non-resident interest in shares changed from
net sales of R3,4 billion in 2012 to net purchases of R13,0 billion to 23 May 2013 (see Figure 13).


May
Mar
Jan
Nov
Sep
Jul
May
Mar
Jan
Nov
Sep
Jul
May
Figure 13
Non-resident net purchases of domestic securities and

risk aversion
Index
R billions

Net equity purchases
* Data up to 23 May 2013
*
VIX® (right-hand scale)
Net bond purchases

Sources: JSE Limited and I-Net Bridge
8. The Chicago Board
Options Exchange
Market Volatility Index
(VIX®) measures the
implied volatility of
S&P 500 index options
and serves as a
popular indicator of
investors’ perception
of risk.

Monetary Policy Review June 2013
Prospects for capital inflows are less certain than they have been in recent years, as some of
the underlying drivers of flows – the carry trade9 and low returns in advanced economies –
continue to evolve with global conditions. A reduction in the pace of capital inflows to South
Africa – either as part of the trend affecting the emerging-market economies or as an idiosyncratic
shock to South Africa – will affect the value of the currency and sustainability of the currentaccount deficit, with potentially serious policy implications.
In recent months domestic factors have played a critical role in driving down the currency.
Resurgent labour market instability, the effect of work stoppages on exports, the trade
deficit and a ratings downgrade by Fitch in January 2013 (following that of Moody’s in
September, and Standard & Poor’s (S&P) in October 2012) contributed strongly towards a
14,3 per cent depreciation against the US dollar from 1 January to date. These factors and
underlying macroeconomic risks in the form of twin deficits continue to differentiate South
Africa from other emerging markets, many of which exhibit significantly better growth and
macroeconomic fundamentals.
The nominal effective exchange rate (NEER) post-crisis peak occurred in December 2010. Since
then the NEER has experienced persistent weakness, declining by 23,3 per cent as shown in
Figure 14.10 The weighted average NEER is based on trade in, and consumption of, manufactured
goods between South Africa and its most important trading partners, and provides a nominal
measure of competitiveness.
Index: 2000=100 (foreign currency per rand)
Index

Figure 14
Exchange rate of the rand and commodity prices
Nominal effective exchange rate of the rand (NEER)
Thompson Reuters/Jefferies CRB Total Return Index* (right-hand scale)

* The TRJ/CRB Total Return Index tracks international commodity prices
Sources: Bloomberg and South African Reserve Bank
The monthly average NEER depreciated to 61 index points in March and April 2013 – its most
depreciated level since early 2009. Some part of the currency weakness can be attributed to
softer commodity prices, as suggested by an index that tracks returns to commodities which
mirror the rand quite closely (Figure 14).11
The REERs12 of developed commodity-exporting countries, such as Australia and Canada, have
moved sideways since mid-2011 despite the decline in commodity prices. REERs provide an
inflation-adjusted measure of competitiveness. South Africa’s REER generally follows that of other
commodity exporters, but the pattern has broken down as from mid-2011 (Figure 15). South
Africa’s REER depreciated by 10,7 per cent from March 2012 to April 2013 – its weakest level since
early 2009, as with the NEER. This implies that South Africa’s exports have become less expensive
relative to its trading partners and competitors, and ought to support export volumes.
9. For further details
on the carry trade and
the rand as a carry
trade target, see
Box 2 in the May 2011
South African Reserve
Bank Monetary Policy
Review (Pretoria:
South African Reserve
Bank, May 2011) http://
www.resbank.co.za/
Publications/Pages/
Publications-Home.
aspx).
10. The methodology
applied is described in
an article in the South
African Reserve Bank
Quarterly Bulletin
(Pretoria: South
African Reserve Bank,
December 2008)

co.za/Publications/
Pages/PublicationsHome.aspx. The
weighted average
exchange rate of the
rand is calculated
against 15 currencies.
The weights of the five
major currencies are in
brackets:
euro (34,82),
US dollar (14,88),
Chinese yuan (12,49),
British pound (10,71)
and Japanese
yen (10,12).
Index 2000 = 100.
11. The TRJ/CRB Total
Return Index reflects
a long-only, broadly
diversified investment
in commodities.
12. The Bank
for International
Settlements (BIS)
REER indices include
a total of 61 entities,
including individual
euro area countries
and the euro area
as a separate entity.
The base year for the
indices is 2010 and the
REERs are geometricweighted averages
of bilateral exchange
rates adjusted by
relative consumer
prices.
Monetary Policy Review June 2013

Indices: 2010 = 100

Figure 15
Real effective exchange rates

South Africa

Canada


Source: Bank for International Settlements

Australia

Mexico

Brazil
Labour markets
Labour markets in South Africa remained constrained by subdued economic growth and
increased instability as unrest and wage demands spread from mining to agriculture and
beyond. These developments pose substantial risks to the outlook for economic growth,
employment and inflation. Unit labour cost growth – a primary driver of the inflation
outlook – accelerated in 2012 to an average rate slightly higher than the upper band of
the inflation target range, as increases in remuneration outpaced the marginal increases
in productivity. Employment creation remained subdued, with the recovery in formal nonagricultural employment continuing to lag real economic activity since the economic
recovery commenced.
The cost of labour per unit of output in the economy, known as ‘unit labour costs’,13 grew by
about 10 per cent per year between 2008 and 2010, before slowing to growth of 5,9 per cent in
2011 and 6,3 per cent in 2012. Over the course of 2012, unit labour costs accelerated from
quarter to quarter (Figure 16), rising from 5,5 per cent in the final quarter of 2011 to 7,4 per cent
in the third quarter of 2012, before decelerating to 5,7 per cent.
Average wage settlements in the collective bargaining system moderated slightly in 2012 from
2011, growing by 7,6 per cent, according to the Andrew Levy Wage Settlement Survey of
2012 (Figure 17). With inflation rising in 2012 compared to 2010 and 2011, the significant real
wage gains of those years have moderated somewhat but remain positive. Outcomes in 2013
have increased, suggesting considerable real wage rigidity in the economy despite sluggish
economic growth and weak job creation.
13. Unit labour costs
represent a link
between productivity
and the cost of labour
in producing output.
The Bank calculates
quarterly unit labour
costs as the ratio
of total salaries and
wages to gross value
added in the formal
non-agricultural sector.

Monetary Policy Review June 2013
Percentage change over four quarters

Figure 16
Remuneration per worker, labour productivity and

unit labour cost in the formal non-agricultural sector

Nominal unit labour cost

Labour productivity


Sources: Statistics South Africa and South African Reserve Bank calculations
-2

Remuneration per worker
Per cent

2013*
Figure 17
Average annual inflation and wage settlements

CPI

* Data for 2013 are for the first three months of the year
Sources: Andrew Levy Employment Publications and Statistics South Africa

Average wage settlements
Table 11 shows the average wage settlements in the major sectors in 2012 reported by Andrew
Levy Employment Publications. In 2012 the highest and lowest average wage settlements
were, as in 2011, respectively in the mining- and in the municipal and utility sectors. The rate of
increase in settlements reached in the first quarter of 2013 ranged from 6,0 per cent in the retail
and catering sector to 10,0 per cent in the transport and freight sector.
Monetary Policy Review June 2013

Table 11
Average percentages of wage settlement by major sector in 2012
Sector
Per cent

Source: Andrew Levy Employment Publications
Total employment creation in the formal non-agricultural sector as reported by Stats SA’s
Quarterly Employment Statistics (QES) survey has remained positive but subdued since June
2010. Total employment increased marginally from 8,379 million in the fourth quarter of 2011 to
8,461 million in the final quarter of 2012 – remaining below the peak of 8,512 million recorded in
the corresponding quarter of 2008 (Table 12).
Table 12
Employment in formal non-agricultural industries
Thousands
Total employment
Industry

4th qr
1st qr
4th qr
3rd qr
4th qr


Financial intermediation, insurance, real-estate and

Source: Statistics South Africa Quarterly Employment Statistics
The more recent outcomes of the Quarterly Labour Force Survey (QLFS) show a deterioration
in total employment in the first quarter of 2013, including a rise in the unemployment rate to
25,2 per cent from 24,9 per cent in the fourth quarter of 2012, caused by a rise in labour force
participation. The recovery in formal non-agricultural employment has continued to lag that of
real economic activity since the economic recovery commenced (Figure 18).

Monetary Policy Review June 2013
Indices: First quarter 2008 = 100

Figure 18
Non-agricultural economic activity and employment*

Real GDP excluding agriculture
* Data is seasonally adjusted
Sources: Statistics South Africa and South African Reserve Bank

Formal non-agricultural employment

Real-estate and equity prices
The real-estate market shows signs of a slight improvement in demand, along with a positive
increase in real house prices. Domestic share prices scaled new highs in line with improved
international financial market conditions, but in some contrast to softer commodity prices
and labour unrest in the resources sector.
The real-estate market continues to be constrained by the fragile domestic economic recovery,
high household debt levels and limited supply of mortgage finance. These factors are mirrored
in nominal house price growth which, since October 2009, has grown at a subdued 4,5 per cent
per year as recorded by First National Bank (FNB) and Lightstone. Absa’s House Price Index,
though more volatile, recorded a positive rate of change from August 2012, and increased
strongly from February 2013, the highest growth rates in any of the indices since June 2010
(see Figure 19). Adjusted for inflation, real house prices increased by 5,0 per cent in April 2013.
Percentage change over 12 months

-20
-10

Absa

Lightstone
Sources: Absa, First National Bank, Lightstone and own calculations
Figure 19
House prices

First National Bank

Absa: Real
Monetary Policy Review June 2013

International financial market conditions continued to improve as accommodative monetary
policies (in the form of low interest rates and increased global liquidity) encouraged greater
risk-taking by investors. The FTSE/JSE All-Share Price Index (Alsi) moved higher in line with
international markets and following the trend in emerging markets. A stronger recovery in the US
economy appears to be supporting a rise in share prices there, beyond the levels reached prior
to the Lehman crisis in October 2007. Figure 20 indicates the disparity between equity markets
as the euro area remains weighed down by the still-unresolved sovereign debt crisis.
Indices: 2 January 2007 = 100

FTSE/JSE All-Share Index
Euro area (Dow Jones Euro Stoxx 50)
Brazil (Bovespa)
Australia (ASX All Ordinaries)
Figure 20
International share price indices*

United States (S&P 500)
Turkey (Istanbul)
Mexico (Mexico City IPC)
Canada (Toronto 300 Composite)
* Based on local currency share prices
Sources: JSE Limited and I-Net Bridge
The strong performance of domestic shares continued as the Alsi surpassed its previous record
high of 22 May 2008 on 17 January 2012, and then scaled successive highs, breaching the
40 000 index level in early 2013 to a new all-time high of 41 836 index points on 22 May 2013.
Indices: 2 January 2007 = 100

FTSE/JSE:

All-Share Index

Industrial Index
Sources: JSE Limited, I-Net Bridge and own calculations
Figure 21
Domestic share price indices

All-Share Index: Real
Resources Index
Financial Index

Monetary Policy Review June 2013
These gains were supported by trends in global equities through dual-listed share prices and
the impact of the depreciation of the rand. Year to date the Alsi decreased in US dollar terms by
7,6 per cent, while increasing by 4,1 per cent in rand terms. Since October 2012, the Alsi was
supported by the performance of the Industrial and Financial Indices, with sideways movement
in the Resources Index reflecting softer commodity prices and domestic labour unrest. In real
terms, the Alsi increased by 3,7 per cent from September 2012 to April 2013 but still yielded an
overall loss compared to May 2008 (Figure 21).
Fiscal policy
In the context of subdued global and domestic economic growth, the 2013 Budget
maintained its countercyclical approach. The weaker growth outcome for 2012 and into
2013 resulted in an increase in the budget deficit as revenue underperformed. Though fiscal
consolidation has been delayed, the focus of the budget remains on fiscal sustainability and
national development through investment and structural reforms.
The February 2013 Budget Review projected a small countercyclical rise in the consolidated
deficit for the fiscal year 2012/13 from 4,8 per cent of GDP in the 2012 Medium Term Budget
Policy Statement (MTBPS) to 5,2 per cent of GDP. With GDP growth slowing and revenue coming
in weaker than expected, spending plans have been kept stable. Consolidated government
revenue for the fiscal year 2012/13 as shown in Table 13 amounted to R887,8 billion, which was
lower than the estimated R900,6 billion in 2012.
For 2013/14, the projected GDP outcome is expected to help reduce the consolidated government
deficit to 4,6 per cent, somewhat lower than the 4,8 per cent projected for 2012/13 in the October
2012 MTBPS. The projected consolidated budget deficit for 2015/16 is 3,1 per cent of GDP.
Table 13
Public finance data
2011/12
2012/13
2013/14 2014/15 2015/16
Outcome
MTBPS
estimates
Budget
estimates
Medium-term estimates
Consolidated government* (R billions)

As a percentage of GDP


Includes national government, provinces, social security funds and selected public entities
**
National government
Sources: National Treasury Medium Term Budget Policy Statement (MTBPS), October 2012 and Budget Review 2013
Government took steps to manage the expected widening of the budget deficit by spelling out
additional measures to control spending. Real expenditure growth is reduced to an average
of 2,3 per cent per annum over the Medium Term Expenditure Framework (MTEF) period
compared to 2,9 per cent in the 2012 MTBPS.
Largely as a result of the wider budget deficit, the 2013 Budget Review projects the publicsector borrowing requirement (PSBR) to increase from 7,1 per cent indicated in the 2012 Budget
Review to 7,4 per cent of GDP in 2012/13, before declining to 4,4 per cent in 2015/16. The
growth in the PSBR has also reflected the borrowing required by non-financial public-sector
enterprises and corporations for capital expenditure, which has averaged 2,0 per cent of GDP
Monetary Policy Review June 2013

since 2007/08. Planned spending on public-sector infrastructure over the next three years of the
MTEF period amounts to R827 billion, and the value of major public-sector projects in progress
or under consideration until 2023 amounts to R3,6 trillion.
Substantial budget deficits and the slow economic recovery have worsened South Africa’s debt
position in recent years. With the projected decline in the budget deficit over the MTEF period,
total net loan debt is expected to stabilise in 2015/16 at R1,7 trillion and as a ratio to GDP at
40,3 per cent compared with a ratio of 39,2 per cent indicated in the 2012 MTBPS.
The real growth of the wage bill has moderated slightly since 2009/10 (Figure 22), but the
consolidated general government wage bill remains historically high at a ratio of 36,2 per cent
of total expenditure in fiscal year 2011/12. Although real growth in capital expenditure has
decreased significantly since 2008/09, the 2013 budget projects that real capital expenditure will
grow at an annual rate of 3,4 per cent over the MTEF period. Despite extending the outstanding
maturity of government debt, growth in national government’s debt-service costs has recently
increased in real terms from -4,6 per cent in 2009/10 to 4,6 per cent in 2011/12. However, debt-
service costs as a ratio to GDP is expected to remain at 2,8 per cent over the medium term.
Percentage change over 12 months
-10
-5


Figure 22
Real growth rates of selected aggregates*

Current expenditure

Public-sector wage bill
* 3-year moving average
Sources: National Treasury, South African Reserve Bank and own calculations

Capital expenditure

Debt-service costs
The 2013 Budget Review announced that tax policies would be reviewed to ensure that public
spending is supported by an appropriate revenue base in a fair and equitable tax system.
Monetary conditions
Overall credit and money-supply growth remained inflation-neutral and broadly in line with
nominal GDP growth. Modest single-digit growth in money supply peaked at 8,5 per cent in
March 2013 in contrast to double-digit growth rates in total loans and advances excluding
mortgage loans, which topped out at 18,6 per cent in December 2012. Other loans and
advances, in particular general loans, remained the main driver of the uneven recovery of
credit extension.

Monetary Policy Review June 2013
The low interest rate environment and vehicle sales supported credit extension, which was
otherwise constrained by the size of outstanding household debt. Banks’ total loans and
advances to the private sector firmed to a post-recession high of 10,0 per cent in December
2012, before moderating somewhat to 8,1 per cent in March 2013 (Figure 23). In real terms,
growth in total loans and advances increased modestly to 4,1 per cent in December 2012 – its
fastest pace since October 2008. As of December 2012, growth in mortgage lending fell below
its 2,1 per cent per year average growth rate in 2012 to a record low 1,6 per cent in March 2013.
Percentage change over 12 months
-10

Figure 23
Banks’ loans and advances to the private sector by type

Total loans and advances

General loans

Total loans and advances excluding mortgages

Total loans and advances: Real

Other loans and advances

Mortgages

As growth in household income slowed, private-sector credit growth (excluding mortgage loans)
peaked at 18,6 per cent in December – its strongest rate of growth since September 2008.
It moderated to 14,5 per cent in March 2013, continuing its above 10 per cent growth rate for
18 consecutive months. The increased momentum in credit extension was supported by growth
in other loans and advances (consisting of general loans, credit card advances and overdrafts).
Growth in general loans, boosted by unsecured lending to households, peaked at 23,5 per cent
in December 2012 before moderating somewhat.
Demand, output and expected growth
Economic activity regained some lost momentum in the final quarter of 2012. This was
followed by weaker-than-expected growth in the first quarter of 2013. On the supply side,
declining output levels in the mining sector contrasted with reasonable growth rates in
the secondary and tertiary sectors in the fourth quarter of 2012. On the demand side,
expenditure growth contracted in the final quarter of 2012. South Africa’s terms of trade
deteriorated as commodity prices weakened. Consistent with the Bank’s composite leading
indicator, South Africa’s economic growth outlook has remained fragile and below potential
thus far in 2013.
The economy regained some lost momentum in the final quarter of 2012 as it rebounded from
the sharply lower growth of 1,2 per cent of the third quarter (Table 14). Excluding mining and
agriculture, the economy grew by 2,7 per cent in the fourth quarter of 2012. The secondary
sector rebounded from the earlier contraction to grow by 3,6 per cent, boosted by 5,0 per cent
growth in manufacturing output. For the calendar year 2012 as a whole, real GDP increased by
2,5 per cent compared to 3,5 per cent in 2011. Real gross domestic expenditure increased by
4,1 per cent in 2012, slightly slower than the 4,6 per cent recorded in 2011.
Monetary Policy Review June 2013

Despite the depreciation of the rand, real exports of goods and services contracted in all but
the third quarter of 2012 and increased by only 0,1 per cent in 2012 (compared to 5,9 per cent
in 2011). This reflected subdued global growth, weak international demand, and the disruptive
effect of domestic labour unrest on production and distribution. These effects were cushioned
somewhat by the depreciated exchange rate and higher international commodity prices. Real
imports, in step with the moderation in domestic demand, contracted by 12,4 per cent in the
fourth quarter of 2012, largely because of a decline in the volume of imported vehicles and
transport equipment. Overall growth in import volumes, however, still amounted to 6,3 per
cent in 2012 compared to 9,7 per cent in 2011. With import prices increasing faster than export
prices, South Africa’s terms of trade deteriorated in the fourth quarter of 2012 and also on an
annual basis (to -3,0 per cent) compared to 2011.
South Africa’s trade balance deteriorated steadily from a surplus of R16,4 billion in 2011 to a
deficit of R75,5 billion in 2012. The deficit on the services, income and current transfer account
to GDP shrank slightly by 0,1 per cent from 2011 to 2012. Relative to GDP, the deficit on the
current account of the balance of payments increased to 6,3 per cent in 2012 from 3,4 per cent
in 2011. During 2012 the current-account deficit peaked at 6,8 per cent in the third quarter,
before narrowing slightly to 6,5 per cent in the fourth quarter.
Table 14
Growth in real GDP and expenditure components
Per cent*

Year
1st qr
2nd qr
3rd qr
4th qr
Year
Final consumption expenditure

* Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data
** Constant 2005 prices
Household consumption expenditure grew by 3,5 per cent in 2012 compared to 4,8 per cent in
2011. Spending remained constrained by rising inflation and moderate growth of 3,8 per cent
in real household disposable income, compared to 5,2 per cent in 2011. Despite an increase in
credit extension, the ratio of household debt to nominal disposable income receded slightly to
75,8 per cent in the fourth quarter of 2012.
Consumption expenditure by general government in 2012 remained strong at 4,2 per cent.
Excluding expenditure on armaments, the fourth-quarter growth rate was 3,6 per cent.
Growth in real gross fixed capital formation slowed to 4,3 per cent in the final quarter of 2012, reflecting
the net effect of a moderation in capital outlays by public corporations and general government, and
continued momentum of private business enterprises. For 2012 as a whole, real gross fixed capital
formation increased by a fairly good 5,7 per cent compared to 4,5 per cent in 2011.
Real inventory investment turned negative in the fourth quarter of 2012 as the mining and
manufacturing sectors depleted inventories to offset the effect of labour market instability
on production.

Monetary Policy Review June 2013
Global economic conditions remain subdued and adversely affect South Africa’s economic
outlook. South Africa’s growth prospects therefore remain fragile at a below-potential pace.
Growth in real GDP of 0,9 per cent was recorded in the first quarter of 2013. Projected growth
has been lowered since the October 2012 MPR, reflecting the weaker global outlook and
the negative impact of some domestic developments. The negative output gap of 2,0 per
cent is expected to widen over the short term and reflects the continued subdued state of
the economy. The May 2013 MPC meeting projected annual average growth in real output
of 2,4 per cent in 2013, somewhat slower than the March 2013 forecast of 2,7 per cent, and
3,5 per cent in 2014 compared to 3,7 per cent in the previous forecast (Figure 24). This may have
to be revised down at the next MPC meeting. (See Box 3 for an evaluation of the accuracy of the
Bank’s economic growth forecasts.)
Percentage change at seasonally adjusted annualised rates

Figure 24
Real GDP growth forecast


Looking forward, the relatively flat trajectory (with a slightly increasing trend since June 2012) of
the Bank’s composite leading business cycle indicator is consistent with the growth forecast
(Figure 25). The Bank’s coincident business cycle indicator has continued to trend upwards.
Short-term indicators show relatively positive sentiment on the supply side of the economy, but
still low consumer confidence on the demand side.
Indices: 2010 = 100

Figure 25
Composite business cycle indicators

Leading business cycle indicator

Coincident business cycle indicator

Downward phases of the business cycle

Monetary Policy Review June 2013

The Rand Merchant Bank (RMB)/Bureau for Economic Research (BER) Business Confidence
Index (BCI) increased by 6 index points from 46 index points in the fourth quarter of 2012 to
52 index points in the first quarter of 2013 – to a level close to the post-recession peak of 55 in the
first quarter of 2011. Sentiment improved in four of the five sectors, with confidence declining only
in the retail sector. According to the first-quarter 2013 BER Manufacturing Survey, manufacturing
business confidence improved further by 4 index points to a still-low 42 index points.
The Ernst & Young/BER Retail Confidence Index fell by 4 index points to 50 index points in the
first quarter of 2013, having been below the neutral level in the second and third quarters of 2012.
The FNB Building Confidence Index increased for the second consecutive quarter to 37 index
points in the first quarter of 2013 – its highest reading since 2010. The improvement was mainly
driven by retailers of building materials who saw significant growth in sales during the first
quarter of 2013. Only subcontractors recorded a decline in confidence.
Table 15
Domestic economic sentiment indicators
Historic range
Most recent
As at MPR:*
Low
High
Low
High
Oct 2012
Jun 2013


-6

-1
-7
* Improved/Worsened since previous MPR
Sources: Kagiso Securities, Rand Merchant Bank, First National Bank, Ernst & Young and the Bureau for Economic Research,
Stellenbosch University
The Kagiso Purchasing Managers’ Index (PMI) has improved unevenly from a recent low of
47,1 index points in October 2012, to above 50 index points in February 2013, before falling
to 49,3 index points in March. This decline reflects weak economic conditions in the euro
area – the largest market for exports of South African factory goods. In contrast to the trend
in South Africa’s major trading partners, the PMI then moved back to just above the neutral
level at 50,5 index points in April 2013, signalling a slight improvement. Two of the five subindices were below the 50 mark, and the changes have been greatly influenced by volatile
movements in the major contributors to the PMI, namely business activity at 52,2 index points
and new sales orders at 53,7 index points.
The forward-looking indicators of the PMI suggest a marginal improvement in manufacturing
conditions. In April 2013 expected business conditions increased to 51,3 index points from
47,0 in March – still significantly lower than the recent high of 58,2 index points in January 2013.
The increase in the ratio of new sales orders to inventories to 1,1 in April 2013 suggests relatively
low inventory levels to demand.
The FNB/BER Consumer Confidence Index (CCI) recorded its fourth successive negative
reading as it declined further to a nine-year low of -7 index points in the first quarter of 2013 –
even lower than at the height of the financial crisis in 2008. This was reflected by a significant
deterioration in sentiment regarding the South African economic outlook, the financial situation
of households and willingness to buy durable goods.

Monetary Policy Review June 2013
Box 3
An accuracy analysis of real gross domestic product growth forecasts
The accuracy of seasonally adjusted real gross domestic product (GDP) growth forecasts
is assessed using real-time data, which is economic data known to the forecaster at the
point of preparing the forecast.1 Real-time data is that set of data that formed the basis of
the forecaster’s view of the future.
In South Africa average revisions to the actual quarterly GDP growth figures have been
1,1 percentage points between the first quarter of 1990 and the third quarter of 2012, with a
maximum revision change of 4,2 percentage points recorded in the second quarter of 1996
(Figure B3.1). Most revisions during this period are upwards.
Figure B3.1 Data revisions to gross domestic product
Per cent

First release

Revised data


Forecast errors are calculated as the forecast values minus the actual values. Therefore, a
negative mean forecast error indicates that the model tends to under-predict the actual (first
release) GDP outcomes. Overall forecast performance is assessed using a number of
descriptive statistics. The most frequently used measures are the average forecast error
(measuring projection bias in terms of systematic over- or under-estimation) and the root
mean square error (indicating the absolute size of the error and how it relates to the variability
of the series).
When the average forecast errors of the Bank’s core model and those of the Reuters
Consensus Forecast for the period March 2001 to December 2012 are compared (Figure
B3.2), it is clear that all the average forecast errors are positive and therefore biased. Both
the Bank and the Reuters participants, on average, overestimated the actual outcome of
GDP over all forecast horizons, that is, one-quarter-ahead to seven-quarters-ahead
forecasts.2 Note that both the respective sets of forecasts have errors increasing initially
along the early part of the forecast horizon but then declining along the remainder of the
forecast horizon.3

Forecasted GDP growth rates are quarter-on-quarter annualised numbers.

Reuters only publishes forecasts that extend seven quarters into the future.

The root mean square error increases over the first several quarters as short-term indicators become
progressively less useful. As the forecast horizon increases, accuracy gradually improves because of
mean reversion in GDP growth rates. Forecast error bias is positive at all horizons in part because initial
data releases over a large portion of the sample were subsequently revised upwards.
Monetary Policy Review June 2013

Figure B3.2 Average forecast error of gross domestic product
Percentage points

Core

Reuters
Quarters ahead


Figure B3.3 shows that the Bank’s forecasts outperform those of the Reuters Consensus
Forecast over all seven forecast horizons when comparing the respective root mean
square errors.4
Figure B3.3 Root mean square error of gross domestic product
Percentage points

Core

Reuters
Quarters ahead

The Bank communicates forecasts of GDP growth to the general public through the use of
probability distributions in the form of fan charts to indicate the balance of uncertainties
surrounding possible future outcomes. When comparing the first release GDP growth rates

The root mean square error is calculated in three steps. Firstly, the forecast errors are calculated and then
squared. Secondly, the average of these numbers is calculated and, finally, the square root is taken to
bring the answer back to the same unit measure as the original data.

Monetary Policy Review June 2013
with the probability distribution around the individual one-year-ahead forecasts (see
Figure B3.4), the values fall within the 90 per cent probability range in all periods except from
the third quarter of 2008 to the second quarter of 2009.5 This reflects the extraordinary
shocks and impact of the global financial crisis on the real economy, resulting in forecast
errors at levels significantly outside the historical probability ranges.
Figure B3.4 Probabilities for gross domestic product forecasts*
Per cent
* For successive revised quarters, the change in confidence intervals reflects new information
Actual GDP


Note: The shaded area depicts a 90 per cent confidence interval
The Bank’s forecasting performance is also compared to the 16 individual forecasters or
institutions and the average of the four best that participate in the Reuters survey. In
Table B3.1 the root mean square errors of the various forecasts are compared over the one-
to four-quarters-ahead horizons.
Table B3.1 Forecasting error comparison
Root mean square error


Quarters ahead


Average of total Reuters consensus forecasts...

Sources: Reuters and own calculations

The forecast probability distribution of GDP, namely the width of the forecast fan, is based on the historical
shocks that have impacted on the real economy.
Monetary Policy Review June 2013

Monetary policy
Since the publication of the previous MPR in October 2012, below-trend growth and subdued
global inflation continue to characterise global conditions, notwithstanding improvements in
some economies. Monetary policy in advanced economies remains highly accommodative.
Global developments continued to affect South Africa’s economic growth and inflation
outcomes, but a range of domestic factors have become relatively more prominent. The
domestic economic landscape worsened as a result of widespread labour market instability,
with a general rise in uncertainty and a decline in confidence. As a result, the outlook for
domestic economic growth has deteriorated with the balance of risks to the downside. The
negative output gap persists and remains significant. Weaker domestic and global output
has further contributed to a widening current-account deficit, ratings downgrades and a
depreciated currency. These factors have sustained upside risks to the inflation outlook,
contributing to successive decisions to keep the policy rate unchanged at 5,0 per cent per
annum over the period (Figure 26). The outlook for inflation remains persistently skewed to
the upside.
Per cent

2012 2013
Prime overdraft rate
Repurchase rate
Three-month negotiable certificates of deposit rate
Figure 26
The repurchase rate and other short-term interest rates

The period since the previous MPR has seen both a general deterioration in global economic
conditions and some sign of improvement. Neither development has been unalloyed, however.
Considerable strengthening in the US economy in 2013 is not evident in many others.
Financial market conditions have also improved quite robustly in various markets, but can be
seen to be increasingly disjointed from real economic outcomes in many of these markets.
Secular developments appear to explain these variations and have given rise to the notion
of a ‘multispeed’ recovery. One common feature of 2013 has been a moderation in inflation
pressures in nearly all economies, barring a few. South Africa, India and Brazil fall outside the
main group by exhibiting stronger inflation pressures.
The building up of inflation remains a policy challenge. For South Africa, inflation pressures do
not derive from economic growth straining at available skills and resources. The output gap
remains substantial and negative, suggesting considerable unused resources of capital and
labour. Demand in the economy has been, and remains, well supported by fiscal and monetary
policy settings, with a sustained and large fiscal deficit and real interest rates that have been
negative since November 2010.

Monetary Policy Review June 2013
While the relative weights of the various factors propelling inflation have changed over the past
year, rand depreciation, oil prices and food prices have all increasingly played a key role in South
Africa’s inflation outcomes.
Figure 27 Policy analysis
Per cent
Percentage of GDP
Percentage of GDP
Per cent
Change in percentage points
2015*
2014*
2013*

-10
-5

-10
-5

-3

Economic activity and external balance
Monetary policy
Fiscal policy
Real GDP
Nominal GDP
Current-account balance (right-hand scale)
Real repurchase rate (nominal rate adjusted by Reuters one-year-ahead CPI forecast)
Consumer price inflation: Targeted inflation
-6
-4
-2

-6
-4
-2


Budget balance of national government
Change (right-hand scale)
2015*
2014*
2013*

* Note: Data for 2013 to 2015 and fiscal years 2012/13 to 2014/15 are estimates from the
Budget Review 2013
Sources: South African Reserve Bank, Statistics South Africa, Budget Review 2013, National Treasury
and own calculations
Global factors
Global factors have continued to be critical to the considerations of monetary policy. In October
and November 2012 the global environment was marked by the euro area returning to recession
and heightened concern about whether and how the US ‘fiscal cliff’ would be resolved and
about its impact on the US economy.
Monetary Policy Review June 2013

In early 2013, however, improvements in global financial market sentiment were evident, with
progress made in respect of the US ‘fiscal cliff’ and more muted concerns about sovereign
debt in the euro area. Global economic growth prospects, however, remained constrained
by downside risks due to persistent structural problems and the unresolved euro area crisis.
Monetary policy in most countries was expected to remain accommodative and increasingly
expansionary, in particular in Japan.
Events in Cyprus in February unsettled global markets and reinvigorated pessimism about
the euro area’s prospects at the same time as real economic indicators suggested weaker
momentum. In successive months it became increasingly clear that global growth exhibited
three distinct trends: stronger growth in some advanced economies, sustained weakness in
others, and generally more rapid but also more variable growth in emerging markets.
In the US, the recovery continued to strengthen, with a rising consumer confidence index,
stronger job creation and wealth effects from both a booming equity market and the
recovering housing market. However, the euro area remained in recession, contracting
by 0,9 per cent in the first quarter of 2013, as deleveraging by households, banks and
governments continued, and financial markets fragmented and restructured. Peripheral
Europe has and will continue to experience negative or, at best, very low growth for some
time. In Japan economic growth accelerated sharply in the first quarter of 2013, although
structural factors may constrain the efficacy of the fiscal, monetary and structural policy
stimulus packages that were announced recently.
Emerging markets remain the main global source of growth, but there are signs of moderation
in some of the systemically important countries, particularly China and India. The Brazilian
economy should recover modestly this year. The rebalancing of the Chinese economy away
from fixed capital formation and production towards internal consumption has resulted in some
slowdown, and has contributed to the declining trend of global commodity prices.
Global inflation has moderated, reflecting persistently slow global growth and weaker commodity
prices. This has prompted further monetary easing by the ECB and the BOJ. Alongside the
Fed’s QE programme, these accommodative policy stances continue to increase global liquidity
and, under current conditions, can be expected to be maintained over the medium term.
Domestic factors
Global factors have contributed to weaker-than-expected South African growth, exogenous
price pressures and a depreciating exchange rate. However, domestic factors have become
more important in assessing the future trajectory of growth and inflation. While the rand has
trended lower in line with some of the other emerging markets, the depreciation has been
considerably more pronounced as a result of South African-specific developments. Some of
these factors carry major risks to inflation in addition to economic growth.
Domestic economic growth has remained fragile and below potential, with a low probability
for the closure of the negative output gap in the medium term. Forecasts for growth hovered
around 2,6 per cent for 2013 throughout the period since October 2012. In the new year
domestic growth prospects remained subdued despite better-than-expected fourth-quarter
GDP growth and positive developments in the mining and manufacturing sectors in January.
The mining sector was expected to remain under pressure, given the unsettled labour relations
environment, while the outlook for manufacturing improved tentatively.
This relatively benign environment deteriorated in subsequent months as consumer confidence
weakened and disruptions in the mining sector worsened. Electricity supply constraints became
more evident and global growth prospects failed to improve. The growth forecast of the Bank
has been revised down from 2,7 per cent to 2,4 per cent for 2013 and from 3,7 per cent to

Monetary Policy Review June 2013
3,5 per cent in 2014. Growth is expected to accelerate to 3,8 per cent in 2015. The risks to
economic growth lie to the downside as a result of the potential for further job and output
losses, particularly in the mining sector.
Government and household consumption is expected to be constrained by a range of factors,
including relative price adjustments and high debt levels. Investment by public-sector corporations
should continue to provide some growth momentum, but private-sector investment remains
sensitive to confidence and uncertainty. Slower expenditure growth is reflected in a moderation in
growth in credit extended, especially from December 2012 through to March 2013.
Widespread labour market instability and work stoppages reduced output and export volumes
in the mining sector. These factors also raised the possibility of protracted wage negotiations,
above-inflation wage settlements and a sustained widening of the deficit on the current account
of the balance of payments. These developments, along with fiscal considerations, contributed
to the ratings downgrades by rating agencies.
A key risk to the inflation and growth outlook has been and continues to be the prospect of
sharply rising unit labour costs arising out of combinations of overly-high wage settlements
and/or falling output and productivity. Protracted and disruptive strike action risks lowering
output and exports. Excessively high wage settlements will come at the expense of retention of
employees, employment creation and could result in higher inflation. A wage-price spiral would
negate the benefits of wage increases to workers and undermine the competitive gains of the
currency depreciation. Wage, salary and price restraint at all levels, including executive pay,
could underpin confidence and provide stability to prices, including that of the currency, in ways
that boost economic growth.
Inflation forecasts
The inflation forecast deteriorated significantly between November 2012 and January 2013, with
the average of 5,5 per cent for 2013 shifting to 5,8 per cent. Inflation was expected to peak at
6,1 per cent in the third quarter of 2013 and then to moderate gradually to 5,1 per cent in the
final two quarters of 2014.
This near-term deterioration was mainly due to an expected increase in food price inflation and
rand depreciation. The pattern of upside risk to the inflation forecast and downside risk to growth
continued in the assessment, informed by sustained pressure of food prices, uncertainty about
exchange rate movements, the overall impact of the new CPI and the possible impact of higher
wage increases relative to benign demand pressures. Inflation expectations remained anchored
at around the upper end of the inflation target range.
Table 16
The Bank’s real GDP growth and targeted inflation forecasts
Per cent
MPC meetings
Real GDP
Targeted inflation

Expected peak
Expected to stabilise
3,4
5,2
4th quarter 2012 at
5,4 per cent
at 5,0 per cent level
to the end of 2014
2,9
5,5
1st quarter 2013 at
5,7 per cent
at 5,0 per cent level in

2,6
5,8
3rd quarter 2013 at
6,1 per cent
at 5,1 per cent level in the
second half of 2014
2,7
5,9
3rd quarter 2013 at
6,3 per cent
at 5,2 per cent level in the
final quarter of 2014
2,4
5,8
3rd quarter 2013 at
6,1 per cent
at 4,9 per cent level in the
final quarter of 2015
Monetary Policy Review June 2013

While the risks to the forecast from food prices moderated somewhat over the medium term,
the exchange rate, wage settlements and petrol prices remained important upside risk factors.
Administered prices, on average, also remained well in excess of the upper end of the target
range. The growth rate for electricity price inflation was adjusted from 16,0 per cent to 7,5 per
cent with effect from July 2013.
Inflation increased to 5,9 per cent in February 2013, contributing alongside rising petrol prices and
depreciation, to a slight deterioration to the March inflation forecast. The March inflation forecast
was adjusted up to an average of 5,9 per cent in 2013 and 5,3 per cent in 2014. The temporary
breach in the upper end of the target range shifted out to the third quarter of 2013, at an average
6,3 per cent for the quarter, before moderating gradually to 5,2 per cent in the final quarter of 2014.
The most recent inflation outcomes, for March and April, also came out at 5,9 per cent, but with
variation in the underlying drivers of the overall rate. Food price inflation measured 6,3 per cent
in April, reversing the downward trend that had prevailed since November 2012. Core inflation,
which excludes food, petrol and electricity, measured 5,2 per cent, marginally up from 5,1 per
cent in March.
The May inflation forecasts for 2013 and 2014 have declined slightly, to 5,8 and 5,2 per cent
respectively due to changed assumptions about international commodity prices, including oil, and
lower global inflation. A temporary breach of the upper end of the target range is still expected
in the third quarter of 2013, but at a lower average level of 6,1 per cent (6,3 per cent previously),
followed by a gradual moderation of inflation to 4,9 per cent in the final quarter of 2015.
Core inflation has risen and is expected to be significantly higher, averaging 5,3 per cent for
2013 compared to the previous forecast of 4,8 per cent. This follows the sharp increase in
medical insurance costs in the February CPI. Core inflation is also expected to be adversely
affected over the coming months by increases in a number of administered prices, particularly
water and municipal rates and taxes. This measure is expected to peak at 5,4 per cent in
both the third and fourth quarter of 2013, and to average 5,0 per cent and 4,6 per cent in the
coming two years. Despite the higher near-term trend, this indicator is still assessed to reflect
an absence of significant demand pressures.
Inflation expectations remain stable and anchored, as confirmed by both the Reuters survey
of analysts and the survey conducted by the BER. For the latter, respondents expect inflation
to average 6,0 per cent in both 2013 and 2014, and 6,1 per cent in 2015.
Risks to the outlook
With strong and negative global headwinds, the South African economy has become especially
vulnerable to declining domestic and foreign investor confidence. This has been reflected in the
depreciating and volatile exchange rate, which was already under pressure from the widening
deficit on the current account of the balance of payments.
A backdrop of weakening commodity prices increases the risk that concerns over the financing
of a large current-account deficit create further volatility and negative sentiment. Non-residents
have remained net buyers of bonds and equities in 2013, totalling about R35,3 billion, and it
will be important for these flows to be maintained. These developments have the potential to
affect, directly and indirectly, South Africa’s credit ratings, and increase the cost of much-needed
finance. Although inflation is forecast to remain relatively contained, these factors have raised
the upside risks to the outlook at a time of worsening real growth prospects.
The impact of the weaker rand on inflation is dependent on the extent, speed and duration of
the depreciation, and on the phase of the business cycle. The current level of the exchange rate,
if sustained, poses a significant upside risk to the inflation outlook. While some of the recent
decline reflects changes in the underlying fundamentals, the rand remains highly vulnerable to
changes in sentiment and overshooting.
International oil prices are expected to remain constrained by the subdued global growth
environment, but vulnerable to political developments in the Middle East in particular. Having
reached a recent high of around US$119,34 per barrel in mid-February 2013, Brent crude oil

Monetary Policy Review June 2013
prices have remained in a range of between US$96 and US$111 per barrel since the beginning
of April. Recent exchange rate movements have raised the probability of further petrol price
increases in the near term and may reverse the recent moderation in food prices. The exchange
rate poses an upside risk to food inflation as prices of agricultural commodities such as wheat
and maize are based on international prices.
The deteriorating outlook for the South African economy remains a major concern for monetary
policy, even though many of the drivers of the outlook lie outside the ambit of the Bank. These
drivers include the financing of the deficit on the current account of the balance of payments; the
fractious labour relations environment and the associated risks of protracted work stoppages
and excessive wage increases; electricity supply constraints; upside risks to inflation; downside
risks to growth and employment creation in a context of high unemployment; and declining
domestic and foreign investor confidence which could impact directly on capital flows. These
interrelated developments are reflected in the volatility and weakness in the exchange rate.
Global factors may have lessened somewhat in the balance of risks, but these nonetheless
remain critically important and significant. Sentiment towards the South African economy is also
a function of developments originating in foreign capitals and their markets. In particular, risks
to financial markets and global capital flows from excessive global liquidity pushing up asset
prices have grown in recent months. An early reversal of the US monetary policy stance looks
less proximate, and likely to be extremely cautious, but its timing is complicated by excessive
asset price increases and exuberance in financial markets.
Box 4
The role of the repurchase rate and the prime rate in the transmission of
monetary policy
This box describes the role of the repurchase (repo) rate and the prime overdraft rate in
monetary policy, and the difference between these two rates. The Bank, in the conduct of
monetary policy, sets the level of the fixed repo rate at which short-term loans are provided to
banks. This rate affects banks’ funding costs and lending rates via the money-market yield
curve and liquidity conditions. The level of banks’ lending rates is determined by three main
factors: operations, funding and capital costs; borrowers’ credit risk profiles; and lenders’
appetite for risk. Variations in these factors cause fluctuations in lending rates relative to the repo
rate and the prime rate (Figure B4.1). This, in turn, influences other interest rates, the exchange
rate of the rand, asset prices, the real economy and, ultimately, inflation.
Per cent

Prime rate
Weighted average bank lending rate on rand-denominated loans and advances
Repurchase rate
Sources: Banks’ BA returns (DI returns prior to January 2008) and own calculations
Figure B4.1 Lending rates in the banking sector

Monetary Policy Review June 2013

This is known as the ‘monetary policy transmission mechanism’. Owing to changes in market
conventions, the role of the prime ‘overdraft’ rate in the domestic banking system changed in
the 1980s from a ‘minimum overdraft rate’ (or ‘best’ lending rate) to a single reference
(or benchmark) rate for different types of loans. These loans have since been priced relative or
linked to the prime rate, with this link facilitating the transmission of broadly equivalent changes
in the repo rate to existing floating rate loans. However, new loans are priced relative to the
current repo and prime rates, and prevailing market conditions. As a result, banks can charge
higher risk premia on new loans if they perceive lending conditions as riskier even during periods
when the repo rate is lowered and vice versa.1 This is illustrated by the shaded areas in
Figure B4.2.
Basis points

Mark-up to repurchase rate
Discount or premium to prime rate
Easier monetary policy
Source: Own calculations
Margin to prime rate
Margin to repurchase rate
Figure B4.2 Relative margins to banks’ weighted average lending rate
-300
-200
-100

In 2001 the spread between the repo rate and the prime rate widened to an appropriate, stable
and constant 350 basis points, with the understanding that market interest rates would respond
to changes in the repo rate.
Figure B4.3 shows how the weighted average bank lending rate2 on rand-denominated loans and
advances responds to and closely follows the monetary policy response. From a lending rate
adjustment perspective, prime-linked assets tend to re-price faster in a downward interest rate cycle.
This, together with banks’ procyclical increase of risk premia on new loans, explains the narrower
margin to prime and wider margin to repo in a downward interest rate cycle (Figure B4.2).
Figure B4.3 clearly shows that the prime rate is only a reference rate, with lending priced
according to risk – on aggregate, at a discount to the prime rate. This refutes the general
misconceptions that loans are priced off prime and that the size of the spread affects lending
rates. Lending rates are not influenced by the 350 basis point spread between the repo rate
and the prime rate. However, changes in the repo rate translate into changes in the prime rate
and because floating rate loans are linked to the prime rate, the repo rate indirectly affects
floating rates. Thus, the role of the spread is to facilitate the transmission of monetary policy to
existing floating rate loans that are linked to the prime rate.
Akin to differentiating interest rates based on clients’ risk profiles, banks also differentiate
between products based on risk, as shown in terms of the respective weighted average interest
rate levels of the credit products.3 (Figure B4.4).

The tendency of banks to include a higher (lower) risk premium in the price of credit when the repo rate is low
(high) is referred to as ‘procyclical behaviour’.

The annualised weighted lending rate of banks is calculated as the total rand-denominated interest income
flow divided by the stock of loans and advances.

The Bank calculates a weighted average rate per credit product by weighing the 5 major banks’ reported
weighted average rates based on outstanding balances.

Monetary Policy Review June 2013
Figure B4.3 The level of weighted lending rates in the latest downward

cycle in interest rates
Per cent

Repurchase rate

Mortgage advances
Sources: Banks’ BA returns and own calculations
Prime rate
Credit card advances
Overdrafts

It is evident that credit card advances are deemed more risky than overdrafts, whereas
collateralised mortgage advances are deemed less risky.
Figure B4.3 shows how lending rates have declined, as expected, across all bank product
categories during the latest monetary policy easing cycle that started in December 2008.
However, with the exception of overdrafts, margins on all credit product categories increased
over this period, thus reaffirming the procyclical behaviour of banks (Figure B4.4).
Basis points
Basis points
Figure B4.4 Margins of weighted bank lending rates relative to the

repurchase rate

Overdrafts

Credit card advances

Mortgage advances

Weighted average bank lending rate

Overdrafts

Credit card advances

Mortgage advances

Weighted average bank lending rate


Change in margins from November 2008 to March 2013
Monetary Policy Review June 2013

Bibliography
South African Reserve Bank, press release, “Monetary Policy and Reserve Bank
Accommodation Procedures” (Pretoria: South African Reserve Bank, 7 March 1998)

aspx?sarbweb=3b6aa07d-92ab-441f-b7bf-bb7dfb1bedb4&sarblist=21b5222e-7125-4e55bb65-56fd3333371e&sarbitem=4466. Accessed 21 January 2013.
South African Reserve Bank and the Banking Association of South Africa, “The Role of the
Prime Rate and the Prime-Repurchase Rate Spread in the South African Banking System”
(8 April 2010)
4279/Summary%20of%20the%20main%20conclusion.pdf. Accessed 21 January 2013.
Expectations and the Bank’s inflation forecast
Given prospects, risks and uncertainties, the outlook for inflation is presented in this section.
Indicators of inflation expectations
Inflation expectations are an important factor in product price-setting and in wage
negotiations, and hence in determining future inflation outcomes. Inflation expectations
remained well anchored with the Reuters survey showing average inflation well within the
target range, the BER inflation expectations survey indicating inflation at, or just above, the
upper band of the target range and break-even inflation rates suggesting inflation slightly
above 6 per cent.
Measured headline CPI inflation fluctuated in a narrow range of between 5,4 and 5,7 per cent from
September 2012 to January 2013 and then increased by 0,5 percentage points to 5,9 per cent
from February through to April. The first-quarter 2013 BER survey of inflation expectations shows
average inflation expectations for 2013 slightly lower at 6,0 per cent compared to the 6,1 per cent
surveyed in the fourth quarter of 2012 (Figure 28). Inflation is expected to remain stable at 6,0 per
cent in 2014 and then to increase moderately to 6,1 per cent in 2015. Lower expected inflation in
2013 resulted from a decline in the expectations of business people and trade union officials, with
those of business above the inflation target and increasing from 2013 to 2014.
Annual averages, per cent


Figure 28
BER surveys of headline CPI inflation expectations

Survey conducted during:

3rd qr 2012
Source: Bureau for Economic Research, Stellenbosch University

4th qr 2012

1st qr 2013

Monetary Policy Review June 2013
Inflation expectations, as surveyed by Reuters (Table 17), continued to suggest that the average
year-on-year percentage change in CPI would be less than 6 per cent. The median forecast for
2013 has increased slightly from 5,4 per cent in September 2012 to 5,8 per cent in April 2013
and has remained around 5,4 per cent for 2014.
The quarterly average year-on-year percentage change in CPI, according to the April 2013 survey,
is expected to peak in the third quarter of 2013, while remaining within the inflation target range
until the fourth quarter of 2014 (the final quarter of the survey). Forecasts of some respondents
indicate a breach of the target to as high as 7,0 per cent in the third quarter of 2013.
Table 17
Reuters survey of CPI inflation forecasts: April 2013*

[5,3]
(5,8)
5,8
[5,4]

[5,4]
(5,8)
5,8
[5,4]

[6,2]
(6,2)
6,5
[6,0]

[4,6]
(5,0)
5,3
[4,8]

[20]
(19)

[16]
(19)

(13)

* September 2012 [ ] and March 2013 ( ) survey results in parenthesis
Source: Reuters
Figure 29 shows inflation expectations associated with break-even inflation rates. The breakeven inflation rate proxy for expected inflation is measured as the difference between the
nominal yields on conventional South African government bonds and the real yields on CPI
inflation-linked government bonds of similar maturity. The changes in the trend and level of
break-even inflation rates since the October 2012 MPR reflected, among other things, changes
in the exchange value of the rand and, more recently, net bond purchases by non-residents.
Short-term break-even inflation rates have caught up with longer-term break-even inflation
rates. The longer-term break-even inflation rates have consistently breached 6 per cent from late
September 2012, followed by the shorter-term rates for brief periods from November 2012 and
continually from late February 2013. This reflected less favourable near- and long-term inflation,
with the short-term break-even inflation rates affected by increasingly negative real yields on
inflation-linked bonds since November 2012.
Percentage points
Figure 29
Break-even inflation rates


Spread between R203 and R211 bonds (4-year maturity)

Spread between R186 and R197 bonds (10- to 13-year maturity)
Sources: JSE Limited and own calculations

Monetary Policy Review June 2013

The South African Reserve Bank inflation forecast
Since the October 2012 MPR, the Bank’s forecast for annual 2013 targeted headline CPI
inflation reflected a deterioration from 5,2 per cent at the September 2012 meeting of the
MPC to 5,9 per cent in March 2013. Subsequently, the inflation outlook improved slightly.
Although the projected peak receded slightly by 0,2 percentage points, the upper end of
the target range will still be breached marginally at 6,1 per cent in the third quarter of 2013.
Headline CPI is expected to gradually move back to within the target range to 4,9 per cent
in the final quarter of 2015.
The most recent projections of the Bank’s core quarterly forecasting model, presented to the
MPC meeting on 21–23 May 2013, are reproduced in the form of a fan chart in Figure 30. The CPI
inflation forecast of the Bank has been revised marginally downwards since the MPC’s previous
meeting in March 2013, primarily as a result of lower global inflation and commodity prices.
According to the central projection, which is conditional on an unchanged repurchase rate,
headline CPI inflation is now expected to average 5,8 per cent in 2013 and 5,2 per cent in
2014, compared with the averages of 5,9 per cent and 5,3 per cent respectively projected
at the time of the March 2013 meeting. At this meeting, the Bank’s assumption for electricity
tariff increases in the CPI basket had already been lowered to 7,5 per cent from July 2013. The
average quarterly CPI inflation rate was expected at the May 2013 meeting to breach the upper
end of the target range and peak at 6,1 per cent in the third quarter of 2013 before returning to
within the target range, while moderating gradually to an average rate of 4,9 per cent in the final
quarter of 2015.
When the unchanged repo rate assumption is replaced with the Reuters average expected
path for the repo rate, headline CPI inflation is expected to average 5,7 per cent in 2013 and
5,1 per cent in 2014, with the average quarterly CPI inflation rate temporarily breaching the
6 per cent level in the third quarter of 2013.
Per cent
Figure 30
Targeted inflation* forecast

*
CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban
areas thereafter
Note:
The MPC uses the fan chart to assess the risks inherent in the forecast and also to
communicate the uncertainties that lie ahead. If future economic developments are
deemed to be particularly volatile, the bands will be wider. If a fairly stable future is
foreseen, the bands will, in turn, be narrower. The fan chart allows policy-makers to focus
their discussion on the risks lying ahead and their effects on inflation. The fan chart uses
confidence bands to depict varying degrees of certainty. The darkest band of the fan
chart covers the most likely 10 per cent of the probable outcomes foreseen for inflation,
including the central projection. Each successive band, shaded slightly lighter and added
on either side of the central band, adds a further 10 per cent to the probability, until the
whole shaded area depicts a 90 per cent confidence interval.

Monetary Policy Review June 2013
In the absence of significant demand pressures, the Bank’s forecast of core inflation (i.e.,
headline CPI excluding food, petrol and electricity prices) shows a rising trend within the inflation
target range, mainly due to expected increases in administered prices. This measure of core
inflation is now expected to average 5,3 per cent in 2013 compared to 4,8 per cent previously,
and with a higher peak of 5,4 per cent in the third and fourth quarter of 2013.
Given that the central projection for targeted inflation is the most likely outcome, the balance of
risks to the inflation forecast in Figure 30 is viewed as being on the upside. These upside risks
are mainly driven by the exchange rate and wage pressures but are mitigated somewhat by the
downward revision of the commodity price assumption. Headline CPI inflation is expected to
average 5,8 per cent in 2013 and 5,2 per cent in 2014.
Assessment and conclusion
In 2012 global economic activity remained weak, although stabilising somewhat in the latter
part of the year when financial market tensions moderated. Subsequently, a weak start in 2013
gradually gained growth momentum. Financial market tensions eased, and the deterioration in
global economic conditions moderated and reversed due to persistent and significant monetary
policy easing. Global inflation remained benign.
Global inflation is expected to remain broadly unchanged, while global real economic activity
is expected to progress gradually, with the US leading the way among advanced economies.
Although short-term risks have eased, global prospects remain uncertain, with global economic
activity likely to suffer periodic setbacks.
Domestic activity rebounded somewhat with the lessening of mining-sector tensions, and with
some signs of improved global prospects and better financial conditions. This improvement
proved short-lived, however, as ongoing prominent negative domestic factors undermined
confidence and demand slowed. Since May 2012, the rand has depreciated by almost
25 per cent against the US dollar, reflecting primarily domestic uncertainty but also global
developments. These factors have shaped, and will continue to shape, inflation outcomes over
the medium term and at present create serious upside risk to the inflation forecast.
Since July 2012, the Bank’s economic growth outlook has oscillated around 2,9 per cent. In
May it was again revised slightly lower to 2,4 per cent and downside risks were identified. The
output gap is expected to widen in 2013 before stabilising in 2014 and narrowing in 2015. The
inflation forecast for the medium term has improved very slightly since the March 2013 MPC
meeting but the risks to the inflation outlook are to the upside.
A more moderate inflation trajectory over the medium term would be brought about by greater
stability of the exchange rate and commodity prices, more modest wage increases, and reduced
administered price pressures.
Monetary policy has continued to provide stability through a period of both global and domestic
uncertainty. The monetary policy stance has taken account of the expected temporary breach
of the inflation target and the relatively weak economic recovery as reflected by a persistent
negative output gap. The unchanged repo rate at 5,0 per cent per annum, and the modest
negative real repo rate are expected to foster price stability and support the economic recovery.
Monetary Policy Review June 2013

Statement of the Monetary Policy Committee
22 November 2012
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC) the domestic growth
outlook has deteriorated, while the upside risks to inflation have increased. Widespread labour
market instability and work stoppages have reduced output and export volumes, with the
potential for employment losses. Risks to the inflation outlook have been increased by a further
depreciation of the rand exchange rate, partly in response to these developments, as well as by
a possible higher trend in wage settlements and the impact of the reweighting and rebasing of
the CPI basket by Statistics South Africa (Stats SA).
At the same time the global environment remains challenging with slowing growth in a number
of regions, declining global industrial output, the worsening Japanese outlook, continued
uncertainty regarding United States (US) fiscal policy and a resurfacing of concerns relating to
the resolution of the crisis in the eurozone, which is now in recession.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas
at 5,6 per cent in October 2012, and up from 5,5 per cent in September, was 0,2 percentage
points above the market consensus. The categories of food and non-alcoholic beverages,
housing and utilities, and transport together accounted for 3,5 percentage points of the inflation
outcome. The upside surprise was mainly attributable to food prices which increased by 2,8 per
cent month on month, and 6,7 per cent on a year-on-year basis. Core inflation, as measured
by the exclusion of food, petrol and electricity from CPI, measured 4,7 per cent, unchanged
from September. Administered prices excluding petrol increased at a year-on-year rate of
7,5 per cent.
Year-on-year producer price inflation moderated further to 4,2 per cent in September, having
measured 5,1 per cent in August. This favourable trend was driven mainly by lower rates of
increase in the prices of mining products. A marked acceleration was seen in the food-related
categories, with agricultural prices increasing at a year-on-year rate of 5,2 per cent in September,
compared with 4,3 per cent in August and a recent low of 1,7 per cent in May. Manufactured
food prices increased by 9,0 per cent and 10,1 per cent in August and September respectively.
The inflation forecast of the Bank reflects a deterioration in the inflation outlook for 2013
compared with the previous forecast. Inflation is now expected to average 5,6 per cent in the
final quarter of 2012, and 5,6 per cent for the year. It is expected to average 5,5 per cent in
2013 and 5,0 per cent in 2014, with a peak of 5,7 per cent expected in the first quarter of 2013.
This near-term deterioration is mainly due to higher expected food price inflation and the recent
depreciation of the rand. Core inflation remains contained, indicating the absence of significant
demand pressures. This measure is expected to peak at 5,0 per cent in the first quarter of 2013,
and to average 4,8 per cent and 4,5 per cent in 2013 and 2014 respectively.
These forecasts do not incorporate the new CPI weights and rebasing recently announced by
Stats SA as the finer details of these revisions, including the introduction of new products, and
the method of linking the old and new baskets, have not yet been finalised. Preliminary evidence
suggests that a slight upward bias to the Bank’s central projection for headline CPI inflation
could occur in 2013. On the assumption that the rate of increase in price changes for most
goods and services, apart from food and electricity, is more or less unchanged, the combined
average upward bias would be relatively small, in the order of around 0,2 percentage points.
The new weights and the rebased index will be incorporated formally into the Bank’s forecast in
2013 after the revisions have been finalised by Stats SA.
Inflation forecasts of financial analysts surveyed by Reuters have also been revised upwards.
Financial analysts now expect inflation to average 5,5 per cent in 2013, compared with
5,3 per cent in the previous survey. The expectation for 2014 remains unchanged at 5,4 per
cent. It is unclear if these forecasts already take account of the changes to the CPI weights.

Monetary Policy Review June 2013
The break-even inflation rates have also exhibited a moderate upward trend since the previous
MPC meeting.
The global economic outlook has deteriorated somewhat with a return to recession in the
eurozone. The prospects for the region remain bleak amid procyclical fiscal austerity, continued
household- and banking-sector deleveraging in a tighter regulatory environment, and renewed
concerns relating to the unresolved sovereign debt crisis. The deepening recession has served to
heighten the solvency risk of the peripheral countries. The recently announced Outright Monetary
Transactions (OMT) programme by the European Central Bank remains yet to be activated. The
Japanese economy contracted in the third quarter and leading indicators point to a possible
recession. Although the United Kingdom economy experienced positive growth in the third
quarter, the outlook is negative as the favourable impact from the Olympic Games dissipates.
The prognosis for the US economy remains highly dependent on progress in resolving the socalled fiscal cliff. The related uncertainty has already adversely affected investment decisions,
and while some last-minute political compromise is likely, the ultimate extent of the fiscal
contraction and its impact on growth are still unclear. Failure to resolve this issue could result in
a recession and derail the nascent recovery in the housing market.
Prospects for emerging markets, while still positive, have also deteriorated somewhat during the
past months, contributing to the downside risk to the global recovery. Trend growth rates in Asia
are declining, and both China and India are expected to experience weaker growth rates, with
possible implications for commodity prices.
For some time the exchange rate of the rand has been determined primarily by external
developments, particularly changing global risk perceptions. More recently, domestic factors
appear to have become dominant determinants of the exchange rate. These include the
increased risk posed to the economic outlook by labour market developments in the mining
and agricultural sectors in particular; the widening deficit on the current account of the balance
of payments, which is likely to have been exacerbated by the stoppages; and the ratings
downgrades by two rating agencies while also retaining a negative outlook. Since the previous
meeting of the MPC, the rand has depreciated by about 6,7 per cent against the US dollar, by
5,8 per cent against the euro, and by 5,8 per cent on a trade-weighted basis.
Inflows into the domestic bond market associated with South Africa’s inclusion in the World
Government Bond Index of Citibank probably helped to moderate the degree of depreciation
over this period. Since the beginning of the year, net purchases of South African bonds by nonresidents have totalled R85,2 billion. By contrast, non-residents have been net sellers of South
African equities since the beginning of the year to the value of R6,8 billion.
The rand is expected to remain sensitive to both unfolding domestic economic and political
developments, in addition to global risk perceptions. The extent to which the weaker rand feeds into
inflation will be dependent on the trading range of the rand going forward and the duration of these
moves. Most analysts do not expect further weakening of the rand from current levels, and a number
of them expect some recovery. However, the rand is expected to remain volatile and subject to
overshooting, and its depreciation poses an increased upside risk to the inflation outlook.
The domestic economic growth outlook has deteriorated recently, largely as a result of the
continued global slowdown and aggravated by domestic events. Mining output has declined
significantly as a result of work stoppages and there are likely to be longer-term implications for
output, exports and employment as the mines adjust to higher labour costs. Labour unrest in
parts of the agricultural sector is also expected to affect output and prices adversely.
Recent high-frequency data indicate that third-quarter growth was well below the 3,2 per cent
recorded in the second quarter. Mining output contracted at a quarter-to-quarter rate of 3,2 per
cent in the third quarter and further contractions are expected in the fourth quarter. The physical
volume of manufacturing production was adversely affected by the road freight transport sector
strike in September when a contraction of 2,3 per cent was recorded on a month-to-month
basis. For the quarter as a whole manufacturing output increased by 0,3 per cent. The outlook
for the sector remains negative, with the Kagiso Purchasing Managers Index declining to a level
of 47,1 in October, reflecting an expectation of contraction in the coming months.
Monetary Policy Review June 2013

The Bank’s forecast of gross domestic product (GDP) growth has been revised downward from
2,6 per cent to 2,5 per cent in 2012. Growth in 2013 is now expected to average 2,9 per cent,
compared with 3,4 per cent previously, while the growth forecast for 2014 has been revised
down from 3,8 per cent to 3,6 per cent. Moreover, the risks to this forecast remain on the
downside. The RMB/BER Business Confidence Index declined marginally in the fourth quarter
and remains below the 50 index level.
Consumption expenditure by households appears to have lost some momentum recently following
the 2,9 per cent annualised growth rate in the second quarter. Consumer confidence in the third
quarter, as measured by the FNB/BER Consumer Confidence Index improved marginally, but was
still at low levels that were not consistent with robust consumer spending. Nevertheless, growth in
retail trade sales, which account for about half of household consumption expenditure, has been
relatively resilient having grown at a quarter-to-quarter rate of 1,9 per cent in the third quarter.
However, passenger vehicle sales and expenditure on services were subdued.
There is, however, still little evidence of demand pressures on inflation. The resilience of
consumer demand has been attributed to a number of factors, including low interest rates,
relatively low inflation, real income growth, high growth rates in unsecured lending, and until
recently a relatively strong exchange rate. Some of these factors may be a constraint on
expenditure going forward, especially when combined with higher administered price increases
which constrain discretionary spending.
The MPC is concerned about the recent trend in wage settlements and the potential negative
impact on the economy, particularly on growth and investment. These developments could also
result in lower growth in employment creation or an absolute decline in employment. Although
the reported headline increases granted in some of the settlements are higher than the actual
average increases, there is no doubt that the increases granted are well above inflation. This
has the potential to increase aggregate demand and prices with a risk of a possible wage-price
spiral, which could negate the real benefits of these wage increases to workers. However,
the impact will be moderated to some extent by the inevitable job losses that are likely to
accompany such increases in the context of a slowing economy. The cost-push effect of these
wage increases will therefore depend on the actual increase in the total wage bill and unit labour
cost developments.
The most recent wage data, which do not yet incorporate these latest trends, show that in
the second quarter of 2012 growth in unit labour costs was 6,1 per cent, while Andrew Levy
Employment Publications reported average wage settlement rates in collective bargaining
agreements of 7,4 per cent for the first nine months of 2012. Wage settlements at these levels
were not assessed to pose a major risk to inflation and these trends will be closely monitored
as the collective bargaining landscape has become more fractious.
It is also too early to assess the impact of recent developments on employment. According
to the Quarterly Labour Force survey, total employment increased by about 200 000 in
the third quarter of 2012, but the increased number of unemployed workers resulted in the
unemployment rate increasing to 25,5 per cent in September. It is expected, however, that
the positive employment trend in the non-gold mining sector observed during the past year is
likely to have reversed or slowed down, while the negative employment trends in manufacturing
and gold mining are likely to persist. The net effect of higher wages and lower employment on
aggregate expenditure is therefore still unclear at this stage.
Credit extension to the private sector moderated on a quarter-to-quarter basis in the third quarter
of 2012, when an annualised increase of 5,4 per cent was recorded. Twelve-month growth
in total loans and advances to the private sector was 8,8 per cent in September. However,
mortgage loan growth remained subdued. When this category is excluded, loans increased at a
significant twelve-month rate of 16,6 per cent. The main impetus has come from the persistently
strong growth in unsecured lending to households, and this has been related to real income
growth particularly in the public sector. Growth in unsecured lending to households remains in
excess of 30 per cent but there are some tentative signs that this growth may be moderating.
Although to date this has not represented a systemic risk, as it is still a small part of total loans

Monetary Policy Review June 2013
and advances, this is being carefully monitored by the Bank. Unsecured lending has probably
helped to underpin household consumption expenditure.
The fiscal policy stance, as reflected in the Medium Term Budget Policy Statement (MTBPS)
remains supportive of the economy through its contra-cyclical stance. Although the goal of fiscal
consolidation is being maintained, the timing has been pushed out further, as lower expected
growth is likely to result in lower revenues. Growth in expenditure is projected to remain the
same as that set out in the February budget, and no large boost to aggregate demand is
expected that could impact on the inflation outlook.
Food prices remain a significant risk to the inflation outlook. Global food prices, while still high,
have declined from recent peaks. The impact of this shock is still to fully filter through to domestic
prices. Although there is usually a lag between the impact of global food price developments on
domestic prices, the impact appears to have been felt more quickly than is generally the case.
The recent depreciation is also expected to exacerbate the upside risk to food prices. Futures
prices, however, indicate that maize prices may be moderating following a better-than-expected
domestic harvest.
International oil prices have remained relatively unchanged since the previous meeting of the
MPC, although in the past few days have increased following ongoing hostilities in the Middle
East. Domestic petrol prices declined in November despite the depreciation of the rand and,
should the exchange rate and international product prices remain at current levels, a further
moderate decline can be expected in December. However, international prices remain highly
dependent on the global growth outlook and political developments in the Middle East.
Since the previous MPC meeting the domestic landscape has seen a marked change. While
the global crisis remains unresolved, South Africa has seen significant developments that
have impacted on the economic outlook and confidence. These domestic developments, if
not addressed in a comprehensive and constructive manner, have the potential to derail the
progress made to date whereby South Africa has been able to withstand the worst contagion
effects of the ongoing global crisis.
While recognising that there are real issues that underlie the recent wave of wildcat strikes,
the Bank is concerned about the conduct of some of the parties involved in the recent labour
market instability and, in particular, the unacceptable levels of violence that have accompanied
the strikes. It is critical that both employers and employees take constructive steps to address
the fraught relations that appear to be prevalent in a number of areas. Employers need to better
appreciate the contribution to stability that an informed, experienced, skilled and organised
workforce can make, and also need to be better informed about, and sensitive to, the conditions
and circumstances of their employees. An important element of this is to take measures that
enable employees to be better informed about the financial situation, strategy and future plans
of the companies and sectors that they work in.
At the same time employees need to ensure an end to the use of violence in labour relations. In
their quest for fair and decent employment conditions, employees need to recognise the potential
negative effects of unsustainable cost structures on employment levels and competitiveness in
the absence of improved productivity. In the prevailing conditions there is the danger of a wageprice spiral and, inevitably, it will be the workers who bear the brunt of the fallout.
The costs are not only the direct costs in terms of lost production, but also the possible
increased costs of finance. In the context of a very weak global economy, where South Africa
should strive to be a destination of choice and thereby grow the economy and achieve the
pursued developmental and employment goals, the ability to attract investment and improve
the country’s ratings must be a clear objective.
While many of the strikes appear to have been resolved, long-term resolution of the underlying
causes requires ongoing, concerted action on the part of all the parties involved. We need
cohesion and certainty of policy, as well as unity of purpose to build an inclusive, longer-term
vision. The National Development Plan is a broad unifying framework that has been adopted
by both Cabinet and Parliament, and could form the base to take the country forward, enabling
South Africa to play an effective role in the continent as a favoured trading and investment partner.
Monetary Policy Review June 2013

The MPC assesses the balance of risks to the inflation outlook to be on the upside, given
the continued pressure of food prices, uncertainty of the exchange rate movements and
the reweighting and rebasing of the CPI. Furthermore, the possible impact of higher wage
increases could exert further upward pressure on inflation notwithstanding the concerns that
recent developments in the labour market could impact negatively on employment. The MPC
considers that the demand pressures on inflation at this stage remain relatively benign, as
evidenced in the contained trend of underlying inflation. There are also signs of moderation of
consumption expenditure against the backdrop of a weak supply side of the economy. The
negative output gap is expected to persist for some time, and the balance of risks to the growth
outlook remains on the downside.
In the light of these factors, the MPC is of the view that the current accommodative stance
remains appropriate and has therefore decided to keep the repurchase rate unchanged at
5,0 per cent per annum. As always, the MPC will monitor developments closely and will not
hesitate to act in a manner consistent with its mandate.

Monetary Policy Review June 2013
Statement of the Monetary Policy Committee
24 January 2013
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC) there has been some
improvement in global financial market sentiment, but economic growth prospects in a number
of the major advanced economies or regions remain constrained. Downside risks to the outlook
persist as the structural problems in many countries, and in the eurozone, in particular, are still
unresolved. Monetary policy in most countries is likely to remain accommodative in the absence
of clear evidence of a sustained recovery, particularly against the backdrop of a relatively benign
global inflation environment.
Despite a generally positive reaction to the ANC elective conference, ongoing labour conflict, the
proposed scaling down of mining operations and ratings agency downgrades are symptomatic
of the challenging domestic outlook. In the absence of coherent and consistent structural
policy initiatives domestic economic growth is expected to continue to be well below both
what is possible and required to make significant inroads into unemployment. In contrast to the
situation in most advanced economies, the risks to the inflation outlook remain on the upside,
due, in large part, to continued exchange rate and wage cost pressures.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas was 5,7 per cent in December 2012, up from 5,6 per cent in November. The categories of
food and non-alcoholic beverages, housing and utilities, and transport together accounted for
3,5 percentage points of the inflation outcome. Food price inflation moderated from 7,5 per cent
in November to 7,0 per cent, mainly as a result of lower meat and grain price increases. Core
inflation, as measured by the exclusion of food, petrol and electricity from CPI, which had been
unchanged at 4,7 per cent since September, increased to 4,9 per cent in December, mainly as
a result of increases in services price inflation and in line with the Bank’s forecast. Administered
prices increased by 8,8 per cent, and by 7,6 per cent excluding petrol.
Having reached a recent low of 4,2 per cent in September 2012, year-on-year producer price
inflation increased to 5,2 per cent in both October and November. This reversal of the previous
downward trend was mainly due to price increases in mining and quarrying, agricultural products
and manufactured food. Agricultural prices increased at year-on-year rates of 6,3 per cent and
5,9 per cent in October and November respectively, while manufactured food prices increased
at rates of 10,9 per cent and 11,1 per cent in these months respectively.
The inflation forecast of the Bank reflects a further deterioration in the inflation outlook for
2013 compared with the previous forecast. The forecasts do not yet incorporate the new CPI
weights and rebasing recently announced by Statistics South Africa, but these changes will
be incorporated formally into the Bank’s next forecast. The impact on the inflation trajectory is
likely to be marginal. Having averaged 5,6 per cent in 2012, inflation is now expected to average
5,8 per cent in 2013 and 5,2 per cent in 2014, compared with the previous forecasts of 5,5 per
cent and 5,0 per cent for the respective years. Inflation is expected to peak at 6,1 per cent in the
third quarter of 2013 and then to moderate gradually to 5,1 per cent in the final two quarters of
2014. This deterioration is largely due to higher expected food price inflation, the lagged effects
of the depreciation of the rand and higher expected unit labour costs.
The forecast of core inflation is more or less unchanged, indicating the continued absence of
significant demand pressures. This measure is expected to peak at 5,0 per cent in the first two
quarters of 2013, and to average 4,9 per cent and 4,5 per cent in 2013 and 2014 respectively.
Inflation expectations remain anchored at around the upper end of the inflation target range.
According to the Survey of Inflation Expectations conducted by the Bureau for Economic Research
(BER) in the fourth quarter of 2012, inflation is expected to average 6,1 per cent in 2013 and
6,2 per cent in 2014. This represents a marginal increase of 0,1 percentage point for 2013 compared
with the previous survey, while the forecast for 2014 is unchanged. Business executives are the
Monetary Policy Review June 2013

most pessimistic about inflation, having raised expected inflation rates to 6,6 per cent and 6,7 per
cent in 2013 and 2014, while trade union respondents reduced their forecasts to 6,1 per cent and
6,6 per cent respectively for these years. The forecasts of financial analysts increased marginally,
but remain within the target range for the forecast period. For the past four quarters expectations
for the next five years have remained unchanged at 6,2 per cent.
The global growth outlook remains challenging, notwithstanding improved sentiment in global
financial markets following the interim deal related to the fiscal cliff in the US. The fiscal issues
have not been fully resolved, with decisions on expenditure cuts and the debt ceiling delayed
till later this year. While the worst-case fiscal scenario has been avoided, the uncertain fiscal
outlook is likely to contribute to continued sub-trend US growth. On the positive side, there are
continued signs of a recovery in the US housing market and improved corporate profitability.
Although sovereign debt risks in the eurozone have subsided for now and bond spreads on
peripheral European debt have narrowed significantly, the region is likely to remain in recession
for much of the year, as fiscal tightening and balance-sheet repair by banks and households
continue. The unemployment rate has now reached 11,8 per cent, with youth unemployment at
24 per cent. The outlook for Germany, the main growth driver in the region, has also deteriorated.
Growth prospects in the UK remain relatively weak, while the outlook for Japan is uncertain
despite the announcement of substantial fiscal and monetary policy stimuli.
The outlook for emerging markets, particularly those in Asia, is more positive. The Chinese
economy appears to have stabilised following concerns about a possible hard landing, and
consensus forecasts suggest some growth acceleration in 2013 in both China and India. Growth
in Africa is expected to be sustained at rates in excess of 5 per cent, while Latin American
growth is expected to be more restrained, but an improvement on 2012.
The rand exchange rate continues to pose an upside risk to the inflation outlook. The exchange
rate has been impacted by the widening deficit on the current account of the balance of
payments during 2012 and changing global and domestic risk perceptions, particularly relating
to the adverse developments in the South African labour market, and the downgrades by the
various ratings agencies. Since the previous meeting of the MPC, the rand has been fairly
volatile, having appreciated initially from R8,94 to the US dollar, to R8,45 at the end of the year,
but subsequently depreciated to current levels of around R9,00. Since the beginning of the year,
the rand has depreciated by 6,1 per cent on a trade-weighted basis and by about 6,6 per cent
against the US dollar.
While the rand is expected to remain sensitive to domestic and global developments and
continued volatility can be expected, most analysts do not expect significant further sustained
depreciation in the coming months. The depreciation of the rand is expected to help moderate
the current-account imbalance, although platinum export growth may be undermined to some
extent by possible shaft closures. However, financing of the deficit may be more challenging
despite relatively high domestic nominal bond yields, as sentiment towards South Africa
has deteriorated, and non-residents already hold over one-third of the stock of outstanding
government bonds.
Non-resident net purchases of domestic bonds totalled R88,6 billion during 2012, due in part
to South Africa’s inclusion in the Citibank World Government Bond Index. However, the pace
of inflows declined substantially in the final quarter of the year, when net purchases amounted
to R10,6 billion. Since the beginning of 2013, net purchases by non-residents have amounted
to R4,3 billion. While non-residents were net sellers of equities during 2012 to the value of
R3,4 billion, they were net buyers to the value of R7,3 billion in November and December. Year to
date, however, the negative trend regarding equities has continued with net sales of R2,3 billion
as growth prospects remain weak.
Domestic economic growth remains fragile and below potential following an annualised growth
rate of 1,2 per cent in the third quarter of 2012, and an estimated growth rate of around 2,5 per
cent for the year. A similar outcome is expected in 2013 with growth of 2,6 per cent forecast,
revised down from 2,9 per cent in the previous forecast. A more favourable outcome of
3,8 per cent is forecast for 2014, compared with 3,6 per cent previously, driven in part by a
more favourable global outlook. However, the risks to these forecasts are assessed to be on

Monetary Policy Review June 2013
the downside, given uncertainties and instability in parts of the mining and agricultural sectors
in particular. Constraints to growth are both external and internal. To achieve a higher internallygenerated growth rate would require a serious commitment to implementing a range of structural
reforms and making the necessary trade-offs as outlined in the National Development Plan.
The outlook for parts of the mining sector is bleak, following continued labour disputes and
announcements of possible closures of shafts and mines, a consequence of increased cost
pressures, weak global demand and prices. Although mining output increased on a monthto-month basis in November, on a three-month-to-three-month basis a contraction of 10,4 per
cent was recorded.
There are mixed signals pertaining to the outlook for the manufacturing sector. The real volume
of manufacturing production increased by 2,3 per cent in November, its highest month-onmonth rate in 4 years, due in part to a rebound from widespread strike activity in previous
months, and growth in the fourth quarter is estimated to have been relatively robust. Capacity
utilisation has also increased. However, the Kagiso PMI declined to below the 50 index point
level to 47,4 in December, indicating an expectation of some contraction in the sector.
The negative business sentiment evident in the confidence indicators is also reflected in the
continued weakness in private-sector gross fixed capital formation. Recent developments in
the mining sector are likely to reinforce this weakness as plans are scaled back. Investment
expenditure is likely to remain underpinned by the government and state-owned enterprises.
In the third quarter of 2012, gross fixed capital formation grew at an annualised rate of 7,2 per
cent, but private-sector capital formation, which accounts for just under two thirds of the total,
only grew at a rate of 2,8 per cent.
Growth in consumption expenditure by households moderated as expected in the third
quarter of 2012 when it increased by 2,6 per cent. The main driver of the moderation was the
decline in expenditure growth on services and non-durable goods. However, there are also
signs of moderation in the growth of expenditure on durable and semi-durable goods, and
the depreciated exchange rate is likely to sustain this trend. Growth in motor vehicle sales has
slowed in recent months, and there was a marked decline in the confidence of new vehicle
traders reported by the BER. Despite the higher-than-expected increase in retail trade sales in
November, the quarterly rates suggest further moderation in growth. The FNB/BER Consumer
Confidence Index declined by 2 index points to -3 index points in the final quarter of 2012.
On balance, the MPC does not assess growth in household consumption expenditure to be
excessive or to pose significant inflationary risks, and further moderation is possible. Factors
that affect the outlook for consumption expenditure, both positively and negatively, include
concerns regarding employment, wage settlements, credit extension particularly unsecured
lending, and administered price increases which impact on discretionary spending.
The upward momentum of banks’ total loans and advances to the private sector has continued,
with twelve-month growth of 9,9 per cent recorded in November, the highest growth rate
since February 2009. Excluding mortgage advances, which remain subdued, the increase in
November was 18,3 per cent. Bank credit extension to the household sector increased by
10,4 per cent. General loans to households, which is mainly unsecured lending, while still
exhibiting rates of growth in excess of 30 per cent, shows some signs of moderation amid
reports that banks are becoming more cautious in extending new loans in this category. Access
to new loans may also be constrained by the increased size of outstanding debt. However,
despite rising debt levels, household debt to disposable income appears to have stabilised at
around 76 per cent.
The MPC remains concerned about the potential impact of the higher level of wage settlements
on employment and inflation. There are indications that wage increases are trending higher,
with growth in nominal remuneration per worker increasing from 7,2 per cent in the second
quarter of 2012 to 8,1 per cent in the third quarter. Once productivity increases are accounted
for, this translates into unit labour cost increases of 6,1 per cent and 6,7 per cent in these
respective quarters. According to Andrew Levy Employment Publications, the overall average
wage settlement rate in collective bargaining agreements amounted to 7,4 per cent in the first
nine months of 2012.
Monetary Policy Review June 2013

The MPC is mindful of the danger of a possible wage-price spiral and further employment
losses should unaffordable real wage demands be granted while economic growth remains
constrained. The risks to inflation should this scenario play itself out are significant in the
absence of productivity gains.
The subdued pace of employment creation in the private sector has been further undermined
by the fractious nature of recent wage negotiations and the announcement of further possible
restructuring in the mining sector, which would involve the closure or mothballing of mines or
shafts. According to the Quarterly Employment Statistics survey of Statistics South Africa, nonagricultural formal sector employment grew by 1,0 per cent or 82 000 employees in the year
to September 2012. Almost two-thirds of this increase was accounted for by the public sector,
while net job losses over this period were experienced in the manufacturing and construction
sectors, with employment in the mining sector unchanged. However, in the third quarter of 2012,
15 000 jobs were shed in the mining sector and there are fears that this trend could continue.
Employment in the agricultural sector, which is not covered by the survey, is also at risk.
Food prices continue to pose a significant near-term risk to the inflation outlook, although there
are signs that these price pressures may moderate during the year as a result of favourable
base effects, as well as the recent moderation in global and domestic wheat and maize prices.
The price of these commodities will also be influenced by developments in the exchange rate of
the rand and unpredictable weather patterns.
Administered prices remain on average well in excess of the upper end of the target range,
and there is as yet no clarity about the new Eskom tariffs to be implemented later this year.
At this stage a 16 per cent tariff increase is assumed in the forecast. International oil prices
have remained relatively stable for the past few months and are more or less unchanged from
the previous meeting of the MPC. Futures prices reflect an expectation of some moderation
in coming months, but some volatility can be expected. The domestic price of petrol, which
is also impacted by the exchange rate, declined by a cumulative 34 cents per litre since early
November, but much of this decline is likely to be reversed in February.
The MPC continues to assess the balance of risks to the inflation outlook to be on the upside.
While the risks to the forecast emanating from food prices may have diminished somewhat,
particularly over the medium term, the exchange rate and wage settlements remain the key
upside risk factors. While the reweighting and rebasing of the CPI is still to be finalised, the
impact is likely to be marginal, but on the upside. Core inflation trends indicate that demand
pressures are relatively contained, and household consumption expenditure has continued
to moderate.
Risks to economic growth are assessed to be on the downside, particularly given the uncertain
outlook for the mining industry and ongoing unsettled labour relations. The negative output gap
is therefore expected to persist. The MPC remains concerned about the possibility of a wageprice spiral and its potential to exacerbate the high level of unemployment in the economy. As
we noted in the previous MPC statement, concerted action is needed on the part of all the
parties involved. We need cohesion of policy and decision-making to provide the necessary
certainty for sustainable economic growth and development.
The monetary policy stance remains accommodative and appropriate, with the real policy rate
remaining slightly negative, notwithstanding the expected temporary breach of the inflation
target. However, further accommodation at this stage is constrained by the upside risks to the
inflation outlook. The MPC has therefore decided to keep the repurchase rate unchanged at
5,0 per cent per annum. As always, the MPC will monitor developments closely and will not
hesitate to act in a manner consistent with its mandate.

Monetary Policy Review June 2013
Statement of the Monetary Policy Committee
20 March 2013
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
There are a number of key developments that this meeting of the Monetary Policy Committee
(MPC) had to consider, not least among them on the domestic front the challenge of moderate
growth, rising inflation, a depreciated currency, a wider current-account deficit and difficult
labour relations and unemployment that remains stubbornly high.
Since the previous meeting of the MPC the domestic inflation outlook has deteriorated slightly.
Risks posed by the depreciation of the rand exchange rate have overshadowed the more
favourable developments, including lower electricity price increases and some moderation in
food price inflation. Nevertheless, inflation is expected to remain contained within the target
range apart from a temporary breach in the third quarter of 2013. The domestic economic
growth prospects remain fragile amid continued tensions in the labour market, particularly in
the mining sector.
The global economy is still characterised by a multispeed recovery. However, recent events in
Europe, particularly as they affect Cyprus, have increased risk and uncertainty in the region,
and have the potential to reignite the banking and sovereign debt crisis and undermine growth
prospects further. The global outlook is also clouded by the fiscal gridlock in the United States
(US) that remains unresolved.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas was 5,9 per cent in February 2013, up from 5,4 per cent in January. The upside surprise
in February was mainly due to the increase in medical insurance costs, which resulted in the
contribution to CPI from miscellaneous goods and services increasing from 0,7 percentage
points to 1,1 percentage points. This category also impacted on core inflation, which increased
markedly from 4,7 per cent in January to 5,3 per cent in February. Petrol prices also contributed
to the upward trend, having increased by 11,9 per cent. Food price inflation measured 6,3 per
cent, down from a recent high of 7,5 per cent in November 2012, and its contribution to overall
inflation declined from 1,0 percentage points to 0,9 percentage points. Administered prices
increased by 8,9 per cent, and by 7,5 per cent, excluding petrol, year-on-year. The producer
price inflation for final manufactured goods measured 5,8 per cent in January.1
The inflation forecast of the Bank reflects a slight deterioration in the inflation outlook for 2013
compared with the previous forecast. The forecasts incorporate the new CPI weights and
rebasing announced by Statistics South Africa (Stats SA), as well as the lower electricity price
increase of 8 per cent granted to Eskom by NERSA. Inflation is now expected to average 5,9 per
cent in 2013 and 5,3 per cent in 2014, compared with the previous forecasts of 5,8 per cent and
5,2 per cent for these respective years. Inflation is expected to breach temporarily the upper
end of the target range in the third quarter of 2013, when it is expected to average 6,3 per cent,
and then to moderate gradually to 5,2 per cent in the final quarter of 2014. This deterioration is
largely due to the depreciation of the rand and higher petrol prices, which more than offset the
impact of the lower electricity price increases and a lower starting point.
The forecast of core inflation is more or less unchanged for 2013 but higher for 2014, yet still
indicates the continued absence of significant demand pressures. This measure is expected
to peak at 5,1 per cent in the second quarter of 2014, and to average 4,8 per cent and 4,9 per
cent in 2013 and 2014 respectively. This forecast is likely to be adjusted upwards in the light of
the increase in medical insurance costs announced earlier today.
Inflation expectations as reflected in the Reuters survey of analysts conducted in February 2013
have remained more or less unchanged since December. Expectations remained anchored
within the target range. but close to the upper end, and, as with the Bank’s forecast, the peak
is expected in the third quarter of 2013.
1.
Statistics South
Africa has adopted
a “stages-ofproduction” concept
for the producer price
index (PPI) and no
longer produces one
aggregated series.
The five producer
price series are (i) PPI
for final manufactured
goods; (ii) intermediate
manufactured goods;
(iii) electricity and
water; (iv) mining; and
(v) agriculture, forestry
and fishing. The PPI
for final manufactured
goods is regarded
as best representing
the effects of price
changes through
the five stages of
production.
Monetary Policy Review June 2013

The global economic outlook presents a mixed picture following a disappointing fourth quarter
in most of the advanced economies. Recent data from the US indicate positive trends in the
labour market and household consumption expenditure due in part to positive wealth effects
from the housing and equity markets. However, uncertainty about the possible negative impulse
from fiscal tightening continues amid political differences over fiscal policy. Economic growth is
still expected to remain below trend in 2013.
The outlook for some of South Africa’s other main advanced-economy trading partners is
less positive. The eurozone remains in recession, and is not expected to recover before mid2013 at the earliest. The tail risks from a sovereign debt crisis appeared to have subsided, but
the uncertainty created by the inconclusive Italian general election and the crisis in Cyprus
have renewed concerns about the stability of the region. The outlook for the United Kingdom
economy remains subdued against the backdrop of continued fiscal austerity.
Growth prospects in the Asian economies are more positive. The Japanese economy is expected
to be bolstered by positive consumer sentiment in response to fiscal and monetary stimuli, but
the response on the capital expenditure side is still cautious. Nevertheless, an improved growth
performance is expected, particularly given the 18 per cent depreciation of the yen against the
US dollar since October 2012. Growth in China is expected to be sustained at relatively robust
levels as fixed investment expenditure remains strong despite a moderation in consumption
expenditure growth. Growth in other emerging markets remains positive.
These trends suggest that monetary policy in the advanced economies will remain
accommodative for some time despite recent fears in the financial markets of an early reversal
of quantitative easing in the US. The relatively weak growth outlook in the advanced economies
has contributed to the subdued global inflation environment.
The exchange rate of the rand continues to pose the main upside risk to the inflation outlook.
Since the beginning of the year, the rand has depreciated by 8,4 per cent against the US dollar
and fluctuated within a range of R8,45 and R9,26. However, given the significant realignment of
global currencies, and particularly the depreciation of the Japanese yen and the pound sterling
against the US dollar, the trade-weighted depreciation since the beginning of the year was more
moderate at 5,6 per cent.
Domestic factors contributing to the recent rand depreciation include continued work stoppages
in parts of the mining sector, which also have the potential to disrupt electricity supplies, and
the further widening of the deficit on the current account of the balance of payments, which
measured 6,3 per cent in 2012. Some narrowing of the deficit is expected in the course of
the year in response to the depreciation, although the degree of response will be constrained
by weak demand from advanced economies as well as strong infrastructure-related import
demands. Mining export growth will also be dependent on the resolution of labour market
issues with a resumption of full production and on the extent of possible shaft closures.
Equity and bond flows to emerging economies have generally moderated in the past few months,
making for a more challenging global environment for financing the deficit. Inflows into South
African bond and equity markets have, however, been sustained, and year-to-date non-resident
net purchases of equities and government bonds have totalled R6,1 billion and R11,3 billion
respectively. These flows have, however, been volatile, and the growing proportion of bonds
owned by non-residents, currently around 37 per cent of the total outstanding stock of debt,
could constrain the pace of inflows.
The rand is likely to remain sensitive to both domestic and global developments. The exchange
rate is expected to remain volatile and subject to overshooting, and further sustained
depreciation would increase the upside risk to the inflation outlook. The Reuters Econometer
survey conducted in February shows that most analysts still expect the rand to appreciate from
current levels during the year, although the degree of dispersion is indicative of the uncertainty
around these forecasts. According to this survey, the consensus forecast for the rand/US$
exchange rate at the end of 2013 is R8,61, with a range of forecasts between R9,19 and R7,80.
Domestic growth prospects remain relatively subdued, notwithstanding a better-thanexpected fourth quarter GDP growth outcome, and positive developments in the mining and

Monetary Policy Review June 2013
manufacturing sectors in January. The economy grew by 2,5 per cent in 2012, having recorded
annualised growth of 2,1 per cent in the fourth quarter, despite a 9,3 per cent contraction in
the mining sector. The moderate pace of recovery is expected to continue in 2013. The Bank’s
forecast is for growth of 2,7 per cent this year, marginally up from the previous forecast of
2,6 per cent, and 3,7 per cent in 2014, compared with a previous forecast of 3,8 per cent. The
risks to these forecasts are assessed to be on the downside.
The flat trajectory of the Bank’s leading indicator of economic activity is consistent with this
forecast. Growth this year is therefore expected to remain below potential output growth of
3,5 per cent, and this is expected to result in a slight widening of the Bank’s revised estimate
of the output gap which, at 2,0 per cent, reflects the continued subdued state of the economy.
The mining sector recorded year-on-year growth of 7,3 per cent in January, with three-month-onthree-month growth of 5,4 per cent following four consecutive months of contraction. Nevertheless,
the sector is expected to remain under pressure, given the unsettled labour relations environment.
The outlook for manufacturing appears to have improved, but this recovery is still very tentative.
The sector grew at a year-on-year rate of 3,9 per cent in January, and by 1,8 per cent on a threemonth-on-three-month basis. This was consistent with improvements in the Kagiso Purchasing
Managers Index, which increased from 49,1 in January to 53,6 in February.
Growth in gross fixed capital formation, which measured 5,7 per cent in 2012, has been on a
moderate upward trend since 2009, driven mainly by investment growth of around 9 per cent
by public corporations and general government. Private-sector investment growth moderated
from 4,6 per cent in 2011 to 3,9 per cent in 2012 due in part to excess capacity in manufacturing
and electricity supply constraints.
While household consumption expenditure has been the main driver of growth since 2010,
its contribution to growth has been diminishing. The general absence of demand pressures
in the economy is reflected in the continued moderation in the growth in real consumption
expenditure by households, which grew by 3,5 per cent in 2012 compared with 4,8 per cent
in 2011. Nevertheless, growth in the consumption of durable goods remained robust at 11 per
cent, compared with demand for services, which grew at only 1,8 per cent in 2012. Sales of
new motor vehicles declined on both a month-on-month and on a three-month-on-three-month
basis in February.
Retail trade sales in January appear to reflect this weakening trend, with a three-month-onthree-month decline of 0,7 per cent, and a lower-than-expected year-on-year increase of 1,9 per
cent. There are indications that consumption growth may moderate further in 2013 amid slower
real income growth, higher inflation, elevated household debt levels, and a possible slow-down
in credit extension to consumers.
Twelve-month growth in banks’ total loans and advances to the private sector measured
8,9 per cent in January, following growth of 10,0 per cent in December. Loans and advances
to the corporate sector grew by 7,5 per cent in January, and to the household sector by
9,9 per cent. Growth in general loans to households – mainly unsecured lending – moderated to
30,1 per cent, following a recent peak growth of 39,3 per cent in June. General loans to
households amounted to 8,3 per cent of total loans and advances, and 14,6 per cent of loans
and advances to household. Growth in this category of lending is likely to be constrained by
lower income growth and high household debt levels. Household debt to disposable income
measured 75,8 per cent in the final quarter of 2012. Non-mortgage debt as a percentage of
total household debt increased from 37 per cent in the third quarter of 2009 to 46 per cent in
the final quarter of 2012.
The trend in wage settlements remains an upside risk to the inflation outlook, although recent
data is somewhat contradictory. The minimum wage in the agricultural sector has been increased
by 52,2 per cent, and indications from the Andrew Levy Employment Publications are that wage
settlements in collective bargaining agreements picked up significantly from 6,8 per cent in
the third quarter of 2012 to 8,2 per cent in the fourth quarter. According to Stats SA, average
salaries and wages per worker in the non-agricultural sector increased over four quarters by
7,0 per cent in the final quarter of 2012, down from 8,9 per cent in the previous quarter, while
unit labour cost increases declined from 7,4 per cent to 5,7 per cent in the same period.
Monetary Policy Review June 2013

The MPC remains concerned about the possible impact of excessively high wage increases
on employment growth. Employment in the formal non-agricultural sector increased by
1,0 per cent during 2012, compared with annual employment growth of 1,6 per cent in 2011.
This included employment growth of 0,2 per cent in the mining and quarrying industry, and a
0,3 per cent contraction in the manufacturing sector. In the fourth quarter of 2012 mining-sector
employment increased by 1 000 employees, following a decline of 16 000 in the third quarter.
Of concern is the seasonally adjusted annualised decline of 0,7 per cent in total non-agricultural
employment during the fourth quarter of 2012.
The recent national government budget tabled before parliament reflects a difficult balance
between a commitment to medium-term fiscal consolidation and the need for counter-cyclical
policy. The projected deficit of 5,7 per cent for the past fiscal year was wider than initially
budgeted for – a result of lower revenue due to weaker economic growth. The fiscal deficit as
a percentage of GDP is budgeted to be 5,1 per cent in the 2013/14 fiscal year, and to decline
to 3,6 per cent by 2015/16. The government net debt-to-GDP ratio is expected to stabilise at
around 40 per cent in 2015/16, well below the international benchmark for debt sustainability of
around 60 per cent.
There are indications that the pressures on inflation emanating from food prices may be
moderating. Food price inflation at the consumer price level declined from a recent high of
7,5 per cent in November 2012 to 6,4 per cent in January and 6,3 per cent in February. A
similar trend is evident at the producer price level where manufactured food inflation declined to
5,9 per cent in January, compared with a recent peak of 11,1 per cent in November 2012.
Similarly, producer price inflation in agricultural products moderated from a recent high of
6,3 per cent in October 2012 to 3,5 per cent in January. Global agricultural commodity prices
have declined, on average, by almost 20 per cent since their recent peak in August 2012, and
expectations are for further moderation in the absence of adverse weather shocks.
Administered prices continue to put upside pressure on inflation, although lower electricity price
increases from the third quarter will dampen some of these pressures. The petrol price, which has
increased by a cumulative R1,24 per litre since January 2013, remains an upside risk. Although
global oil prices have declined over the past few weeks, resulting in an over-recovery of the petrol
price so far this month, it is unlikely to be sufficient to offset the adverse exchange rate impacts
and the fuel levy increases – and a further increase in the petrol price is likely in April.
The MPC continues to assess the balance of risks to the inflation outlook to be on the upside,
mainly due to the exchange rate and wage pressures. These upside risks are mitigated in part
by lower risk from food price inflation. Underlying inflation appears to be relatively contained,
consistent with the moderating trend in consumption expenditure by households.
The economic growth outlook is more or less unchanged from the previous meeting of the MPC,
and risks to the outlook remain on the downside. The unresolved labour disputes in the mining
sector pose a significant risk to the exchange rate and to economic growth through their negative
impact on export revenues, employment growth and investor perceptions of South Africa.
However, the depreciated exchange rate provides an opportunity for the manufacturing
sector in particular to become more competitive despite the challenging export environment.
Ensuring that this increase in competitiveness is sustained will require improved productivity,
and the containment of wage and other cost pressures, which underline the need to keep
inflation under control.
The MPC continues to assess the monetary policy stance to be appropriately accommodative,
given the persistence of the negative output gap. At the same time, further accommodation
remains constrained by the upside risks to the inflation outlook. The MPC has therefore decided
to keep the repurchase rate unchanged at 5,0 per cent per annum. The committee will continue
to apply monetary policy consistent with its mandate of price stability within a flexible inflationtargeting framework.

Monetary Policy Review June 2013
Statement of the Monetary Policy Committee
23 May 2013
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
The South African economy is facing a number of domestic challenges, while headwinds
from the fragile and uneven global recovery remain a constraint to growth. The uncertain,
and increasingly difficult, labour relations environment continues to dominate the economic
landscape, contributing to declining domestic and foreign investor confidence. The growing
vulnerability of the economy to changes in sentiment has been reflected in the depreciating
and volatile exchange rate, which was already under pressure from the widening deficit on the
current account of the balance of payments. Although inflation is forecast to remain relatively
contained, these factors have raised the upside risks to the outlook at a time of worsening real
growth prospects.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas
was 5,9 per cent in April 2013, unchanged from the previous two months. However, the drivers of
the overall rate changed somewhat. Food price inflation measured 6,3 per cent in April, reversing
the downward trend that had prevailed since November 2012. The contribution of food to overall
inflation remained unchanged at 0,9 percentage points, while housing and utilities contributed
1,4 percentage points. Administered prices increased by 8,9 per cent, and by 7,8 per cent
excluding petrol. Core inflation, which excludes food, petrol and electricity, measured 5,2 per
cent – marginally up from 5,1 per cent in March. The headline producer price inflation for final
manufactured goods measured 5,7 per cent in March – up from 5,4 per cent in February.
The inflation forecast of the Bank has remained relatively unchanged since the previous meeting
of the MPC. Inflation is now expected to average 0,1 percentage points lower in 2013 and 2014
at 5,8 per cent and 5,2 per cent respectively, and to average 5,0 per cent in 2015. A temporary
breach of the upper end of the target range is still expected in the third quarter of 2013, but at
a lower average level of 6,1 per cent (6,3 per cent previously), followed by a gradual moderation
of inflation to 4,9 per cent in the final quarter of 2015. The slight improvement is due to changed
assumptions about international commodity prices, including oil, and lower global inflation.
The forecast for core inflation for 2013, at an average of 5,3 per cent, is significantly higher than
the forecast of 4,8 per cent previously. This follows the sharp increase in medical insurance
costs in the February CPI. Core inflation is also expected to be adversely affected over the
coming months by increases in a number of other administered prices, particularly water and
municipal rates and taxes. This measure is expected to peak at 5,4 per cent in both the third
and fourth quarter of 2013, and to average 5,0 per cent and 4,6 per cent in the coming two
years. Despite the higher near-term trend, this indicator is still assessed to reflect an absence of
significant demand pressures.
Inflation expectations, as reflected in the Reuters survey of analysts conducted in April, has
remained relatively stable for some months. The forecast is the same as the Bank’s for 2013,
although higher for the next two years but still within the target range. The relatively anchored
inflation expectations at the upper end of the target range are also evident in the survey
conducted by the Bureau for Economic Research (BER) at Stellenbosch University in the first
quarter of 2013. Overall, respondents expect inflation to average 6,0 per cent in both 2013 and
2014, and 6,1 per cent in 2015.
The global economic environment remains challenging, with different regions growing at varying
rates. Within the advanced economies, the United States (US) appears to be showing a number
of positive signs of recovery: the University of Michigan’s consumer confidence index is at
its highest in almost six years; labour market developments have been more favourable; and
there are strong wealth effects from the booming equity market as well as from the recovering
housing market. However, headwinds can be expected from the fiscal contraction resulting
from the fiscal cliff compromise and the spending cuts that were part of the recent sequester.
The impact of this contraction is expected to be as high as 2 percentage points of GDP.
Monetary Policy Review June 2013

The eurozone remains in recession, having contracted at an annualised rate of 0,9 per cent in
the first quarter of 2013, compared with a contraction of 2,7 per cent in the previous quarter. The
French economy has recorded two consecutive quarters of negative growth, while Germany
managed to avoid recession by recording annualised growth of 0,3 per cent in the first quarter
of this year. The eurozone is constrained by continued deleveraging by households, banks
and governments, and the region is also characterised by increasing financial fragmentation.
Although a slower pace of fiscal consolidation in the periphery has been agreed to in terms
of the bail-out agreements, negative or, at best, very low growth is expected to persist in the
region for some time.
The Japanese economy rebounded from its 2012 recession in the first quarter of 2013, but
it is still too soon to assess the impact of the fiscal, monetary and structural policy stimulus
packages that were announced recently. The yen exchange rate, which has depreciated by
around 30 per cent against the US dollar since October 2012, is likely to contribute positively
to growth.
Emerging markets remain the main global source of growth, but there are signs of moderation in
some of the systemically important countries, particularly China, India and Brazil. The rebalancing
of the Chinese economy away from fixed capital formation and production towards internal
consumption has resulted in some slowdown, which has contributed to the declining trend of
global commodity prices.
The persistence of slow global growth and weaker commodity prices have resulted in a
moderation in global inflation. This is particularly the case with respect to energy prices in the
advanced economies. This combination of lower inflation and slow growth prompted further
monetary easing by the European Central Bank, and with Japan yet to begin with its quantitative
monetary easing, these accommodative policy stances are likely to persist for some time. While
there are concerns about the possible risks posed to financial markets and global capital flows
by an early reversal of the US monetary policy stance, any such action is likely to be extremely
cautious, and is only expected to begin once a sustained recovery is well entrenched. There
are, however, growing concerns that the buoyant conditions in the financial markets in many
countries are indicative of bubbles caused by excessive global liquidity, rather than reflecting
underlying positive growth prospects.
Movements in the exchange rate of the rand continue to be impacted by external developments,
but since mid-2012 they have been compounded by domestic factors, which have undermined
investor sentiment. The increasingly fraught labour relations environment, and high wage
demands in the mining sector in particular, are likely to continue to impact adversely on the
volume of mining exports against a backdrop of falling international commodity prices and
concerns about the widening of the current-account deficit of the balance of payments. These
developments also have the potential to affect, directly and indirectly, South Africa’s credit
ratings, and increase the cost of much-needed finance. The rand has also been influenced
in recent weeks by the hedging related to renewable energy projects and by a strengthening
dollar. Since the previous meeting of the MPC, the rand has depreciated by around 4,6 per cent
against the US dollar and by 3,7 per cent on a trade-weighted basis.
Despite the current negative sentiment towards the rand, non-residents have remained net
buyers of bonds and equities this year. Since January, non-residents have been net buyers of
equities to the value of R12,7 billion, and bonds to the value of R22,5 billion. However, these
positive inflows can reverse very quickly in response to changing risk perceptions. Furthermore,
any hedging of these exposures, as is sometimes the case during periods of rand weakness,
puts pressure on the rand even though the underlying assets are still held by non-residents.
As we have noted previously, the impact of the weaker rand on inflation is dependent on the
extent, speed and duration of the depreciation, as well as the phase of the business cycle. While
some of the recent decline reflects changes in the underlying fundamentals, the rand remains
highly vulnerable to changes in sentiment. The rand has a tendency to overshoot in either
direction and, at times, for extended but uncertain periods, which makes the impact on inflation
difficult to forecast. The current level of the exchange rate, if sustained, poses a significant
upside risk to the inflation outlook.

Monetary Policy Review June 2013
Domestic growth prospects remain fragile amid low consumer confidence, continued output
disruptions in the mining sector, electricity supply constraints and a weak global environment.
The growth forecast of the Bank has been revised down from 2,7 per cent to 2,4 per cent for
2013 and from 3,7 per cent to 3,5 per cent in 2014. Growth is expected to accelerate to 3,8 per
cent in 2015. At these growth rates, the negative output gap will widen further before stabilising
next year, and begin to close during 2015. This outlook is consistent with the flat trajectory of
the Bank’s leading indicator of economic activity. Notwithstanding the increase in the Rand
Merchant Bank/BER Business Confidence Index in the first quarter of 2013, given the difficult
labour relations environment in the country and the risks to global growth, the downside risk to
growth remains as does the possibility of increased job losses.
Although the physical volume of mining production recorded a quarter-to-quarter increase of
6,1 per cent in the first quarter of 2013 following the disruptions in the previous quarter, output
contracted on a month-to-month basis in both February and March. The outlook for the sector
remains bleak, with threats of shaft closures and retrenchments, falling commodity prices, high
wage demands, and a risk of protracted periods of industrial action and further supply disruptions.
Manufacturing production declined in the first quarter of 2013 compared with the previous
quarter, although the extent of the decline is complicated by the seasonal adjustment for the
Easter weekend, which fell over March and April. The Kagiso Purchasing Managers Index,
which increased marginally above the neutral 50 level in April, reflects the uncertain outlook for
the sector. The depreciated value of the rand should improve the competitiveness of the sector,
provided that gains are not eroded by rising wages and prices. The weaker rand is expected to
result in some narrowing of the trade deficit. However, the subdued global demand, together
with robust import volume growth, driven to a large extent by infrastructure projects, suggests
that the net export position will remain negative over the forecast period and continue to be a
constraint on growth. Nevertheless, the BER Manufacturing Confidence Index, while still low,
improved somewhat in the first quarter.
The outlook for household consumption expenditure – in recent years the main driver of growth
– appears to have weakened with the FNB/BER Consumer Confidence Index declining to a
nine-year low in the first quarter of 2013. Retail sales grew at a modest quarter-to-quarter rate
of 0,6 per cent in the first quarter of this year, while sales contracted on a month-to-month
basis in March. This was consistent with the decline in the BER Retail Confidence Index in the
first quarter. New vehicle sales growth, while increasing significantly on a year-on-year basis,
moderated to 0,1 per cent on a three-month-to-three-month basis in April 2013.
Consumption expenditure by households is expected to be constrained in part by lower real
income growth, significant increases in the price of electricity and petrol, and high debt levels. The
slowdown in expenditure growth has also been related to the moderation in some categories of
credit extension by banks. Year-on-year growth in total loans and advances to the private sector
moderated steadily from a recent peak of 10 per cent in December, to 8,1 percent in March
2013. Excluding the weak growth in mortgage advances, year-on-year growth in loans and
advances declined from 18,5 per cent in December 2012 to 14,5 per cent in March. Although
growth in unsecured lending to households remains at high levels, it has declined continuously
since September 2012, to measure 27,9 per cent in March. This moderating trend is expected to
continue, due in part to the increasing number of impaired advances in this category of lending
at some of the banks. However, the ratio of total impaired advances to total loans and advances
in the banking sector continues to decline and stands at just below 4 per cent.
A number of sectors in the economy are entering into wage-bargaining rounds. The MPC is
increasingly concerned about the prospect of settlements well above inflation and productivity
growth, and the risk of protracted and disruptive strike action, with negative implications for
growth and exports. Furthermore, excessively high settlements will come at the expense of
retention of employees, employment creation and could result in higher inflation. The risk of a
wage-price spiral remains high. This would negate the benefits of wage increases to workers,
and undermine the competitive gains of the currency depreciation. According to Andrew Levy
Employment Publications, the overall wage settlement rate in collective bargaining agreements
increased from 7,6 per cent in 2012 to 7,9 per cent in the first quarter of 2013. Should this
upward momentum continue, it is likely to impart an upside risk to inflation. At a time of high and
Monetary Policy Review June 2013

rising unemployment, and slowing growth, the imperative of an economy-wide commitment
to wage and salary restraint at all levels, including executive pay, cannot be over-emphasised.
International oil prices are expected to remain constrained by the subdued global growth
environment, but vulnerable to political developments in the Middle East in particular. Having
reached a recent high of around US$118 per barrel in mid-February of this year, Brent crude
oil prices have remained in a range of between US$97 and US$105 per barrel since April. The
domestic price of petrol increased by 12 cents in April, but declined by 73 cents in May, mainly
as a result of lower international oil prices. Although there is currently a small average overrecovery on the petrol price, recent exchange rate movements have raised the probability of
further petrol price increases in the near term.
The higher CPI food price increases in April may have reversed the favourable food price
developments observed in recent months. Since the end of November 2012 to date, domestic
maize prices have declined by about 17 per cent and wheat prices by around 9 per cent. This
is reflected in the producer price index for agriculture which increased at a year-on-year rate of
1,4 per cent in February and declined by 0,2 per cent in March. Manufactured food prices, by
contrast, increased by 6,1 per cent and 6,3 per cent in the same months respectively, in line
with CPI food price increases. The exchange rate poses an upside risk to food inflation as the
prices of agricultural commodities such as wheat and maize are based on international prices.
The MPC is increasingly concerned about the deteriorating outlook for the South African
economy. There are a number of critical domestic issues that are contributing to the vulnerability
of the economy that need to be addressed. urgently These include the financing of the deficit on
the current account of the balance of payments; the fractious labour relations environment and
the associated risks of protracted work stoppages and excessive wage increases; electricity
supply constraints; upside risks to inflation; downside risks to growth and employment creation
in a context of high unemployment; and declining domestic and foreign investor confidence
which could impact directly on capital flows. These interrelated developments are reflected in
the volatility and weakness in the exchange rate. There is an urgent imperative for all parties
– government, business, labour and civil society – to interact and address these issues and
vulnerabilities at a national level. While the Bank is prepared to play its part, many of these
challenges are beyond the role, scope and effectiveness of monetary policy.
While a depreciated exchange rate is part of the balance-of-payments adjustment mechanism,
the competitive advantages thereof need to be realised through price and wage restraint. In the
absence of such restraint, the outcome is simply higher inflation, with the risk of an exchange
rate–inflation spiral. Given the current unsettled environment in the economy, the MPC assesses
the risks to inflation to be on the up side, while many of the above factors contribute to a
downside risk to growth.
The MPC assesses the current stance of monetary policy to be accommodative. Given the risks
outlined above, the scope for further monetary easing is limited at this stage. The MPC has
therefore decided to leave the repurchase rate unchanged at 5 per cent per annum. The MPC
is ready to act appropriately in either direction in the event of material changes in the outlook.

Monetary Policy Review June 2013
Abbreviations
Alsi

All-Share Price Index
API

administered price index
BCI

Business Confidence Index
BER

Bureau for Economic Research [Stellenbosch University]
BIS

Bank for International Settlements
BoE

Bank of England
BOJ

Bank of Japan
BRICS

Brazil, Russia, India, China and South Africa
CBRT

Central Bank of the Republic of Turkey
CCI

Consumer Confidence Index
COICOP

Classification of Individual Consumption by Purpose
COPOM
Brazil’s Monetary Policy Committee
CPI

consumer price index
CPIX

consumer price index excluding mortgage interest cost for metropolitan
and other urban areas
CRB

Commodity Research Bureau
ECB

European Central Bank
EMBI+

[JPMorgan] Emerging Markets Bond Index Plus
FAO

Food and Agriculture Organization
FNB

First National Bank
GDP

gross domestic product
IEA

International Energy Agency
IES

Income and Expenditure Survey
ILO

International Labour Organization
IMF

International Monetary Fund
JGB

Japanese Government Bond
MPC

Monetary Policy Committee
MPF

Monetary Policy Forum
MPR

Monetary Policy Review
MTBPS

Medium Term Budget Policy Statement
MTEF

Medium Term Expenditure Framework
NAB

non-alcoholic beverages
NEER

nominal effective exchange rate
NERSA

National Energy Regulator of South Africa
OECD

Organisation for Economic Co-operation and Development
OMT

Outright Monetary Transactions
OPEC

Organization of the Petroleum Exporting Countries
PBC

People’s Bank of China
PMI

Purchasing Managers’ Index
PPI

producer price index
PSBR

public-sector borrowing requirement
QE

quantitative easing
QES

Quarterly Employment Statistics
QLFS

Quarterly Labour Force Survey
RBA

Reserve Bank of Australia
RBI

Reserve Bank of India
REER

real effective exchange rate
RMB

Rand Merchant Bank
S&P

Standard and Poor’s
SSA

sub-Saharan Africa
TRJ

Thompson Reuters Jefferies
UK

United Kingdom
US

United States
VIX®

Chicago Board Options Exchange Market Volatility Index
WGBI

World Government Bond Index [Citi]
Monetary Policy Review June 2013

Glossary
repo

repurchase [rate]
Stats SA

Statistics South Africa
the Bank
South African Reserve Bank
the Fed

United States Federal Reserve