Monetary Policy
Review


May 2009
Monetary Policy
Review
May 2009
South African Reserve Bank
Monetary Policy Review May 2009
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ISSN: 1609-3194
South African Reserve Bank
Monetary Policy Review May 2009
Contents
Monetary Policy Review


Statements issued by Mr T T Mboweni, 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


Recent conventional and unconventional policy measures adopted by monetary


Figures


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


South African Reserve Bank
Monetary Policy Review May 2009


Tables


B1.1 Change in weights of administered prices within various inflation measures


B1.3 Basket of administered prices that are not regulated in the CPI for all


Real value of building plans passed and buildings completed in larger municipalities...


South African Reserve Bank

Monetary Policy Review May 2009
Monetary Policy Review
Introduction
Global output and trade have contracted sharply in the period since the previous
Monetary Policy Review was published in November 2008. Financial markets remain
under stress, despite the introduction of extensive fiscal and monetary policy measures
by governments and central banks, and falling asset prices and disruptions to credit
markets have impacted powerfully on consumer demand. There is growing uncertainty
about the depth and duration of the economic slowdown, which is generally viewed as
the most severe of the post-war period.
The South African economy has not escaped the impact of these developments.
Domestic production has contracted as a result of weak domestic demand and a
significant decline in export demand. Real gross domestic product (GDP) contracted at
an annualised rate of 1,8 per cent in the final quarter of 2008, largely as a result of a
marked slowdown in the manufacturing sector, and there is a general expectation that
domestic growth will remain lacklustre in 2009. Inflation is expected to continue to trend
downwards, although the volatility of developments in global markets and elevated levels
of uncertainty subject inflation forecasts to higher risk than usual.
This Monetary Policy Review begins with an analysis of inflation developments and the
factors that have impacted on inflation, followed by an assessment of recent monetary
policy developments and a discussion of the outlook for inflation. Three topical issues
are focused on in the boxes. The first box notes the impact on the administered prices
index of the recent changes to the consumer price index (CPI) announced by Statistics
South Africa (Stats SA), while the second discusses the policy measures adopted by
monetary authorities in various countries in response to the global financial crisis. The
third box discusses the inflation-linked bond market in South Africa with a view to
facilitating the interpretation of break-even inflation rates.
Recent developments in inflation
This section reviews recent trends in the main inflation indices and analyses
developments in the main factors impacting on inflation in South Africa.
The evolution of indicators of inflation
The inflation measure targeted by the South African Reserve Bank (the Bank) until the
end of 2008 was specified in terms of the consumer price index excluding mortgage
interest costs for metropolitan and other urban areas (CPIX). As Figure 1 shows, the
year-on-year CPIX inflation rate peaked at 13,6 per cent in August 2008 and then
declined continuously to 10,3 per cent in December. The main drivers of inflation over
the last quarter of 2008 were food prices, fuel and power (electricity prices), and
transport (petrol prices). The upward bias included in the year-on-year CPIX as a result
of the treatment of non-discounted clothing and footwear averaged 0,29 percentage
points over the September–December 2008 period.1 Average CPIX inflation for
the calendar year 2008 was 11,3 per cent, with the upward bias averaging
0,24 percentage points.

From January 2008,
Stats SA no longer included
sale items in the clothing and
footwear prices collected for
the CPI. This change in the
treatment of clothing and
footwear prices, together with
the policy of not revising the
CPI and CPIX indices, created
an upward bias in the annual
rates of change of the indices
for the period January–
December 2008.

Since the release of the January 2009 CPI data, the targeted inflation measure has been
the headline CPI (CPI for all urban areas). The new CPI includes a number of significant
changes when compared to the previous CPI in terms of the methodology of data
collection, classification and weighting (these changes were discussed in the November
2008 Monetary Policy Review). The year-on-year CPI inflation rate was 8,1 per cent in
January 2009. It then rose to 8,6 per cent in February before declining marginally to
8,5 per cent in March (Figure 1). Inflation in the first quarter of the year was driven mainly
by increases in food prices, alcoholic beverages, household maintenance and repair,
electricity, and in financial services.
Table 1
Contributions to CPI inflation
Percentage change over twelve months* and percentage points

Jan
Feb
Mar
8,1
8,6
8,5
Of which:

Source: Statistics South Africa
Table 1 examines the contributions to the CPI inflation rate. In January 2009 the main
contributors to the year-on-year inflation rate of 8,1 per cent were food prices
(2,4 percentage points), housing and utilities (2,1 percentage points), and miscellaneous
goods and services (1,4 percentage points). In February a similar pattern is observed,
Monetary Policy Review May 2009
South African Reserve Bank
Percentage change over twelve 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
although there were increased contributions from transport (0,3 percentage points) and
from miscellaneous goods and services (1,6 percentage points), driven by increases in
the insurance as well as health services components. March saw a decline in the
contribution of housing and utilities (1,8 percentage points) due to lower inflation in
rentals for housing and owners’ equivalent rent (surveyed quarterly). The movements in
the contribution of transport in Table 1 were driven by changes in the price of petrol. The
Gauteng price of 95 octane unleaded petrol, which had declined from R10,70 per litre
in July 2008 to R6,01 per litre in January 2009, rose to R6,61 per litre in February and
R7,07 per litre in March.
The rates of increase in the prices of food items in the consumer price basket generally
slowed in the period under review (Figure 2). The year-on-year inflation rate for all food items
slowed from 19,2 per cent in August 2008 to 16,1 per cent in January 2009 and a still-high
14,9 per cent in March. This trend has been driven by slowly declining, albeit persistently high,
inflation in bread and cereals (36,5 per cent in August 2008 to 19,9 per cent in March 2009),
and meat (11,9 per cent to 10,8 per cent over the same period). Vegetable price inflation
has been one of the factors limiting the decline in food price inflation, increasing sharply
from a low of 0,5 per cent in September 2008 to 19,3 per cent in February 2009 before
recording 18,6 per cent in March.
The effect of excluding petrol, food and non-alcoholic beverages, and electricity prices from
the CPI inflation measure is considered in Table 2. Since petrol prices have provided
downward pressure on CPI inflation during 2009, despite rising in recent months, excluding
them from the CPI results in higher inflation rates for this core measure than the 8,5 per cent
recorded for headline CPI in March. Excluding petrol prices, the inflation rate for the
remaining items in the headline CPI was 9,5 per cent in March. Food and non-alcoholic
beverages, by contrast, have provided upward pressure on CPI inflation. If these items had
been excluded, headline inflation would have been lower at 7,5 per cent in March, although
notably higher than the 6,6 per cent recorded for this core measure in January. If both petrol
prices and food and non-alcoholic beverages had been excluded from the CPI, inflation
would have been 8,6 per cent in March. Finally, if energy had been excluded along with the
other categories, an inflation rate of 8,0 per cent would have been recorded in March 2009.
South African Reserve Bank

Monetary Policy Review May 2009
Percentage change over twelve months
-10

All food items

Milk, cheese and eggs

Bread and cereals

Vegetables

Meat

Targeted inflation measure
Figure 2
Targeted inflation* and food inflation
* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban areas
thereafter
Source: Statistics South Africa

Table 2
The effect of food, petrol and electricity prices on headline inflation
Percentage change over twelve months

Jan
Feb
Mar

NAB: Non-alcoholic beverage
Source: Statistics South Africa
The inflation rates for the goods and services categories of the CPI in 2009 are presented
in Table 3. Measured over twelve months, goods prices increased by 7,9 per cent in
January, and by 8,7 per cent in February and March. Within the goods category, inflation
for non-durable goods has been far higher (11,8 per cent in March) than for semi-durable
(6,6 per cent in March) and durable (2,9 per cent in March) goods. Services prices rose
by 8,2 per cent in January, by 8,5 per cent in February and by 8,4 per cent in March.
Table 3
CPI: Goods and services inflation
Percentage change over twelve months

Jan
Feb
Mar

Source: Statistics South Africa
Administered prices play a potentially important role in the inflation process. The changes to
the CPI made by Stats SA have also impacted on the administered prices index, as
discussed in Box 1. Table 4 shows that the year-on-year inflation rate for administered
prices was 1,4 per cent in January 2009 and 2,8 per cent in February and March. The
inflation rate for regulated items increased from -0,7 per cent in January to
1,5 per cent in February before slowing to 0,6 per cent in March, largely as a result of
movement in the petrol price. The inflation rate for unregulated items was constant at 5,0 per
cent in January and February, and then increased to 6,8 per cent in March, largely as a
result of increases in the cost of schooling, tertiary education and university boarding fees.
Table 4
Administered prices
Percentage change over twelve months

Jan
Feb
Mar

Source: Statistics South Africa
Monetary Policy Review May 2009
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South African Reserve Bank

Monetary Policy Review May 2009
Box 1 Administered prices in the consumer price index
An ‘administered price’, as reported in the consumer price index (CPI) published by Statistics South
Africa (Stats SA), is defined as “the price of a product which is set consciously by an individual
producer or group of producers and/or any price, which can be determined or influenced by
government, either directly or through a government agency/institution without reference to market
forces”.2 This group of prices is of particular interest to monetary policy-makers as they constitute a
significant portion of the CPI that may not be influenced by monetary policy implementation.
Stats SA reports the administered price index (API) as having a total weight of 14,66 per cent in the
current CPI for all urban areas. This is lower than the previous weights of 20,01 per cent in the
consumer price index excluding mortgage interest costs (CPIX) for metropolitan and other urban
areas and 17,91 per cent in the CPI for metropolitan and other urban areas (Table B1.1).3 As Table
B1.1 shows, most components of the API have a lower weighting in the new CPI when compared to
both the previous CPI and CPIX measures that were used until the end of 2008.
Table B1.1 Change in weights of administered prices within various inflation
measures according to the classification of individual consumption
by purpose
Per cent
Weights (2000)
Weights (2008)
CPIX for
CPI for
CPI for
metropolitan and
metropolitan and
all urban
other urban areas
other urban areas
areas

Source: Statistics South Africa

Statistics South Africa,
2009. “Consumer price index:
January 2009”, Statistical
release P0141. Pretoria:
Statistics South Africa,
25 February.

The reason for the differing
weights of the API in the CPIX
and CPI for metropolitan and
other urban areas is the result of
a reweighting that occurs in the
index when the interest
component is removed. This
ensures that the total weight of
both indices is 100 per cent and
hence all components remaining
in the CPIX have a higher
weighting than in the CPI.

Monetary Policy Review May 2009
South African Reserve Bank
The exceptions to this are assessment rates, motor licence and registration fees, cellular telephone
call charges, and university boarding fees. These changes are largely the result of changes in
spending patterns captured in the Income and Expenditure Survey conducted in 2005/06.
The API is divided into a regulated component and an unregulated component, which are both
reported in the CPI publication. Regulated administered prices are those that are set according to
government’s policy objectives and may or may not have an economic regulator. The products and
services included in regulated administered prices, as well as their weight in the CPI for all urban areas
are shown in Table B1.2. Table B1.3 shows the products and services included in the unregulated
portion of the API.
Table B1.2 Basket of regulated prices in the CPI for all urban areas
Per cent
Group
Products and
Reasoning for inclusion
Weight
services
Housing
Total
2,94
Water
Set by local government within Department of
Water Affairs and Forestry guidelines
1,10
Electricity
Set by local government and regulated
by National Electricity Regulator
1,68
Paraffin
Regulated by Department of Minerals and Energy
0,16
Transport
Total
3,93
Petrol
Regulated by Department of Minerals and Energy
3,93
Communication Total
2,75
Telephone fees
Regulated by Independent Communications
Authority of South Africa (ICASA)
1,26
Postage
Regulated by government
0,02
Cellular telephone Regulated by Independent Communications
calls
Authority of South Africa (ICASA)
1,47
Total
9,62
Source: Statistics South Africa
Table B1.3 Basket of administered prices that are not regulated in the CPI for
all urban areas
Per cent
Group
Products and
Reasoning for inclusion
Weight
services
Housing
Total
2,22
Assessment rates
A tax set by local government
2,07
Sanitary fees
Set by local government
0,06
Refuse removal
Set by local government
0,09
Transport
Total
0,23
Public transport: Trains
Set by government agency
0,04
Motor licences
Set by provincial government
0,09
Motor registrations
Set by provincial government
0,10
Recreation and
culture
Total
0,13
Television licences
Set by government agency
0,13
Education
Total
2,18
School fees
Set by government agencies (schools)
1,28
Universities/technikons/
Set by government agencies
colleges
(universities, technikons)
0,90
Restaurants and
hotels
Total
0,28
University boarding fees
Set by government agencies (universities)
0,28
Total
5,04
Source: Statistics South Africa
Inflation measured in terms of the year-on-year change in the headline producer price
index (PPI) continued to decline in the period under review, from 14,5 per cent year on
year in October 2008 to 5,3 per cent in March 2009. Focusing on the food component
of the PPI, Figure 3 plots the inflation rates for the agricultural food and food at the
manufacturing-level components, alongside that for food in the CPI. The figure shows
that upward pressure on food price inflation at the consumer level from food production
prices has been easing for some time. The inflation rate for the agricultural food PPI has
declined since the end of 2007, falling below that of food in the CPI in April 2008 and
PPI inflation for food at the manufacturing level has been slowing since July 2008, falling
below the CPI food inflation rate in October 2008.
Factors affecting inflation
This section reviews recent developments in some of the main drivers of inflation in
South Africa. These include the external environment and the exchange rate, domestic
demand and output, fiscal policy, and monetary conditions. A discussion of the outlook
for these variables and their likely impact on inflation is presented in a later section.
International economic developments
Worldwide economic growth slowed significantly in 2008, buffeted by the deep
financial crisis, sharp run-ups in energy and food prices, and declines in many
developed economies’ housing markets. According to the most recent International
Monetary Fund (IMF) data, the global economy recorded growth of 3,2 per cent in
2008, compared with 5,2 per cent in 2007 (Table 5). Global real GDP fell at an
unprecedented annualised rate of 5 per cent in the fourth quarter of 2008.
South African Reserve Bank

Monetary Policy Review May 2009
Percentage change over twelve months

Source: Statistics South Africa
Figure 3
Food prices in the PPI and CPI
-15
-10
-5

PPI – food at agricultural level
Consumer prices – food
PPI – food at manufacturing level

Table 5
Annual percentage change in real GDP and consumer prices
Share of global
Consumer
real GDP*
Real GDP
prices**


Other emerging-market and

Commonwealth of Independent States ....

GDP shares based on the IMF’s purchasing-power-parity valuation of country GDPs for 2008
**
Zimbabwe excluded
Source: IMF World Economic Outlook, April 2009
The slide in global growth has proved to be far more severe than most forecasters had
projected prior to the failure of Lehman Brothers and the intensification of uncertainty in its
wake. The business cycle dating committee of the United States (US) National Bureau of
Economic Research determined that a peak in economic activity occurred in the US
economy in December 2007. The peak marked the end of the 73-month expansion that
began in November 2001 and the beginning of a US recession. For the US, economic
growth of 1,1 per cent was recorded for the year 2008 compared with 2,0 per cent in 2007.
However, growth in the US had weakened considerably by the second half of 2008 and
declined at an annualised pace of 6,3 per cent in the fourth quarter of 2008 – the largest
negative value since 1982. Consumer spending, which comprises about 70 per cent of total
expenditure in the economy, declined at the fastest pace in almost three decades.
Japan is in a sounder financial position than most advanced economies, but the country’s
growth depends heavily on exports, which have been hit hard by declining foreign
demand. Thus, despite Japanese banks’ lower exposure to US mortgage-backed
assets, Japan slipped into a recession as international trade diminished rapidly. Japan’s
economy shrank in the final quarter of 2008 at an annualised rate of 12,1 per cent – the
fastest since the 1974 oil shock. The sharp fall in output reflects plunging net exports and
business investment, and faltering private consumption. Consequently, the economy of
Japan shrank by 0,6 per cent in 2008, compared with real growth of 2,4 per cent in 2007.
For the euro area, economic growth of 0,9 per cent was recorded for the year 2008
compared with 2,7 per cent in 2007. First estimates show that real output had
declined rapidly in the final quarter of 2008 – contracting the most in nearly 13 years
as real GDP fell by 6,3 per cent at an annualised rate. Overall eurozone consumer
price inflation of 3,3 per cent in 2008 was well above the target ceiling of the European
Central Bank (ECB).
Monetary Policy Review May 2009
South African Reserve Bank
In the United Kingdom (UK), real GDP grew by 0,7 per cent in 2008 compared with 3,0 per
cent in 2007 as further weakening in the housing market continued to impact negatively on
the components of final demand. Inflation in the UK rose from 2,3 per cent in 2007 to
3,6 per cent in 2008.
The confluence of weakening external demand, tightening financing constraints and
declining commodity prices led to much weaker growth outcomes in a broad swath of
emerging economies. For developing Asia, recent economic data indicate that real
output growth moderated to 7,7 per cent in 2008 from 10,6 per cent in 2007. Growth
in China and India is slowing, albeit from high rates, but domestic demand is being
supported by a strong policy stimulus. The Chinese economy recorded growth of 9 per
cent in 2008, while India’s economy recorded growth of 7,3 per cent.
Growth in Africa remained relatively strong in 2008, with an expansion in real GDP of
5,2 per cent but commodity prices fell sharply in 2008 from mid-year highs, causing an
especially large loss of income for commodity exporters. The severe deterioration in
external growth not only reduced demand for African exports, but also began curtailing
workers’ remittances and the downturn was most pronounced in oil-exporting countries
and other commodity-exporting countries. The 10,1 per cent inflation rate in 2008 was
significantly higher than the rate of 6,3 per cent recorded the previous year.
Oil prices
Oil markets have been severely affected by the rapid slowdown in global economic
activity in the second half of 2008. With supply exceeding demand, substantial inventory
accumulation occurred and international oil prices declined sharply. The price of Brent
crude oil fell from record highs of above US$145 per barrel in July 2008 to below US$35
by the end of the year (Figure 4). After the Organization of the Petroleum Exporting
Countries (OPEC) announced in December 2008 a reduction in production quotas of
4,2 million barrels per day with effect from January 2009, oil prices fluctuated around
US$45 per barrel during the period from mid-February to mid-March 2009. In recent
weeks prices have risen and have fluctuated around the US$50 per barrel level.
South African Reserve Bank

Monetary Policy Review May 2009
Figure 4
Price of Brent crude oil

J M M J S N

J M M J S N

J M M J S N

J M M J S N

J M M J S N

J M M J S N
US dollar per barrel
Source: Bloomberg

International monetary policy developments
The backdrop to international monetary policy developments in recent months was the
continued weakening of the global economy and financial markets with inflation beginning
to trend downwards in many countries. Consequently, central banks around the globe
continued to ease their monetary policy stance aggressively. Since September 2008,
policy rates have been reduced by central banks in most countries (Table 6), including
Australia, Brasil, Canada, Chile, the Czech Republic, Denmark, Sweden, the euro area,
Hungary, India, Indonesia, Israel, Malaysia, Mexico, Poland, South Korea, Taiwan,
Thailand, Turkey and the UK.
Table 6
Selected central bank interest rates
Per cent
Latest decision
(change in
Countries
1 Sep 2008
30 Apr 2009
percentage points)
2,00
0,00–0,25
29 Apr 2009
(0,00)
0,50
0,10
30 Apr 2009
(0,00)
4,25
1,25
02 Apr 2009
(-0,25)
5,00
0,50
09 Apr 2009
(0,00)
3,00
0,25
21 Apr 2009
(-0,25)
4,60
2,00
03 Apr 2009
(-0,25)
4,50
0,50
21 Apr 2009
(-0,50)
2,75
0,00–0,75
12 Mar 2009
(-0,25)
7,25
3,00
07 Apr 2009
(-0,25)
8,00
2,50
30 Apr 2009
(-0,50)
4,25
0,50
27 Apr 2009
(0,00)
7,47
5,31
22 Dec 2008
(-0,27)
3,50
0,50
30 Apr 2009
(0,00)
9,00
7,50
03 Apr 2009
(-0,25)
3,50
2,00
29 Apr 2009
(0,00)
5,25
2,00
12 Mar 2009
(0,00)
3,63
1,25
26 Mar 2009
(0,00)
3,75
1,25
08 Apr 2009
(-0,25)
9,00
4,75
21 Apr 2009
(-0,25)
13,00
10,25
29 Apr 2009
(-1,00)
7,75
1,75
09 Apr 2009
(-0,50)
8,25
6,00
17 Apr 2009
(-0,75)
3,50
1,75
26 Mar 2009
(0,00)
8,50
9,50
20 Apr 2009
(0,00)
6,00
3,75
29 Apr 2009
(0,00)
11,00
12,50
24 Apr 2009
(-0,50)
16,75
9,75
16 Apr 2009
(-0,75)
15,50
15,50
08 Apr 2009
(-1,50)
Source: National central banks
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South African Reserve Bank
Box 2 Recent conventional and unconventional policy measures adopted
by monetary authorities in response to the global financial crisis
With inflation concerns waning and risks to the economic outlook deepening, monetary
authorities in various countries have used a range of conventional and unconventional policy tools
to support their economies and ease credit market conditions. As inflation fears have receded,
central bankers in many countries have been at the forefront of attempts to sustain demand in
the face of severe financial disruptions. In an attempt to stabilise their financial systems,
governments in many developed countries have also implemented additional policy measures.
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Monetary Policy Review May 2009
Central banks in some developed countries have reacted pre-emptively to the rising threat of
deflation. Policy rates in many countries are nearing the zero interest rate floor after having been
cut sharply – bringing them to 0,5 per cent or less in some countries (Canada, Japan, the United
Kingdom (UK) and United States (US)) and to unprecedented lows in others (including the euro
area and Sweden). Central banks in developed countries have attempted to maximise relief in
dislocated markets – increasing credit availability and lowering spreads – while minimising
possible longer-term instability. The European Central Bank (ECB) cut the margin between its
benchmark rate and the cost of borrowing from its standing facility from 100 to 50 basis points.
The margin between the benchmark rate and interest paid on banks’ deposits was also
narrowed to 50 basis points. Furthermore, the ECB broadened the pool of eligible collateral
significantly and introduced additional longer-term central bank operations. Monetary authorities
in some developed countries have followed multiple strategies involving continued provision of
liquidity and extended guarantees of bank liabilities. Major banks in the US, the UK and Europe
were provided with new capital and guarantees against losses from holdings of legacy (formerly
known as ‘toxic’) assets. The Federal Deposit Insurance Corporation (FDIC) in the US announced
programmes to guarantee selected liabilities of FDIC-insured depository institutions and their
holding companies. It later also expanded its guarantees of bank liabilities temporarily to include
unsecured obligations and non-interest-bearing transaction deposits.
A number of central banks have introduced a range of new instruments, including purchases of
long-term government securities and more direct measures to support intermediation. In the US
the nearing zero floor has constrained room for further cutting, and lower interest rates have been
supported by the use of less conventional approaches, using both the size and composition of
the Federal Reserve’s (the Fed) balance sheet to support credit intermediation. The “crediteasing” strategy announced by the Fed is aimed at providing direct support to credit markets by
providing funding and guarantees to financial intermediaries in, for example, the US commercial
paper and residential mortgage-backed securities markets. The Fed established new lending
facilities and expanded existing facilities by jointly establishing with the US Treasury the Term
Asset-Backed Securities Loan Facility (TALF) that lends against asset-backed securities
collateralised by student loans, credit card and other loans. The Fed’s programmes to purchase
up to US$300 billion in longer-term Treasury securities and a combined US$1,45 trillion in agency
and agency-backed mortgage-backed securities are aimed at lowering key borrowing costs for
households and companies.
Per cent

FOMC: Federal funds target rate
ECB: Main refinancing rate
UK: Repo rate
Japan: Uncollateralised overnight
call rate
Figure B2.1
Policy rates

Source: National central banks

Monetary Policy Review May 2009
South African Reserve Bank
Central banks in the UK and Japan have also commenced purchasing long-term government
securities to provide direct support to illiquid credit markets. In March 2009 the Bank of England
announced that it would buy £150 billion of government and corporate bonds as part of an
unprecedented attempt to revive the UK economy. The Bank indicated that it would favour buying
assets from institutions other than banks, and would focus on medium and long maturities. As an
additional step to increase the availability of corporate credit, the Bank of England had previously
set up an asset purchase programme implemented through a specially created fund and the
bank’s commercial paper facility had already become operational in February 2009. As some
central banks have become key intermediaries in the credit process, their balance sheets have
expanded rapidly. For example, the Fed’s balance sheet has expanded from less than US$1 trillion
in September 2008 to over US$2 trillion at the end of March 2009. Including TALF, the Fed’s
balance sheet could expand to over US$3 trillion – or more than 20 per cent of GDP in the US.
To put the scale of its most recently announced quantitative easing into perspective, the
US$1,25 trillion in agency mortgage-backed securities the Fed now plans to purchase in 2009
represents about one-quarter of the market. Moreover, the US$300 billion in US Treasuries the Fed
plans to purchase in the next six months represents nearly 10 per cent of marketable notes and
would bring its total ownership to roughly one-quarter of the market. The TALF programme is also
gaining momentum and could be expanded to US$1 trillion and eventually include a wide variety
of financial assets (possibly including legacy assets). Having already reduced the key interest rate
that it controls to nearly zero, the central bank has increasingly turned to alternatives such as
buying securities. The interventions on 18 March 2009 were the biggest to date, almost doubling
all of the Fed’s measures in the past year.
Central banks in emerging economies have been confronted by the need to sustain external
stability in the face of highly fragile financing flows. Given the current global economic outlook,
emerging-market financing is potentially more vulnerable than in the case of advanced economies
due to the possibility of “sudden stops”. Emerging economies that have borrowed heavily in foreign
currency are also more vulnerable to exchange rate depreciation. Governments in developing
countries have in general provided fiscal support on a much smaller scale than in developed
countries, with China and Saudi Arabia being the important exceptions. China’s central bank has
ensured sufficient liquidity to sustain economic growth by implementing a moderately loose
monetary policy. The government has encouraged banks to lend in support of the stimulus,
implemented after the global recession had led to a collapse in exports that dragged economic
growth in China to the weakest pace in seven years. In November 2008 the People’s Bank of China
announced that it would lend Rmb100 billion (US$14,6 billion) to banks by the end of December to
stave off a slowdown in growth. In December 2009 the central bank cut its key lending rate for the
fifth time in three months and, once again, lowered its reserve requirement for the country’s banks.
Many developing countries, especially in Asia and Latin America, have used policy buffers to
alleviate pressures. In some countries exchange rates have been allowed to adjust downwards
and in others stockpiles of reserves have been significantly depleted in an attempt to counter
volatile exchange rate movements. In some instances reserves have been applied to augment
private credit and sustain trade finance in particular. The Fed offered bilateral currency swap
facilities to 14 systemically important countries and the International Monetary Fund (IMF)
provided assurance to markets that external funding would be available if required by countries
that had been implementing sound macroeconomic policies. In emerging Europe and the
Commonwealth of Independent States countries policy responses have been complicated by
greater vulnerabilities and less flexible exchange regimes. Some of these countries have been
confronted by severe external financing shortages and mismatches on borrowers’ balance
sheets. Authorities in these countries have tightened macroeconomic policies, and have
approached the IMF and other official sources for external financial support.
The rapid, and in some instances unorthodox, policy responses in many countries to the extreme
financial market conditions that arose after the collapse of Lehman Brothers in the US in
The US Federal Reserve (the Fed) eased its stance further in December 2008 by adopting
a target range for the federal funds rate of zero to 0,25 per cent per annum. More recently,
it intensified its efforts to bolster the economy. Although the Fed left the federal funds target
rate unchanged at 0–25 basis points at its most recent meeting, it still eased policy, as it
moved towards a quantitative easing strategy (Box 2 discusses this in more detail). On
18 March 2009 it announced that it would inject an extra US$1 trillion into the financial
system by purchasing Treasury bonds and mortgage securities. The Fed announced that
it would further expand its balance sheet by purchasing up to an additional US$750 billion
of agency mortgage-backed securities and up to an additional US$100 billion of agency
debt this year (bringing total purchases to US$1,25 trillion and US$200 billion respectively).
It also decided to purchase up to US$300 billion of longer-term (2- to 10-year) Treasury
securities over the next six months. Finally, the Fed anticipates that the range of eligible
collateral for the Term Asset-Backed Securities Loan Facility (TALF) is likely to be expanded
to include other financial assets.
The ECB is providing enhanced credit support and has allowed the interest rate it pays on
its deposit facility, used by banks to place funds overnight, to become a benchmark for
market rates. While the main policy rate has been cut to 1,25 per cent – the lowest ever –
the deposit facility rate stands at just 0,25 per cent. The Bank of England’s Monetary Policy
Committee cut the official Bank Rate to a record low 0,50 per cent on 5 March 2009, and
reached consensus on the adoption of a quantitative easing programme.
As widely anticipated, the Bank of Japan left its key policy rate unchanged at
0,10 per cent at its most recent meeting. However, it did increase the size of its monthly
government bond purchases (rinban operations) from ¥1,4 trillion to ¥1,8 trillion.
Moreover, it unveiled plans to provide as much as ¥1,0 trillion of subordinated loans to
large commercial banks, in order to shore up the capital bases of institutions hit by
portfolio losses.
Exchange rate developments
The foreign-exchange rate of the South African rand has generally strengthened in the
period since the publication of the November 2008 Monetary Policy Review (Figure 5).
The nominal effective exchange rate (NEER), which measures the value of the rand
against a basket of 13 currencies, appreciated by 31 per cent; from a recent low of
52,57 on 27 October 2008 to 69,06 on 30 April 2009. Over the same period, the rand
appreciated from R11,31 to R8,43 against the US dollar, and from R14,04 to
R11,26 against the euro.
South African Reserve Bank

Monetary Policy Review May 2009
September 2008 have thus far failed in aggregate to arrest the downward spiral in global
economic activity. Policy responses have helped to alleviate financial market conditions, but
financial markets have yet to stabilise. The additional stimulus measures announced by the G-20
in April 2009 represent a further substantial co-ordinated attempt by policy-makers to break the
financial sector’s negative feedback loop with the real economy.
References
International Monetary Fund. “Global Prospects and Policies”. World Economic Outlook.
22 April 2009.
Wall Street Journal. “Bernanke: Fed Actions Help Lending”. 3 April 2009.
National central banks’ websites.

However, as is evident in Figure 5, the exchange rates of the rand have recovered
from the sharp depreciation experienced in October 2008 that was largely due to
lower commodity prices and increased global risk aversion. The risk aversion was
most starkly felt in October when close to R50 billion worth of domestic bonds and
shares were sold by non-residents; this was more than double the combined sales
of bonds and equities by non-residents in any other month in 2008. The strengthening in the value of the rand during April 2009 was largely fuelled by improved
investor sentiment around the world.
Demand and output
The South African economy contracted at an annualised rate of 1,8 per cent in the fourth
quarter of 2008 (Table 7), the first quarterly decline in aggregate real production since
the third quarter of 1998. Following successive growth rates of 1,7 per cent, 5,0 per cent
and 0,2 per cent in the preceding three quarters of 2008, this resulted in real GDP
growth of 3,1 per cent in 2008, compared with 5,1 per cent in 2007.
The deceleration in growth in the fourth quarter of 2008 can be attributed mainly to a
marked deterioration in real value added by the secondary sector, particularly by
manufacturing. The real value added by the manufacturing sector contracted at an
annualised rate of 21,8 per cent in the fourth quarter, having recorded a contraction of
9,4 per cent in the third quarter. By contrast, the annualised growth in real value added by
Monetary Policy Review May 2009
South African Reserve Bank
Index: 2000 = 100 (foreign currency per rand)
Rand per euro
Rand per US dollar
Figure 5
Exchange rates of the rand

Mar May
Mar May
Jul
Sep
Nov
Jan

Mar May
Jul
Sep Nov
Jan
Jan

Nominal effective exchange rate of the rand (NEER)

Rand per US dollar

Rand per euro (right-hand scale)

the primary sector accelerated to 6,0 per cent in the final quarter of 2008 from 3,3 per cent
in the third quarter, reflecting an improved growth performance by the mining sector and
continued strong growth in the agriculture sector. The mining sector recorded annualised
growth of 0,5 per cent in real value added in the fourth quarter after contracting by 8,8 per
cent in the third quarter, while growth in real value added by the agriculture sector was
31,6 per cent in the third quarter and 16,7 per cent in the fourth quarter.
Table 7
Growth in real GDP and expenditure components
Per cent*

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

Changes in inventories (R billions)** ....

Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data
**
Constant 2000 prices
Real gross domestic expenditure declined at an annualised rate of 3,9 per cent in the
final quarter of 2008, after increasing by a modest 0,7 per cent in the third quarter. This
performance was the result of a contraction in final consumption expenditure by
households over the period, a notable decline in inventory levels, and slower growth in
gross fixed capital formation and final consumption expenditure by general government.
Final consumption expenditure by households declined at annualised rates of 0,9 per
cent in the third quarter and 2,7 per cent in the final quarter of the year. The annual
growth rate for final consumption expenditure by households slowed from 6,6 per cent
in 2007 to 2,3 per cent in 2008, which was the lowest rate recorded this decade.
In the external sector of the economy, real exports of goods and services grew by an
annualised 4,0 per cent in the third quarter of 2008 before declining by 16,4 per cent in
the final quarter. Real imports of goods and services rose by 4,7 per cent and declined
by 19,0 per cent in the corresponding quarters, with the result that the trade deficit
narrowed from R36,7 billion in the third quarter of 2008 to R19,6 billion in the fourth
quarter. This outcome was supported by a narrowing of the shortfall on the service,
income and current transfer account with the rest of the world in the fourth quarter of
2008, mainly as a result of lower interest and dividend payments to non-resident
investors. As a consequence of these developments, the deficit on the current account
of the balance of payments expressed as a ratio of GDP shrank from 7,8 per cent of
GDP in the third quarter of 2008 to 5,8 per cent in the fourth quarter.
South Africa’s gross gold and other foreign reserves declined marginally from
US$34,4 billion at the end of September 2008 to US$34,1 billion at the end of March 2009.
The international liquidity position decreased from US$33,6 billion to US$33,5 billion over
the same period. The changes in the reserve positions were mainly the result of exchange
rate-induced revaluation effects.
South African Reserve Bank

Monetary Policy Review May 2009

Real-estate and equity prices
The adverse economic conditions that enveloped developed countries around the globe
during 2008 inevitably filtered through to developing countries such as South Africa. As
in many other emerging markets, South African property and share markets weakened
considerably from the second half of 2008. Negative and uncertain conditions in global
markets, lower commodity prices and less favourable economic growth prospects
generally contributed to the weaker performance of the South African share market,
while the property market also extended its downward trend.
Measured by the Absa House Price Index (Figure 6), the year-on-year rate of change in
nominal house prices continued to trend downwards from the high of 15,7 per cent
reached in March 2007, reaching negative levels of growth from December 2008. This is
the first occurrence of a decline in the index since 1987. The year-on-year rate of increase
in the First National Bank House Price Index also continued to move downwards,
recording a decline of 10,2 per cent in April 2009, while the year-on-year change in the
Standard Bank House Price Index recovered from -3,6 per cent in January 2009 to
-2,5 per cent in April.
The declining level of economic activity in the real-estate sector is also evident from the
building statistics published by Stats SA and reproduced in Table 8. While growth in the
value of buildings completed decelerated during the course of 2008, the value of building
plans passed recorded an even sharper deceleration, providing an indication that future
construction activity may remain subdued. However, positive growth was displayed in
plans passed for non-residential buildings. The real value of building plans passed for the
residential sector contracted by 27,2 per cent in 2008 after decreasing by 3,2 per cent in
2007, while that for the non-residential sector expanded by 0,8 per cent in 2008 after
contracting by 5,9 per cent in 2007. In the first two months of 2009, year-on-year growth
in the value of buildings completed remained positive, while the value of plans passed
contracted sharply for both residential and non-residential buildings.
Monetary Policy Review May 2009
South African Reserve Bank
Percentage change over twelve months

-15
-10
-5

Absa House Price Index

Standard Bank House Price Index

First National Bank House Price Index
Sources: Absa, Standard Bank and First National Bank
Figure 6
House prices
Table 8
Real value of building plans passed and buildings completed in
larger municipalities
Annual percentage change

2009*
Building plans passed

Buildings completed

Figures for January and February 2009 compared with the corresponding months of 2008
Source: Statistics South Africa
Share prices on the JSE Limited (JSE) trended downwards during the second half of
2008, effectively mirroring developments in international markets. As Figure 7 shows, the
FTSE/JSE All-Share Index (Alsi) declined by 46 per cent from a record high on 22 May
2008 to 20 November, led by a steep fall in resources shares which lost more than half
their value after the commodity boom had come to an abrupt end. Similar, although
somewhat less pronounced, declines were recorded by industrial and financial shares
over the same period. Financial shares have been on a downward trend since the end
of 2007, partly as a result of investor concerns about the impact of rising domestic
interest rates on the profitability of these companies, and the negative perceptions
globally regarding banking and credit markets in general.
South African Reserve Bank

Monetary Policy Review May 2009
Indices
R billions

FTSE/JSE Resources Index
FTSE/JSE Industrials Index
Non-resident net purchases (cumulative since January 2005, right-hand scale)
Figure 7
Share price indices and non-resident net purchases

of shares


FTSE/JSE All-Share Index
FTSE/JSE Financials Index
Source: JSE Limited

The decline in domestic share prices during 2008 coincided with a sell-off of South
African shares by non-resident investors. Towards the end of 2007 non-residents
reassessed their investments in the light of the turbulence in global financial markets
and, after four consecutive years of net purchases of South African shares, substantial
net sales of R54 billion were recorded in 2008. However, early indications are that
non-residents again purchased shares to the net value of R19 billion in the first four
months of 2009.
Although share prices remained somewhat volatile during the first months of 2009, the
Alsi rebounded by 16 per cent from 20 November 2008 to the end of April following a
modest recovery in commodity prices, the lowering of the repurchase rate and improved
conditions on global equity markets.
Fiscal policy
The adverse developments in the global economy impacted markedly on the budget
presented by the Minister of Finance on 11 February 2009 (Table 9). According to the
Budget Review 2009, the estimated budget balance for 2008/09 is a deficit of
R22,8 billion (or 1,0 per cent of GDP), a significant revision to the surplus of R14,3 billion
that was estimated at the time of the 2008 budget. As a percentage of estimated GDP,
the medium-term budget balances are projected to be deficits of 3,9 per cent in
2009/10, 3,1 per cent in 2010/11 and 2,3 per cent in 2011/12. The structural budget
balance, which adjusts for the effects of the economic cycle, averages -3,2 per cent of
GDP over the next three fiscal years.
Table 9
Public finance data
R billions and per cent

Feb 2008
Revised
Actual
Actual
budget
estimates
Medium-term estimates
National government

As a percentage of GDP

PSBR: Public-sector borrowing requirement
Source: National Treasury Budget Review 2009
The weaker economic environment has resulted in a revised main budget revenue total
of R611,1 billion for fiscal 2008/09, representing R14,3 billion less than originally
budgeted. Expenditure has been revised upwards by R22,8 billion to R633,9 billion for
the same period. Debt-service costs as a percentage of GDP are projected to decline
slightly over the medium term, from 2,4 per cent in 2008/09 to 2,2 per cent in 2009/10
and 2010/11, and 2,3 per cent in 2011/12.
Monetary Policy Review May 2009
South African Reserve Bank
The public-sector borrowing requirement (PSBR), which represents the funds needed by
the public sector to cover any deficit in financing its own activities, has moved from
-0,6 per cent of GDP in 2007/08 to a revised estimate of 3,9 per cent of GDP in
2008/09. The PSBR, bolstered by the public corporations’ and governments’ capital
expenditure, is projected at 7,5 per cent of GDP in 2009/10, before contracting slightly
to reach 5,3 per cent of GDP in 2011/12.
Labour markets
Figure 8 shows that wage inflation, measured by the year-on-year rate of increase in the
nominal remuneration per worker in the non-agricultural sectors, accelerated from
7,1 per cent in the third quarter of 2007 to 13,7 per cent in the third quarter of 2008,
before slowing to 12,4 per cent in the fourth quarter. The combination of these changes
in wage inflation and generally declining labour productivity growth resulted in the growth
in unit labour cost rising from 4,6 per cent to 12,8 per cent during the same period.
According to the outcome of the Andrew Levy Wage Settlement Survey, the average
level of wage settlements amounted to 10,2 per cent in the first quarter of 2009, after
recording 9,8 per cent in 2008 and 7,3 per cent in 2007. The settlements in the first
quarter of 2009 ranged from 7 per cent in the metal/manufacture sector to 12,3 per cent
in the food/agriculture sector.
Monetary conditions
Monetary data, and particularly growth in credit extension, continued to reflect tighter
conditions in the period under review, affected by higher interest rates, decelerating
economic activity and tighter lending criteria applied by banks (Figure 9). Year-on-year
growth in banks’ loans and advances to the private sector decelerated from 23,8 per
cent in January 2008 to 14,0 per cent in December and 7,3 per cent in March 2009.
Similarly, growth in broad money supply (M3) decelerated from 24,5 per cent in January
2008 to 14,8 per cent in December and further to 10,6 per cent in March 2009.
South African Reserve Bank

Monetary Policy Review May 2009
Percentage change over four quarters

Figure 8
Remuneration per worker, labour productivity and

unit labour cost in the formal non-agricultural sector

Nominal unit labour cost

Remuneration per worker

Labour productivity
-2

Mortgage advances dominate the bank loans and advances aggregate, with more
than 50 per cent of outstanding loans falling in this category (Figure 10). Of the
remaining categories, approximately one-quarter consists of general loans, while
overdrafts (7 per cent), credit card advances (3 per cent) and instalment sales and
leasing finance (13 per cent) make up the remainder. Growth in all the loan categories
decelerated during 2008 and the early months of 2009. Year-on-year growth in
mortgage advances decelerated from, on average, 27 per cent in 2007 to 19 per cent
Monetary Policy Review May 2009
South African Reserve Bank
Percentage change over twelve months

Figure 9
Growth in money supply and credit extension

M3
Loans and advances to the
domestic private sector
Percentage change over twelve months
Outstanding balance in R billions
Figure 10 Banks' loans and advances by type
-20
-10

1 000
1 500
2 000

Mortgages

Instalment sale and leasing finance

Credit card advances

General advances

Overdrafts

in 2008 and 12 per cent in the first three months of 2009. Growth in other loans and
advances, which include general loans, overdrafts and credit card advances,
decelerated from 30 per cent in 2007 to 24 per cent in 2008 and 9 per cent in the first
three months of 2009.
Monetary policy
Since the publication of the previous Monetary Policy Review there have been four
meetings of the Monetary Policy Committee (MPC). The severe downturn in the global
economy in the final months of 2008, and the speed with which it spread to virtually all
parts of the world, created new challenges for monetary policy-makers generally. It was
decided that, in the light of these developments, it would be appropriate for the time being
to meet more frequently in order to assess these rapidly changing circumstances in a
timeous manner and to be able to act appropriately when necessary. Accordingly, the
MPC is scheduled to meet every month, apart from July, for the remainder of 2009.
For much of 2008, the MPC had been concerned about the more generalised nature of
the inflation dynamics that were brought about primarily by the succession of supplyside shocks such as food and oil price increases. As outlined in this Review, the global
economic landscape changed dramatically in the later part of the year, and these global
developments have had a significant impact on the South African economy and on
monetary policy in particular. The economy has experienced a marked slowdown and a
consequent widening of the output gap, while pressures on inflation have subsided as a
result of declining demand and lower commodity prices. These developments allowed
for a change in the monetary policy stance. As Figure 11 shows, the repurchase rate
was reduced by 50 basis points in December and by a further 100 basis points at each
of the subsequent three meetings.
These interest rate reductions were effected despite the fact that inflation was still
above the upper end of the inflation target range. As explained in previous Reviews,
given the lag in the reaction of inflation to interest rate changes, the focus of
monetary policy is on the medium- to longer-term expected trajectory of inflation,
South African Reserve Bank

Monetary Policy Review May 2009
Per cent

Prime overdraft rate
Repurchase rate
Three-month NCD rate
Figure 11 The repurchase rate and other short-term interest rates

rather than on the current outcomes. It is also the case that an inflation-targeting
framework allows for flexibility in the time horizon for achieving the inflation target.
The MPC also has to assess the risks to the inflation outlook, as the forecast is not
followed mechanistically. During the past months, the view of the committee was that
the balance of risks to the outlook, which for most of 2008 had been viewed as being
on the upside as a result of oil and food price developments, had changed
significantly. The widening output gap was increasingly seen as a downside risk to
the inflation outlook. While the exchange rate was initially seen as a source of upside
risk, the recent appreciation of the rand reduced this risk somewhat.
At the December MPC meeting the inflation forecast generated by the Bank’s forecasting
model showed an improvement in the inflation outlook, with inflation expected to return
to within the target range by the third quarter of 2009. Although inflation was forecast to
increase again in the first quarter of 2010 as a consequence of base effects, it was
expected to remain within the target range for the remainder of the forecast period. The
forecast presented to the February 2009 meeting was similar, but both these forecasts
were subject to heightened uncertainty as a result of the reweighting and rebasing of the
CPI that was due to be implemented by Stats SA in January 2009.
The new CPI measure for January was available at the March 2009 MPC meeting and it
revealed that the previous forecasts had slightly overestimated the degree to which the
inflation rate would decline. This then resulted in a near-term deterioration in the inflation
outlook, but a more favourable trend was forecast for the medium term, with inflation
expected to average 5,3 per cent in the final quarter of 2010. At the April meeting, the
forecast again deteriorated slightly, with inflation now expected to average 5,4 per cent at
the end of the forecast period. The most recent forecast is discussed in more detail later
on in this Review. The MPC, however, emphasised the fact that the higher levels of
uncertainty and the pace of change of global developments made these forecasts subject
to higher risk than was usually the case.
Inflation expectations, which had been deteriorating in the course of the year, appeared
to have improved somewhat in the longer term in the fourth quarter of 2008. According
to the inflation expectations survey conducted on behalf of the Bank by the Bureau for
Economic Research (BER) at Stellenbosch University, inflation expectations for 2009 as
measured in the fourth quarter of 2008 reflected a slight deterioration when compared
with those measured in the previous quarter. However, expectations for 2010 improved,
with average expected inflation of 7,2 per cent, compared with 7,4 per cent in the
previous survey. In the survey conducted in the first quarter of 2009, average inflation
expectations for 2009 showed an improvement, but there was a marked deterioration for
2010 with CPI inflation now expected to average 8 per cent. However, the survey was
characterised by divergent views between the different groups of respondents.
During the review period, international developments had an impact on the domestic
inflation outlook. At each MPC meeting, the international economy was characterised by
progressively worse outcomes as the advanced economies experienced negative
growth, and emerging-market economies also showed signs of slowing. The forecasts
for global growth were also revised downwards over time. The falling global demand and
declining commodity prices meant that world inflation pressures eased, despite
significant monetary and fiscal policy stimuli in many countries.
Food and petrol prices continued to warrant special attention. At the time of the
December meeting North Sea Brent crude oil was trading at around US$40 per barrel,
compared with a peak of almost US$150 per barrel in August 2008. A similar level was
recorded at the time of the February meeting, but by the April meeting international
Monetary Policy Review May 2009
South African Reserve Bank
prices had risen to above the US$50 per barrel level. The impact on the domestic petrol
price was also affected by exchange rate developments and domestic tax increases.
Whereas domestic petrol prices declined by around R4,40 per litre between September
2008 and February 2009, successive increases in the following months resulted in a
cumulative increase in petrol prices of R1,37 per litre. The committee nevertheless noted
that under conditions of low global growth the risk posed to domestic inflation by
international oil prices had subsided to a large extent.
The committee also concluded that the risk posed by food prices had moderated
somewhat. The price of a number of agricultural commodities had declined in global and
domestic markets, and this was reflected in price declines in some of the agricultural food
categories in the PPI. However, up to the April 2009 meeting food price increases at the
consumer price level, although declining, had remained stubbornly high and the MPC noted
that the expected decline in inflation might be delayed by the continued high rates of
increase in food prices, despite marked declines in producer price food inflation.
The MPC paid particular attention to the output gap that had been widening over the
past quarters. The output gap, measured as the difference between actual and potential
output growth, is an important determinant of inflation. At the time of the December
meeting, the committee noted that the 0,2 per cent GDP growth rate recorded in the
third quarter of 2008 represented a significant widening of the output gap. Other highfrequency data, observed at the December 2008 and February 2009 meetings,
indicated that the fourth-quarter growth outcome was likely to be lower than that
recorded in the third quarter. By the March meeting the fourth-quarter contraction of
1,8 per cent was confirmed, and the outlook for the first quarter of 2009 remained bleak
in the light of contractions in mining, manufacturing and retail sales as observed in the
monthly data releases. The RMB/BER Business Confidence Index and the Investec/BER
Purchasing Managers Index (PMI) also indicated that growth, particularly in the manufacturing sector, was likely to remain under pressure in the coming months.
Expenditure in the economy also remained subdued over the period under review, in part
due to the tighter stance of monetary policy that had been adopted until the middle of
2008, but also due to the impact of other factors related to the global financial crisis. At
all the meetings of the MPC during this period, the sharp decline in real household
consumption expenditure was noted, particularly with respect to durable goods
consumption. In the fourth quarter of 2008, household consumption expenditure
declined at an annualised rate of 2,7 per cent, mainly as a result of a 20 per cent
contraction in consumption of durable goods.
The weak trends in global and domestic demand were also seen to have an impact on
the current account of the balance of payments. The lower international price of oil,
along with declining demand for goods and services generally, allowed for a decline in
imports in the final quarter of 2008. This trend, coupled with lower net income and
dividend payments to non-residents, more than offset the decline in the volume and
value of exports during that quarter. Consequently, the deficit on the current account of
the balance of payments narrowed to 5,8 per cent of GDP in the final quarter of 2008,
compared with a deficit of 7,8 per cent in the previous quarter.
Trends in credit extension also exhibited a steady deceleration over the period. Credit
extension to households continued to moderate in line with the lower levels of
consumption expenditure, while credit extension to firms also decelerated. The
committee also noted that the downward trend in the growth of credit extension was not
only a result of lower demand, but also of the more stringent lending criteria applied by
banks. Asset prices also remained under pressure: by April the various house price
South African Reserve Bank

Monetary Policy Review May 2009

indices showed that house prices were falling and equity prices on the JSE had declined
substantially in the wake of the global credit crisis since September 2008. These factors
were seen by the committee as factors constraining a near-term increase in expenditure.
Evidence that households were rebuilding their impaired balance sheets was also seen
in the declines in the ratio of household debt to disposable income that were observed
in the final two quarters of 2008.
While the above factors generally contributed to the moderation in inflation and in some
instances were seen to impart a downside risk to the inflation outlook, a number of upside
risks were also observed. In particular, the behaviour of the rand exchange rate in the
wake of the financial crisis was a cause for concern for the committee, because of the
potential impact of the exchange rate on inflation. At the December 2008 and February
2009 meetings, the rand was seen to pose the main upside risk to the inflation outlook.
The rand had been trading at levels of around R8,00 to the US dollar in early September
2008. However, as risk aversion increased following the collapse of Lehman Brothers in
mid-September, the rand depreciated against the US dollar along with most other
emerging-market currencies. At the time of the December meeting, the rand was trading
at around R10,20 to the US dollar, having reached a level of R11,80 at one stage. The
rand remained volatile during the subsequent months, but by the March 2009 meeting it
had appreciated to levels of around R9,45 to the US dollar and to around R8,50 in April.
While the risk to the inflation outlook emanating from the exchange rate had subsided
somewhat, the committee recognised that the volatile and uncertain international
environment meant that the outlook for the rand remained uncertain.
At the March and April meetings, the main upside risks to the inflation outlook were
identified as emanating mainly from cost-push pressures, particularly from administered
prices. These included possibly higher-than-expected electricity tariff increases.
The improved outlook for inflation, in part a result of the declining economic growth, and
the change in the balance of risks to the outlook have allowed for a 350 basis point
reduction in the repurchase rate by the MPC since December 2008. Unlike in a number
of other countries, monetary policy in South Africa has not had to focus directly on
financial stability issues as the domestic banking system has remained sound. Monetary
policy, which continues to be conducted within a flexible inflation-targeting framework,
has remained focused on bringing inflation down to within the inflation target range over
a reasonable time period, while being sensitive to growth variability issues.
The outlook for inflation
The outlook and uncertainties relating to some of the international and domestic factors
that are considered by the MPC in setting monetary policy, including indicators of
inflation expectations and the fan chart representation of the Bank’s forecast, are
discussed below.
International outlook
The global economy has continued to weaken significantly in recent months and the
decline in global demand has resulted in a marked contraction in international trade.
There is growing uncertainty about the depth and duration of the economic slowdown.
The IMF, which in January 2009 was forecasting global growth to average 0,5 per cent
in 2009, has downgraded its outlook for the global economy for the third time in five
months and now expects a contraction of 1,3 per cent in 2009 (Table 10). This would
be the first decline in the nearly 40-year history of the series.
Monetary Policy Review May 2009
South African Reserve Bank
Table 10
IMF projections of world growth and inflation for 2009 and 2010*
Per cent
Real GDP
Inflation rates**


Other emerging-market and developing countries....

IMF projections for 2009 as at October 2008 in parenthesis
**
Zimbabwe excluded
Source: IMF World Economic Outlook, April 2009
The IMF projects a severe 3,8 per cent contraction in the advanced economies and
relatively meagre growth of just 1,6 per cent in the emerging economies. Moreover, it
projects an anaemic recovery in 2010 with global growth of only 1,9 per cent. The IMF’s
April 2009 World Economic Outlook economic growth projections for all countries are
lower than their September 2008 counterparts due to the sudden and steep declines in
global production and world trade. Notwithstanding these significant downward
revisions to the IMF forecast, risks to the growth outlook are heavily skewed to the
downside. Consumer price inflation also continues to trend downwards in most
countries and world inflation is projected to be restrained by declining demand and lower
commodity prices, which are expected to remain subdued under conditions of negative
or low growth.
The IMF has warned that the US recession may last into 2010 unless policy-makers can
stabilise the financial system. For the US economy, the IMF projects contractions of 2,8 per
cent in 2009 and 0,1 per cent in 2010. The contraction in economic activity is expected to
push the output gap to levels reached in the early 1980s. Growth in the US is only
expected to turn positive in the third quarter of 2010, based on the assumptions that
financial market conditions improve relatively rapidly in the second half of 2009 and that
sustained policy support bolsters domestic demand.
The economy of the 16-nation euro region is expected to contract by 4,2 per cent in
2009, worse than the 2 per cent slump that the IMF forecast in its January 2009 update.
Record declines in exports and production in the first half of this year are expected to
shrink the economy significantly and a further marginal contraction of 0,4 per cent is
projected for the region in 2010. The projected decline in economic activity in 2009
reflects the significant contraction in external demand, the corrections in housing
markets in certain member states and increasing financing constraints.
South African Reserve Bank

Monetary Policy Review May 2009

Japan is expected to experience the sharpest contraction among the G-7 economies in
2009, with real GDP projected to fall by no less than 6,2 per cent as net exports,
business investment and private consumption weaken simultaneously. The financial
sector in Japan has also begun to weigh on growth prospects.
In Africa regional growth is expected to slow sharply to 2,0 per cent this year, less than
half the rate of the past five years, but the IMF warns that the projection may be too
optimistic. Even though the crisis has been slow in reaching Africa’s shores, the IMF
expects the combined impact of economic and financial shocks to be severe. Financial
flows have become scarce, trade financing even scarcer and more expensive, and
foreign investment in Africa’s stock and bond markets has fallen. As growth around the
world declines, demand for Africa’s products is expected to fall significantly further and
commodity export prices to remain lacklustre. Tourism revenue is also expected to
decline further as consumers around the world tighten their belts.
Among major emerging economies, China appears to be best positioned to weather the
global slowdown. Although export growth has weakened substantially, China has a large
budget surplus that gives the government considerable flexibility to boost consumer and
business spending. China’s financial system has a limited connection to foreign banks and
the country’s foreign-exchange reserves are approaching US$2 trillion. India’s banking
system is also relatively insulated from international financial turmoil and the country’s
economic growth has generally relied more on domestic demand than on exports.
The IMF warns that a further deterioration in the financial markets in advanced
economies could lead to a deeper and longer downturn, and that the deflation risk in
advanced economies could reinforce such an outcome. Emerging economies may also
find it increasingly difficult to secure external financing, and the spectre of trade and
financial protectionism is also a concern for the overall global economic outlook.
However, the global growth outlook could improve significantly once the monetary and
fiscal policy measures announced in various countries begin to bear fruit, especially if
policy measures are strengthened credibly.
The composite leading indicator compiled by the Organisation for Economic
Co-operation and Development (OECD) projects a continuing slowdown in economic
activity in the major OECD countries (Figure 12). The OECD composite leading
indicator continued to fall, recording a decline of 9,7 per cent in February 2009
compared with the same month of the previous year. The percentage change over
twelve months in the OECD industrial production index declined further to a negative
15,4 per cent in January 2008, compared with a decline of 12,0 per cent recorded
on the same basis for the previous month. Although the JPMorgan global
manufacturing PMI increased for a third straight month to 37,2 in March 2009 from
33,7 in December 2008, it is still at a level that is indicative of continued broad
contraction in global manufacturing.
Whereas inflation is expected to remain subdued due to lower commodity prices and
weakening economic growth, deflation risks have arisen in some of the advanced
countries. Headline inflation in the advanced economies fell below 1 per cent in
February 2009. Inflation has also moderated significantly across the emerging
economies, although in some cases falling exchange rates have dampened the
downward momentum. Sustained deleveraging and tight credit availability are likely to
continue to weigh heavily on the global economy in 2009. The world economy is
therefore expected to stagnate for most of 2009, with a slow recovery commencing
only during 2010.
Monetary Policy Review May 2009
South African Reserve Bank
The magnitude of the global slowdown in 2009 will, to a large degree, depend on the
severity of the financial crisis and the effectiveness of government policy initiatives
around the world. Considerable time could pass before financial institutions’ losses are
fully recognised, leverage is reduced and market confidence recovers. A decisive
commitment to multilateral concerted and co-ordinated efforts is therefore deemed
crucial by the IMF to achieving a nearer-term global recovery. The colossal global
stimulus package has continued to expand in recent months and President Obama’s US
programme began taking effect in April 2009. The US Congressional Budget Office
estimates that the programme will add up to 4 percentage points to US real GDP growth
rates in the second and third quarters of 2009. Stimulus programmes are also expected
to bolster a number of other major economies across the world. However, overall, the
global economic situation for 2009 remains extremely uncertain and significant
downside risks remain a palpable threat to the global growth outlook.
Outlook for domestic demand and supply
There is a general expectation that domestic growth will be quite disappointing in the
first two to three quarters of 2009 due to weaker domestic and international economic
conditions, before improving moderately in 2010 and 2011. Although annual growth in
final consumption expenditure by government remained relatively unchanged, growth in
gross final expenditure by households and in gross fixed capital formation decelerated
between 2007 and 2008. In particular, growth in households’ real disposable income,
which fell from a seasonally adjusted and annualised rate of -0,8 per cent in the third
quarter of 2008 to -1,9 per cent in the fourth quarter, is expected to remain subdued,
with recovery only expected later in 2009. The main source of growth in 2009/10 from
the demand side is likely to be the increased public-sector investment in infrastructure
that will be supported by a deficit of 3,8 per cent deficit of GDP, as announced in the
National Treasury’s 2009 Budget Review.
According to the latest Reuters consensus forecasts surveyed in March 2009, the South
African economy is expected to contract by 0,3 per cent in 2009, with the second
South African Reserve Bank

Monetary Policy Review May 2009
Percentage change over twelve months
Index points

OECD composite leading indicator

OECD industrial production index

JPMorgan global manufacturing PMI (right-hand scale)
Sources: OECD and JPMorgan
Figure 12 Selected indicators of global economic activity


quarter of the year expected to show an annualised contraction of 0,8 per cent, followed
by positive growth of 0,7 per cent in the third quarter and 1,8 per cent in the fourth
quarter. Growth in 2010 and 2011 is expected to recover to 2,7 per cent and 3,9 per
cent respectively.
As far as the quarterly analysis of manufacturing activity is concerned, the first-quarter
2009 BER survey revealed that the net majority of respondents rating current business
conditions worse than those of a year ago increased from 50 per cent to 56 per cent.
On the supply side, production volumes have declined sharply due to declining sales
volumes and high levels of finished goods inventories. In addition, the net majority of
respondents expecting a deterioration in business conditions in the coming twelve
months increased from 28 per cent to 34 per cent. On the demand side, net majorities
of 41 per cent reported declines in domestic order volumes and 25 per cent reported
declines in export order volumes.
Surveys of consumer and business confidence indicate that confidence levels in the
economy remain at low levels. Consumer confidence, measured by the First National
Bank/Bureau for Economic Research (FNB/BER) Consumer Confidence Index (CCI) as
the percentage of respondents expecting an improvement in conditions less the
percentage expecting deterioration, rose from -4 in the fourth quarter of 2008 to
+1 during the first quarter of 2009. Improvement in the consumer confidence was
supported by, among other factors, significant declines in petrol and diesel prices
between November 2008 and February 2009, a 150 basis point cut in official interest
rates up to the time the survey was conducted, the easing of CPI inflation, and a positive
response to the national budget announced in the 2009 Budget Review.
The level of business confidence, measured in terms of the Rand Merchant
Bank/Bureau for Economic Research (RMB/BER) Business Confidence Index, declined
to its lowest level in a decade, registering 27 index points in the first quarter of 2009,
which was preceded by 33 points in the fourth quarter of 2008 (Figure 13). The index
measures business confidence on a scale of 0 to 100, with 0 indicating an extreme lack
of confidence, 50 neutrality and 100 extreme confidence. The decline in business
confidence occurred in the midst of the deteriorating global landscape. Manufacturers’
confidence declined from 31 to 16 index points on the back of declining domestic and
Monetary Policy Review May 2009
South African Reserve Bank
Percentage

98 2000 02

Sources: Rand Merchant Bank and Bureau for Economic Research
Figure 13 RMB/BER Business Confidence Index
Net positive
Net negative
export orders, and of slow-moving inventories. Wholesaler confidence registered 31 index
points, following 44 index points registered in the fourth quarter of 2008. Building
contractor confidence declined from 42 to 33 index points due to a sharp contraction in
building activity. Retailers’ confidence rose marginally from 49 to 52 index points on the
back of strong sales of non-durable goods such as food and beverages. However, the
high confidence among retailers was limited to dealers in non-durable goods.
The Investec/BER PMI, a barometer of manufacturing activity, registered a historical
low of 35,6 index points in April 2009, marginally down from 36,0 index points in
March. On a seasonally adjusted basis, the inventories index fell to 28,7 points in April,
and the purchasing commitments index declined to a record low of 29,9 points. The
business activity index showed a slight improvement in April to 32,8 from 31,2 points
in March, and new sales orders increased to 33,7 from 32,6 points. Business
expectations regarding economic conditions six months ahead adjusted upwards
from 46,6 index points in March 2009 to 48,3 points in April. Since the index is still
below 50, this indicates that the manufacturing sector continues to expect
unfavourable conditions in the short term due to the weak domestic and global
economy, but that some improvement is expected in the second half of the year.
The FNB Building Confidence Index, which measures the business confidence of the
major role players and suppliers involved in the building industry, dropped from an index
value of 40 in the last quarter of 2008 to 28 in the first quarter of 2009. All subcomponents of the index showed significant generalised deterioration in the first quarter
of 2009. The business confidence of residential contractors slipped from an index value
of 34 in the fourth quarter of 2008 to an index value of 26 in first quarter of 2009. The
business confidence of non-residential building contractors dropped from an index value
of 59 in the fourth quarter of 2008 to 51 in the first quarter of 2009.
Indicators of inflation expectations
Estimates of inflation expectations for the forecast period from 2009 to 2011 obtained
from the BER survey conducted during the first quarter of 2009 show that average
annual CPI inflation expectations are expected to decline over the forecast years,
although they are expected to remain above the upper limit of 6 per cent of the CPI
inflation target. As depicted in Table 11, average CPI inflation expectations for 2009 are
8,3 per cent, followed by 8,0 per cent for 2010, and 7,8 per cent for 2011. Among the
groups surveyed, only the financial analysts expect CPI inflation to fall within the target
range during 2010 and 2011. By contrast, business and labour expect CPI inflation to
exceed the upper end of the target range by a considerable margin.
Table 11
BER survey of CPI inflation expectations: First quarter 2009
Per cent


Source: Bureau for Economic Research, Stellenbosch University
The March 2009 Reuter’s survey of long-term forecasts for the South African economy,
which surveys a group of financial market analysts, reports that targeted CPI inflation is
South African Reserve Bank

Monetary Policy Review May 2009

expected to fall within the official target range of 3 to 6 per cent from the third quarter
of 2009 and is expected to stay within the target range until the end of the forecast
period in 2011 (Table 12). It is expected that CPI inflation will average 6,7 per cent in
2009, decline to 5,6 per cent in 2010, and reach 5,3 per cent in 2011.
Table 12
Reuters survey of CPI forecasts: March 2009*
Per cent


(21)

(15)

*
February 2009 survey results in parentheses
Source: Reuters
Expectations derived from break-even inflation rates, measured as the difference
between the yields on South African CPI inflation-linked bonds and conventional nominal
bonds of similar maturity, suggest that inflation expectations trended downward from the
beginning of July 2008 until the end of the year (Figure 14). In 2009 break-even inflation
rates obtained from the R189 inflation-linked bond maturing in 2013 show that shortterm market inflation expectations initially fell below longer-term break-even rates
associated with the R197 bond maturing in 2023. In the second week of March 2009
the R189 spread was around 4,2 per cent, down from a high of 9,0 per cent at the
beginning of July 2008. During the same period the R197 break-even rate was 5,0 per
cent, down from 8,3 per cent in the first week of July 2008.
More recently, break-even inflation rates have again moved higher. This is partly the result
of the rally in the inflation-linked bond market, particularly the shorter-term inflation-linked
bonds, which resulted from the windfall effect of the revised base index values (Figure 15).
Box 3 provides more detail regarding this. On 30 April 2009 break-even inflation
Monetary Policy Review May 2009
South African Reserve Bank
Percentage points

Figure 14 Break-even inflation rates

Spread between R189 and R206 bonds (4-year maturity)

Spread between R197 and R186 bonds (14-year maturity)

at the four-year maturity had risen to 5,8 per cent, a level similar to that at the fourteenyear maturity.
South African Reserve Bank

Monetary Policy Review May 2009
Box 3 The South African inflation-linked bond market and break-even
inflation rates
Inflation-linked bonds are bonds that have their redemption value and coupon payments linked
to a price index. They provide investors with an inflation hedge, while reducing uncertainty about
the real cost of borrowing. In South Africa, inflation-linked bonds were first issued by the South
African government during March 2000, when the R189 bond with a coupon rate of 6,250 per
cent maturing in March 2013 was launched. In the subsequent years government issued
inflation-linked bonds of various maturities with the intention of developing a yield curve of
inflation-linked bonds of up to 30 years. There are currently four inflation-linked government
bonds in issue, varying from the R189 to the R202, with a coupon rate of 3,450 per cent and
maturing in December 2033. As at the end of 2008, the total value outstanding of government
inflation-linked bonds comprised approximately 15 per cent of the overall government bond
market. In recent years inflation-linked bonds have also been issued by various public and
private-sector institutions (mostly banks).
Prices of inflation-linked financial securities are often used to infer market-based measures of
expectations of future inflation and attitudes to inflation risk. The difference in the yield between
conventional and index-linked bonds of similar maturity, referred to as the ‘break-even inflation
rate’, provides information about market participants’ views regarding average expected inflation
for the reference price index over the period to maturity of the bonds. This measure is a useful
supplement to surveys and econometric forecasts of future inflation. However, as is regularly
noted in this Review, movements in break-even inflation rates may be affected by factors such
as inflation risk premiums, the liquidity of the bonds, the demand and supply balance, and other
market developments. Since these factors may influence their reliability, break-even rates should
be used cautiously in the assessment of capital market players’ inflation expectations. This box
provides information about the South African inflation-linked bonds market that facilitates the
interpretation of break-even inflation rates.
Liquidity
South African inflation-linked bonds are generally not very liquid instruments, as they are traditionally
bought as long-term investments by investors. As a ratio of the nominal value of inflation-linked
Per cent

R206 – conventional government bond yield
Break-even inflation R206/R189
R189 – inflation-linked government bond yield
Figure 15 Nominal, inflation-linked and break-even yields

Monetary Policy Review May 2009
South African Reserve Bank
bonds in issue, the turnover in the secondary market for inflation-linked bonds is far lower than
that of conventional bonds. In 2008 the annualised liquidity ratio of all listed bonds on the Bond
Exchange of South Africa (BESA) averaged around 24, that is, in a year bonds generally traded
24 times their amount in issue. By comparison, inflation-linked bonds traded at an average ratio
of only twice their amount in issue. In the first three months of 2009 the annualised liquidity ratio
of all bonds came to 19, while that of inflation-linked bonds came to 1.
Of the different inflation-linked bonds in issue, the R210, issued in 2007 and expiring in 2028,
has been the most liquid inflation-linked bond since 2007, trading at around three times per year
its nominal value in issue. Prior to that, the R198 was the most liquid of the inflation-linked
Ratio
Figure B3.2
Liquidity of inflation-linked government bonds

in issue

R198: 2008-03-31

R197: 2023-12-07

R202: 2033-12-07


* January to March, annualised
Source: BESA and own calculations
2009*

R189: 2013-03-31
R210: 2028-03-31
Ratio

All bonds
Inflation-linked government bonds
Figure B3.1
Liquidity ratios (annualised)

Source: BESA and own calculations
South African Reserve Bank

Monetary Policy Review May 2009
bonds in issue, before it expired in 2008. In recent years the liquidity of the longer-term
R202 bond, first issued in 2003, has dwindled.
Figure B3.3 indicates the more active participants in secondary market trading of inflationlinked bonds. The South African Reserve Bank (the Bank), acting as an agent on behalf of the
National Treasury, is generally the net supplier or seller of inflation-linked bonds. The main
buyers are banks and other financial institutions. The Public Investment Corporation (PIC) is
also usually a net buyer, while insurers and pension funds, who generally buy to hold, are less
active participants in the secondary market. To try and promote greater liquidity in inflationlinked bonds, the National Treasury initiated a Reverse Repurchase Agreement Transactions
Facility, operated by the Bank, from 31 August 2006. However, thus far this measure has had
a very limited impact on liquidity.
Demand and supply
New issuances of inflation-linked government bonds declined from around R22 billion in 2005
and R17 billion in 2006, to around R8 billion and less in 2007 and 2008. This coincided with a
general decline in goverment bond issuance as well as a decline in demand as the bid-to-cover
ratio4 declined from, on average, four times the amounts auctioned in 2005 to twice the amounts
auctioned in 2007 and 2008. However, this ratio has since improved in the early part of 2009.
Holders of inflation-linked bonds in issue
A substantial portion of inflation-linked bonds in issue is held by the PIC, which acts as the asset
manager for the government pension funds. As at the end of 2008, the PIC held more than 80 per
cent of the inflation-linked government bonds in issue. The retirement funds managed by the PIC
would, understandably, show a preference for holding long-term inflation-hedged instruments.
The impact of the new headline CPI
The reference inflation measure used for South African inflation-linked bonds is the headline
CPI. This was the CPI for metropolitan areas until January 2009, when it became the CPI for
R billions
Figure B3.3
Net purchases and sales on BESA by sector

Source: BESA and own calculations
Other
Nonfinancial
private
sector
Other
financial
institutions
Unit
trusts
Insurers
and
pension
funds
PIC
Banks
Monetary
authority
Nonresidents
-15
-10
-5

The ratio of the number
of bids received in a security
auction compared to the
number of accepted bids.

Monetary Policy Review May 2009
South African Reserve Bank
all urban areas as a result of the changes implemented by Statistics South Africa. On
20 March 2009 the National Treasury clarified the pricing of inflation-linked bonds based on
the new headline CPI for all urban areas. In essence, the holders of inflation-linked bonds may
receive higher returns than the official inflation rate due to base effects in the changeover to
the new index for 2009. This resulted in a rally in the yields in all the categories of inflationlinked bonds, with sharper declines recorded in the yields on shorter-term inflation-linked
bonds (Figure B3.4).
In addition to the beneficial impact of the new index values, the decline in inflation-linked bond
yields also resulted from higher demand due to rising inflation expectations. The downward trend
in interest rates has also improved the relative return on inflation-linked bonds compared to that
of term bank deposits.
The rally in the inflation-linked bond market, which resulted from the windfall effect of the revised
base index values, exaggerated the upward movement in break-even rates towards the end of
March 2009. At the same time the short-term break-even rate realigned itself with movements
in longer-term rates. On 30 April 2009 break-even inflation in the four-year maturity range had
risen to 5,76 per cent, while that over fourteen years indicated expectations of 5,77 per cent.
The break-even rate for the nineteen-year maturity range stood at 5,87 per cent, while that of
the twenty-four-year-maturity range, at 6,07 per cent, exceeded the upper band of the inflation
target range. It is possible that break-even rates over the different categories would have been
significantly lower, were it not for the recent revision in the base index values that followed from
the implementation of the new headline CPI.
References
Mageza, M. Room for Continued Real Yield Rally. Research by ABSA Capital, affiliated with
Barclays Capital, 24 March 2009.
National Treasury. 2000 to 2009. Various press releases.
Scholtes, C. On Market-based Measures of Inflation Expectations. Bank of England Quarterly
Bulletin, Spring 2002.
Per cent

R189
R210
Figure B3.4
Yields on inflation-linked government bonds

R197
R202
20 March: National
Treasury announces
new base index
values
The South African Reserve Bank inflation forecast
The most recent projections of the Bank’s quarterly inflation forecasting model,
presented to the MPC meeting on 29 and 30 April 2009 are reproduced in the form of
a fan chart in Figure 16. According to these projections, the inflation outlook for 2009
has deteriorated since the forecast presented to the previous MPC meeting, largely as
a result of a higher administered price inflation outlook and the higher-than-anticipated
February inflation outcome, but the forecast for 2010 remains fundamentally the same.
The central projection, conditional on an unchanged repurchase rate, is for the average
quarterly CPI inflation rate to decelerate further to 6,2 per cent in the third quarter of
2009. Thereafter inflation is expected to increase marginally to 6,4 per cent in the first
quarter of 2009, before resuming its downward trajectory to reach 5,4 per cent by the
end of the forecast period in the fourth quarter of 2010.
The heightened levels of uncertainty and the rate of change in global developments make
recent forecasts subject to higher risk than is usually the case. Alternative scenarios for
movements in the foreign-exchange rate of the rand and oil prices generate more optimistic
or pessimistic outcomes than the central projection. Larger-than-anticipated electricity price
increases and their second-round effects pose an upside risk to the forecast, as do higherthan-expected salary and wage settlements. Conversely, the risks arising from the
possibilities of a deeper and more prolonged global slowdown or a more significant
moderation in domestic growth generally tend to exert a downward bias on the forecast.
South African Reserve Bank

Monetary Policy Review May 2009
Per cent

Figure 16 Targeted inflation* forecast

* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban
areas thereafter
Note:
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 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 (see
Box 4 “Understanding the fan chart” on p. 27 of the March 2001 Monetary
Policy Review).

Assessment and conclusion
The turmoil that erupted in the financial markets in the later part of 2008 has had a
profound impact on the growth prospects in many countries. Most economies are either
contracting or slowing significantly and these adverse conditions are likely to persist for
some time. Financial markets are likely to remain volatile as risk aversion and optimism
about growth prospects fluctuate in response to emerging data and conflicting signals.
The uncertainty created by these developments makes it a difficult environment for
monetary policy-making. Most countries have responded to the banking and real-sector
crisis with monetary and fiscal policy stimuli, in order to offset the decline in demand and
encourage new demand.
The South African economy has also been impacted by these developments and in the
final quarter of 2008 the economy experienced its first quarter of negative growth since
1998. Recent indicators suggest that the economy, and the manufacturing sector in
particular, is likely to remain under pressure for some time. While the prospects for
the economy are linked to global developments, the infrastructural expenditure
programme that is currently under way will go some way towards underpinning
investment expenditure.
The global and domestic economic slowdown has had a significant moderating impact
on the inflation outlook. The widening output gap, weak domestic demand and lower
commodity prices have all contributed to the revised outlook, although administered
price developments and, to a lesser extent, uncertainties relating to the exchange rate
provided some countervailing pressure. Nevertheless, the improvement in the overall
inflation outlook and the perceived downside risk to the medium-term inflation outlook
has allowed for a more accommodative stance, and the repurchase rate has been
reduced by 350 basis points since December 2008. The continued stability of the
domestic banking system meant that the MPC could maintain its focus on its mandate
to achieve price stability within a flexible inflation-targeting framework.
Monetary Policy Review May 2009
South African Reserve Bank
Statement of the Monetary Policy Committee
11 December 2008
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
Since the previous meeting of the MPC, domestic inflation has moderated and is
expected to decline further over the coming months. At the same time, the South African
economy has been affected by the significant global slowdown that has intensified
recently. The domestic economy experienced negligible growth in the third quarter, while
a number of sectors contracted. Moreover, while there has been some improvement in
the inflation outlook, risks posed by uncertainty with regard to the exchange rate, in
particular, remain.
The data releases over the past weeks have shown that the international economy is
slowing down faster than previously expected and that global inflation pressures are
subsiding. This has resulted in the recent global interventions by policy-makers.
Domestic monetary policy remains guided by local conditions. Monetary policy always
takes into consideration the possible impacts of global developments on the South
African economy, in general, and on inflation, in particular.
Recent developments in inflation
CPIX inflation (headline inflation excluding mortgage interest cost) measured 13,6 per
cent in August 2008 and subsequently declined to year-on-year increases of 13,0 per
cent and 12,4 per cent in September and October respectively. Food, petrol and
electricity prices were the main contributors to the inflation outcomes, despite the petrol
price reductions in September and October. Food prices increased at a year-on-year
rate of 17,2 per cent in October, while petrol and electricity prices increased by 31 per
cent over the same period. If food and petrol were excluded, CPIX inflation would have
measured 8,4 per cent in October, compared with 8,5 per cent in September.
Producer price inflation also showed signs of moderating in the past two months despite
significant electricity price increases. Producer price inflation increased at a year-on-year
rate of 19,1 per cent in August, but moderated to 14,5 per cent in October. Agricultural
food prices declined for the third successive month in October when the year-on-year
rate declined to 10,4 per cent. Manufactured food prices increased by 15,6 per cent in
October, compared with 20,5 per cent in August.
The outlook for inflation
The most recent central forecast of the South African Reserve Bank (the Bank) shows a
further improvement in the inflation outlook since the previous MPC meeting. With an
unchanged stance of monetary policy, inflation is expected to continue its downward
trajectory and to return to within the inflation target range in the third quarter of 2009.
Inflation is then expected to breach the upper end of the target range marginally in the
first quarter of 2010 as a result of technical base effects associated with the decline in
petrol prices at the end of 2008. However, the downward inflation trend is forecast to
continue thereafter.
Inflation is expected to average 6,2 per cent and 5,6 per cent in 2009 and 2010
respectively, and to average 5,3 per cent in the final quarter of 2010. The forecasts are
subject to a greater degree of uncertainty than usual, given the highly volatile global
South African Reserve Bank

Monetary Policy Review May 2009

environment, and the uncertainty related to the impact of the rebasing and reweighting
of the CPI basket to be introduced by Statistics South Africa in January 2009.
Inflation expectations as measured by the yield differential between conventional
government bonds and inflation-linked bonds declined from just over 9 per cent in
July 2008 to around 5,1 per cent in early December. The yield curve has remained
inverted at the longer end and has declined since the previous meeting, particularly in
the one-to-five year maturity range.
Inflation expectations as reflected in the inflation expectations survey conducted on
behalf of the Bank by the Bureau for Economic Research (BER) at Stellenbosch
University deteriorated marginally for 2009, but then improved slightly for 2010. Average
inflation expectations for 2009 measured 8,2 per cent compared with 8,1 per cent in the
previous quarter, while inflation expectations for 2010 measured 7,2 per cent compared
with 7,4 per cent in the previous survey. This was the first time since the first quarter of
2006 that expectations for any forecast year had declined.
Unit labour cost in the third quarter of 2008 increased by 12,5 per cent compared with
the same quarter last year. However, the improved inflation expectations, coupled with
the lower actual trend in inflation, may have a moderating impact on unit labour costs,
which will most likely be influenced by the weaker state of the economy.
The exchange rate remains the most significant upside risk to the inflation outlook. Since
the previous meeting of the MPC, the rand exchange rate has depreciated against the
US dollar by about 11 per cent. At the time of the previous meeting, the rand was at a
level of R9,15 to the United States (US) dollar. The currency subsequently depreciated to
a level of R11,80 but recovered soon after, and for the past few weeks has traded in a
relatively narrow range of between R10,00 and R10,50. On a trade-weighted basis, the
rand has depreciated by around 7,6 per cent since the previous meeting. The rand, along
with other emerging-market currencies, is influenced by the risk aversion prevailing in the
uncertain global environment.
International crude oil prices have declined further. North Sea Brent crude oil is currently
trading at around US$40 per barrel, compared with US$83 per barrel at the time of the
previous meeting of the MPC. The lower international oil price has resulted in a
cumulative decline in domestic petrol prices of R3,35 per litre since August, and by
R2,06 since the previous MPC meeting. If current levels of international oil prices and
exchange rates persist, a further sizeable decline in the domestic petrol price can be
expected in January.
The trend in international food prices has also followed that of other commodities, and
since June 2008 there has been a 30 per cent decline in the Economist Food Price Index.
These developments have contributed to the year-on-year declines in the agricultural food
component of the producer price index mentioned above, and to the significant fall in
domestic spot prices of maize and wheat, despite the depreciation of the rand over the
past weeks. Food price increases at the consumer price level remain elevated, but the
spot price developments are expected to impact on these prices in the coming months.
South Africa’s economic growth rate also declined significantly in the third quarter of 2008
when real gross domestic product (GDP) increased at an annualised rate of 0,2 per cent.
This represented a significant widening of the output gap. The slowdown was a result of
contractions in mining, manufacturing and the retail and wholesale trade sectors.
Manufacturing output declined further in October. The Bank’s leading indicator of
economic activity has been trending downward for some time, and more recently the
coincident indicator has followed this trend. The Investec/BER Purchasing Managers’
Index declined to its lowest level since its inception to reach a level of 39,5 – a level similar
Monetary Policy Review May 2009
South African Reserve Bank
to that prevailing in a number of other countries. The RMB/BER Business Confidence
Index also reflects a negative outlook.
Gross fixed capital formation held up relatively well in the third quarter when it grew at a
rate of 10,0 per cent, mainly as a result of investment by public corporations and general
government. However, growth in private-sector gross fixed capital formation declined to
2,6 per cent. This was particularly the case in investment in private residential buildings
where the real value of residential and non-residential building plans continued to decline.
Household consumption expenditure contracted in the third quarter for the first time
since 1998. Consumption of durable goods in particular declined by almost 10 per cent,
while non-durable goods consumption also contracted. Motor vehicle sales continued
to decline in October and November, while real retail trade sales declined further in
October. The FNB/BER Consumer Confidence Index showed a further deterioration in
the fourth quarter of 2008.
The rate of growth of credit extension to the private sector continued to moderate. Yearon-year growth in total loans and advances to the private sector declined to 17,1 per
cent in October, while growth in mortgage advances and instalment sale credit and
leasing financed decline to 16,1 per cent and 10,5 per cent respectively. There are also
indications of tighter credit standards being applied by banks to both households and
the corporate sector. The lower rate of credit extension to households contributed to the
further moderation of household indebtedness. Household debt as a percentage of
disposable income measured 75,3 per cent in the third quarter, compared with 78,5 per
cent in the first quarter of 2008.
The current-account deficit, which measured 7,9 per cent of GDP in the third quarter of
2008, is likely to moderate in the coming months as a result of the lower international oil
price and lower dividend payments to non-residents, among other factors.
The turmoil in the international financial markets has also been reflected as well in
domestic asset prices. The all-share index on the JSE Limited has followed global equity
market trends and has exhibited a high degree of volatility over the past months. Since
the previous meeting, the index has declined by about 1,5 per cent, but at one stage it
had declined by about 15 per cent. The housing market remains subdued, with prices
falling in real terms, and in some instances in nominal terms as well. These negative
wealth effects are likely to weigh on household expenditure in the coming months.
Global developments are also expected to contribute to downward inflation pressures.
Apart from sharply declining commodity prices, the decline in the volume of world trade
has also lowered transport costs significantly. Growth forecasts have been revised down
significantly, particularly in the advanced economies, and the expected protracted
slowdown is likely to lower prices of other goods as well, as the pricing power of firms
dissipates. The possible stimulus to growth provided by more accommodative monetary
policies and fiscal stimuli are likely to take some time to filter through, given the fragile state
of the banking systems and the marked declines in business and consumer sentiment.
Monetary policy stance
The Monetary Policy Committee considered recent developments in the South African
economy and the risks to the inflation outlook against the backdrop of conditions
prevailing in the global economy and international financial markets. The MPC has noted
improvements in the inflation outlook in South Africa since its previous meeting in October
2008. However, risks to the inflation outlook remain and will be monitored closely. The
MPC has therefore decided to reduce the repurchase rate by 50 basis points to 11,5 per
cent per annum with effect from 12 December 2008.
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Monetary Policy Review May 2009

Statement of the Monetary Policy Committee
5 February 2009
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
Since the previous meeting of the MPC, domestic inflation has continued on its
downward trend. A further decline is expected in the January data when the reweighting
and rebasing of the consumer price index (CPI) implemented by Statistics South Africa
(Stats SA) comes into effect. With respect to economic growth, the domestic economy
is being adversely affected by the continuing turbulence in the global economy. The
widening domestic output gap and declining international commodity prices are
expected to exert further downward pressure on inflation going forward. Nevertheless,
some risks to the inflation outlook remain and the MPC had to assess these conflicting
risks against the backdrop of a highly uncertain and volatile international environment.
Recent developments in inflation
CPIX inflation (headline inflation excluding mortgage interest cost) has been moderating
consistently since August 2008 when it measured 13,6 per cent. In November and
December 2008 inflation had declined to 12,1 per cent and 10,3 per cent respectively.
Electricity, food, and clothing and footwear prices were the main contributors to the
inflation outcomes in these months, having increased at year-on-year rates in excess of
15 per cent. Petrol prices increased by 25,8 per cent in November, but declined by
1,8 per cent in December. If food and petrol were excluded, CPIX inflation would have
measured 8,7 per cent in December.
Producer price inflation also moderated in the past two months, declining to a year-onyear rate of 11,0 per cent in December. Food price increases continued to moderate:
agricultural product prices were unchanged in December, while manufactured food price
inflation declined to a year-on-year rate of 12,8 per cent in the same month.
The outlook for inflation
The most recent central forecast of the South African Reserve Bank (the Bank) is similar to
that presented to the MPC in December. Partly as a result of the reweighting and rebasing
of the new targeted inflation index, CPI inflation is expected to decline further and average
7,5 per cent in the first quarter of 2009, and to decline to below the upper end of the
inflation target range during the third quarter of the year when it is expected to average
5,2 per cent. Inflation is then forecast to increase again and to breach the upper end of the
target range in the first quarter of 2010, mainly as a result of technical base effects.
Thereafter, inflation is expected to return to within the target range and remain there until
the end the forecast period when it is expected to average 5,5 per cent. The simulation
results of the model make provision for the most recent trends of actual and preliminary
data that have become available from Stats SA since the previous MPC meeting.
Market indicators also reflect a moderation in expected inflation. Inflation expectations
as measured by the yield differential between conventional government bonds and
inflation-linked bonds have remained within the inflation target range. The Reuters
consensus survey conducted in December indicates that analysts expect inflation to
average 6,4 per cent in 2009 and 5,8 per cent in 2010.
Monetary Policy Review May 2009
South African Reserve Bank
The volatile exchange rate of the rand continues to pose the main upside risk to the
inflation outlook. The rand is currently trading against the United States (US) dollar at levels
similar to those prevailing at the time of the previous MPC meeting. During December 2008
the rand appreciated against the US dollar and reached a level of R9,30 in the first week
of January. This move was mainly a result of a weaker US dollar, which depreciated to
US$1,47 against the euro. Renewed risk aversion in international markets and a stronger
US dollar in January resulted in the rand returning to current levels of around R10,00. The
rand has appreciated marginally on a trade-weighted basis since the previous meeting.
The risks to the inflation outlook posed by oil and food prices appear to have subsided
somewhat. Food prices continued to moderate at the production price level, but these
favourable developments have not yet been seen at the consumer price level. Spot and
futures prices of maize and wheat remained well below the average price level in 2008
and some relief at the consumer price level is expected in the coming months.
The price of Brent crude oil, which reached a low of US$34 per barrel during December
2008, averaged around US$41 for the month. This, along with the termination of the
slate levy, allowed for a further reduction in domestic petrol prices of R1,34 per litre in
January. However, international oil prices recovered somewhat in January and
averaged almost US$45 per barrel during that month. As a consequence, the domestic
price of petrol was increased by 61 cents per litre in February. The outlook for oil prices
remains uncertain, but prices are expected to remain relatively subdued as a result of
weakening global growth.
The domestic economy continues to show signs of slowing, following the 0,2 per cent
annualised growth recorded in the third quarter of 2008. The composite leading and
coincident business cycle indicators of the Bank point to a continuation of this trend. Other
high-frequency indicators are consistent with this outlook. The physical volume of manufacturing production declined at a year-on-year rate of 4,4 per cent in November 2008,
while the latest Investec/BER Purchasing Managers Index indicates that the outlook for
the manufacturing sector remains negative. The utilisation of production capacity in
manufacturing declined by 3,4 percentage points in the fourth quarter of 2008 to 82 per
cent. Mining output contracted by 6,1 per cent in November compared with the previous
year, while the real value of total building plans approved declined by 25,3 per cent over
the same period.
Household consumption expenditure also remains under pressure. Real wholesale trade
sales increased slightly in the year to November 2008, but real retail sales declined by
4 per cent over the same period. Motor vehicle sales contracted at a year-on-year rate
of 35,4 per cent in January, with commercial vehicle sales declining by 41 per cent.
Motor vehicle exports, which remained strong in 2008, also moderated and the industry
expects larger declines in the coming months. Exports in general are expected to remain
under pressure, given the adverse global conditions. However, preliminary data indicates
that the deficit on the trade account of the balance of payments probably contracted
during the final quarter of 2008.
Household consumption expenditure may also be affected by remuneration trends and
employment growth. According to Andrew Levy Employment Publications, the level of
wage settlements for the year 2008 amounted to 9,8 per cent, compared with an
average inflation rate of 11,3 per cent. Nominal unit labour cost increases in the third
quarter of 2008 measured 12,4 per cent. Employment growth has also been impacted
by the slowing economy. In the third quarter of 2008 non-agricultural employment
increased by one per cent, compared with 3,9 per cent in the first quarter of that year.
Private-sector employment contracted in the second and third quarters.
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Monetary Policy Review May 2009

The subdued trend in household consumption expenditure and the stricter credit criteria
applied by banks to both households and corporates have been reflected in a further
moderation in the growth of credit extension to the private sector. Growth over 12 months
in total loans and advances by banks to the private sector declined to 14,4 per cent in
December 2008. Most categories of loans have exhibited declines in growth.
High consumption expenditure is expected to remain under pressure from negative
wealth effects resulting from adverse asset price developments. The all-share index on
the JSE Limited remained volatile in line with global market turbulence. The housing
market has also remained subdued, with the various house price indices indicating real
price declines.
The outlook for the world economy has deteriorated further as a result of the continued
difficulties being experienced by the global financial system. The International Monetary
Fund significantly downgraded its forecast for global growth in 2009 to 0,5 per cent.
Many of the advanced economies are expected to experience negative growth rates in
the coming months, while growth prospects of emerging market and developing
economies have also deteriorated. As a result of these widening output gaps and
declining commodity prices, world inflation pressures have subsided.
Monetary policy stance
The MPC has decided to reduce the repurchase rate by 100 basis points to 10,5 per
cent per annum with effect from 6 February 2009. The MPC will continue to monitor
domestic and global developments in order to decide on the most appropriate
monetary policy stance going forward.
Monetary Policy Review May 2009
South African Reserve Bank
Statement of the Monetary Policy Committee
24 March 2009
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
The global economy has continued to weaken significantly in recent months as a result
of the turmoil in the financial markets. There is growing uncertainty regarding the depth
and duration of the economic slowdown. The South African economy has not escaped
the impact of these developments, and domestic production has contracted as a result
of weak domestic demand and a significant decline in export demand. Against this
backdrop of widening domestic and global output gaps, the balance of risks to the
inflation outlook has changed somewhat.
Recent developments in inflation
Inflation as measured by the reweighted and reconstituted consumer price index (CPI) for
all urban areas (which is the new target measure) measured 8,1 per cent in January 2009.
Food and non-alcoholic beverages prices, which increased at year-on-year rates of
15,7 per cent in January, contributed 2,4 percentage points to total inflation. The
housing and utilities category contributed 2,1 percentage points, and together with
food accounted for more than half of the measured inflation increase. The transport
component had a minimal impact on the overall CPI as a result of the 20,3 per cent
reduction in petrol prices during January. Producer price inflation, which reached 19,1 per
cent in August 2008, continued its downward trend, measuring 9,2 per cent in January
2009. Despite the depreciation of the rand during 2008, producer prices of imported
goods declined at a year-on-year rate of 5 per cent in January.
The outlook for inflation
The most recent central forecast of the Bank shows a near-term deterioration in the
inflation outlook, but a more favourable trend is forecast for the medium term, which is
the relevant time frame for monetary policy. Consumer price inflation is expected to
average 8,1 per cent in the first quarter of 2009 and then to decline to below 6 per cent
in the third quarter of the year. As a result of technical base effects, inflation is then
expected marginally to exceed the upper end of the inflation target range, before returning
back to within the range in the second quarter of 2010 and to remain there until the end
of the forecast period in the fourth quarter of 2010, when it is expected to average
5,3 per cent. The heightened levels of uncertainty and the rate of change of global
developments make these forecasts subject to higher risk than is usually the case.
Expectations by analysts are similar to those of the Bank, with the Reuters consensus
forecast showing a moderate upward revision of inflation in 2009 and a relatively
unchanged forecast in 2010, when inflation is expected to average 5,5 per cent in the final
quarter. Most forecasters expect inflation to have increased moderately in February 2009
before resuming its downward trend. Inflation expectations, as reflected in the yield
differential between inflation-linked bonds and conventional government bonds, have
increased slightly since the previous meeting of the MPC, but remain within the inflation
target range.
The inflation outlook has been dominated by the continued weakening of the global
economy and financial markets, notwithstanding significant monetary and fiscal
measures introduced by central banks and governments. The decline in global demand
South African Reserve Bank

Monetary Policy Review May 2009

has resulted in a marked contraction in international trade. The International Monetary
Fund, which in January was forecasting global growth to average 0,5 per cent in 2009,
now expects the global economy to contract by up to 1 per cent in 2009. Numerous
industrialised and developing countries are already experiencing negative growth. World
inflation is being restrained by declining demand and lower commodity prices, which are
expected to remain subdued under these conditions of negative or low growth.
The weak global demand has been reflected in the export performance of the South
African economy. However, the decline in the value of exports in the final quarter of
2008 was more than offset by a lower value of imports, mainly due to declining
international oil prices. Combined with a narrowing of the deficit on the services,
income and current transfer account of the balance of payments, this resulted in a
narrowing of the deficit on the current account from 7,8 per cent of GDP in the third
quarter of 2008 to 5,8 per cent in the final quarter. However, the published January
trade data, which showed a further considerable decline in the value of merchandise
exports, suggest that the improvement in the trade deficit may not be sustained to the
same extent seen in the fourth quarter. The deficit on the current account of the
balance of payments measured 7,4 per cent of GDP for the 2008 calendar year.
Domestic demand conditions have also deteriorated further. In the fourth quarter of
2008, gross domestic expenditure and domestic final demand contracted by 3,9 per
cent and 0,4 per cent respectively. Final consumption expenditure by households
declined by 2,7 per cent, mainly as a result of a 20 per cent contraction in
consumption of durable goods. The growth in gross fixed capital formation moderated
further, recording an annualised growth rate of 3 per cent. Motor vehicle sales, which
have been under pressure for some time, declined at a year-on-year rate of 35,6 per
cent in February. In January real retail sales increased at a year-on-year rate of 1,7 per
cent – the first year-on-year increase in 9 months – while wholesale trade sales
declined by 4,5 per cent over the same period.
Domestic demand conditions are expected to remain under pressure as a result of
declining disposable incomes, tighter credit conditions and negative wealth effects.
Credit extension to the private sector has continued its downward trend as a result of
lower demand and more stringent lending criteria being applied by banks. In January
2009 growth in total loans and advances to the private sector measured 11,4 per cent.
The slower rate of credit extension has resulted in a further moderation of the ratio of
household debt to disposable income to 76,4 per cent in the fourth quarter of 2008,
compared with a peak of 78,2 per cent in the first quarter of that year.
Domestic output has been impacted appreciably by these external and domestic
demand developments, resulting in a further widening of the domestic output gap. In the
final quarter of 2008 GDP contracted at an annualised rate of 1,8 per cent, mainly due
to a 22 per cent decline in manufacturing-sector output. The high frequency data
indicate that these adverse conditions may have persisted in the first quarter of 2009.
Manufacturing and mining output contracted at year-on-year rates of 11,1 cent and
8,7 per cent respectively in January, while the Investec/Bureau for Economic Research
(BER) Purchasing Managers Index reached a new low in February, reflecting continued
strain on the manufacturing sector. The latest BER manufacturing survey indicates
extreme and broad-based weakness in this sector in the first quarter of 2009. The
RMB/BER Business Confidence Index surveyed in the first quarter of 2009 reached its
lowest level since 1999, particularly in the manufacturing, wholesale and construction
sectors. The confidence of retailers of non-durable goods increased somewhat.
Monetary Policy Review May 2009
South African Reserve Bank
On a trade-weighted basis, the rand has been relatively stable since the beginning the
year and has appreciated by about 2,5 per cent since the previous meeting.
Movements in the rand exchange rate in recent weeks have been mainly reflecting
volatile international currency developments. After the previous meeting of the MPC,
the rand first depreciated to around R10,60 against the US dollar, as the dollar
strengthened against most currencies. Since then the US dollar has weakened
somewhat and the rand is currently trading at levels of around R9,45 per US dollar.
The upside risks to the inflation outlook emanate primarily from cost-push pressures,
particularly from administered prices. These include possible higher-than-expected
electricity tariff increases. The decline in inflation may also be delayed by continued high
rates of increases in food prices, despite marked declines in producer price food
inflation.
Monetary policy stance
Against the background of a slowing global and domestic economy and an improved
medium-term outlook for inflation, the MPC has decided to reduce the repurchase rate
by 100 basis points to 9,5 per cent per annum with effect from 25 March 2009.
South African Reserve Bank

Monetary Policy Review May 2009

Statement of the Monetary Policy Committee
30 April 2009
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
The global economy continues to be in the midst of a severe synchronised downturn
with a number of countries already experiencing recession. The G-20 countries,
including South Africa, have committed themselves to a programme of action in order
to contribute towards the earliest possible global economic recovery. Despite a
generally positive response to the G-20 summit in April, it has become increasingly
accepted that the slowdown is likely to be severe and protracted, and that the global
recovery is likely to be gradual.
Domestic output and expenditure growth are declining or negative, and the growth
outlook is dependent to a significant extent on a broader global recovery. Despite the
widening domestic output gap, inflation remains sticky, but is expected to continue on
its downward path.
Recent developments in inflation
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas increased to 8,6 per cent in February 2009 and then moderated to 8,5 per
cent in March. Food price inflation continued its downward trend, increasing at a yearon-year rate of 14,7 per cent in March, compared with 15,8 per cent in the previous
month. Food prices remained the largest contributor to the inflation outcome,
contributing 2,3 percentage points. The largest price increase was recorded by
electricity and other fuels, which increased by 30,1 per cent. Significant increases were
also recorded in the prices of tobacco, housing maintenance and repairs, health,
recreation and culture, and education. Countervailing pressure came from petrol prices,
which declined by 14,9 per cent, despite the petrol price increase of 45 cents per litre
in March.
Producer price inflation, which reached 19,1 per cent in August 2008, continued its
downward trend, measuring 7,3 per cent and 5,3 per cent in February and March 2009
respectively. Prices of agricultural food products declined at a year-on-year rate of 2,1 per
cent in March, while manufactured food price inflation moderated to 9,4 per cent.
The outlook for inflation
The most recent central forecast of the Bank shows a near-term deterioration in the
inflation outlook, but inflation is expected to follow a downward trend and to average
5,4 per cent at the end of the forecast period in the final quarter of 2010. The slightly
higher expected trend is a result of revised assumptions about administered prices and
the higher-than-anticipated inflation outcome for February.
Inflation expectations show a mixed picture. The inflation expectations survey, which is
conducted on behalf of the Bank by the Bureau for Economic Research (BER) at
Stellenbosch University, reflects somewhat divergent inflation expectations between
the different groups of respondents. In the survey conducted in the first quarter of
2009, average CPI inflation expectations for 2009 declined from 8,6 per cent to 8,3 per
cent. Expectations ranged from 6,1 per cent for analysts, to 9,7 per cent for trade
unionists. Inflation is expected to average 8,0 per cent in 2010, up from the 7,5 per
Monetary Policy Review May 2009
South African Reserve Bank
cent measured in the previous survey. While analysts expect inflation to average 5,4 per
cent in 2010, business executives and trade union officials expect inflation to average
8,6 per cent and 10,1 per cent respectively. Inflation is expected to moderate to 7,8 per
cent in 2011.
Wage settlements, which generally follow inflation trends with a lag, have also edged
up slightly. According to Andrew Levy Employment Publications, the level of wage
settlements increased by 10,2 per cent in the first quarter of 2009, compared to the
2008 average of 9,8 per cent. Nominal unit labour cost increased over four quarters by
12,8 per cent in the final quarter of 2008. Nominal wage settlements are expected to
moderate somewhat as the inflation rate declines. According to the Quarterly
Employment Statistics Survey conducted by Statistics South Africa, in the fourth
quarter of 2008 employment levels showed their first decline in four years.
The risks to the inflation outlook as assessed by the MPC have remained relatively
unchanged since the previous meeting of the committee, although the recent
appreciation of the rand exchange rate, if sustained, may have reduced the degree of
the upside risk to the inflation outlook. The rand exchange rate remains affected by
changes in global risk aversion, but there has been a decline in the degree of volatility.
Since the positive market reaction to the G-20 summit in early April, sentiment towards
emerging-market economies in general has improved and most emerging market
currencies have appreciated against the US dollar.
As noted earlier, the global economy remains under pressure despite fiscal and
monetary stimuli in many countries. In January 2009 the International Monetary Fund
(IMF) forecasted global growth of 0,5 per cent and 3,0 per cent for 2009 and 2010
respectively. The IMF now expects global output to contract by 1,3 per cent in 2009,
before recovering gradually to 1,9 per cent in 2010. The advanced economies are
expected to contract by 3,8 per cent, while the emerging and developing economies
are expected to experience positive growth of 1,6 per cent, with China and India
expected to grow by 6,5 per cent and 4,5 per cent respectively. The growth forecast
for Africa has been reduced from 3,4 per cent to 2,0 per cent. The risks to these
forecasts are seen to be on the downside, given the current heightened levels of
uncertainty. World trade has also declined and is expected to contract by a further
9,5 per cent in 2009.
World inflation is expected to remain subdued as a result of these growth trends and
lower commodity prices. World inflation is expected to average 2,5 per cent in 2009
and 2,4 per cent in 2010. Although a number of commodity prices have recovered
somewhat from their lows in the fourth quarter of 2008, they are expected to be
restrained by the weak global demand. The price of North Sea Brent crude oil declined
to around US$35 per barrel in late December 2008, but has been trading at around the
US$50 per barrel level for most of April 2009. During this month, the higher international
oil product prices have been more or less offset by the appreciation of the rand against
the US dollar, and the domestic price of petrol is expected to remain relatively
unchanged in May.
The outlook for domestic economic growth remains subdued, with no indications of a
quick recovery. The high-frequency data continue to suggest that the negative
conditions recorded in the final quarter of 2008 persisted in the first quarter of 2009.
The physical volume of manufacturing production declined at a year-on-year rate of
15,0 per cent in February, following an 11,1 per cent contraction in the previous month.
The outlook for manufacturing remains negative, with the Investec/BER Purchasing
Managers Index declining further in March. Total mining production declined at a yearon-year rate of 12,8 per cent in February, while the real value of building plans approved
declined by 42,7 per cent over the same period.
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Monetary Policy Review May 2009

The sluggish domestic demand conditions also appear to have persisted. Wholesale
trade sales declined at a year-on-year rate of 8,9 per cent in February, while retail sales
declined by 4,5 per cent following a modest increase in January. Total new vehicle sales
declined by 30,3 per cent in March, reflecting the continued weak demand for durable
goods. However, the FNB/BER Consumer Confidence Index, while still at low levels,
showed an increase in the first quarter of 2009. Falling house prices and weak asset
markets are also expected to restrain consumption expenditure.
Domestic credit extension continues to reflect the declining trend in domestic
expenditure, as well as more stringent credit criteria being applied by banks with
respect to loans to both households and companies. Year-on-year growth in total loans
and advances to the private sector declined to 10,2 per cent in February and 7,3 per
cent in March 2009. The quarterly growth declined from 6,2 per cent in the fourth
quarter of 2008 to 0,1 per cent in the first quarter of 2009. Instalment sale credit and
leasing finance reflected the weak demand for durable goods, with increases of 3,1 per
cent in February and 1,6 per cent in March.
In line with the previous MPC statement, the committee assesses the main risks to the
inflation outlook to emanate from cost-push pressures, particularly administered prices,
which include the risk of higher-than-expected electricity tariff increases. Food price
inflation at the consumer price level, which has remained relatively unresponsive to
lower inflation at the producer price level, appears to show signs of moderation. Should
this downward trend accelerate, it could have a significant downward impact on the
inflation trajectory.
Monetary policy stance
The MPC considered the severe synchronised downturn in international and domestic
economic conditions and noted their potential future downward impact on inflation,
notwithstanding the higher-than-expected recent domestic inflation outcomes. The
committee is of the view that the adverse economic conditions continue to tilt the
balance of risks to the inflation outlook to the downside over the medium term and has
therefore decided to reduce the repurchase rate by 100 basis points to 8,5 per cent
per annum with effect from 4 May 2009.
Monetary Policy Review May 2009
South African Reserve Bank