Monetary Policy
Review


November 2009
Monetary Policy
Review
November 2009
South African Reserve Bank
Monetary Policy Review November 2009
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ISSN: 1609-3194
Produced by the Publishing Section
South African Reserve Bank
Monetary Policy Review November 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

Statement of the Monetary Policy Committee

Statement issued by Ms G Marcus, Governor of the South African Reserve Bank
Statement of the Monetary Policy Committee


Boxes


Figures


South African Reserve Bank
Monetary Policy Review November 2009


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


B1.4 Calculated average interest rate on total loans and advances, and the repurchase rate...

B1.5 Calculated average interest rates on categories of loans and advances compared to


Tables


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


B3.1 Component series of the composite leading business cycle indicator and their

B3.2 Timing relationship between the composite leading indicator and the reference


South African Reserve Bank

Monetary Policy Review November 2009
Monetary Policy Review
Introduction
There are signs that the global economic recovery is under way, although indications
are that the initial pace of recovery is likely to be slow and distributed unevenly across
countries. The severe global recession saw a synchronised contraction of advanced
economies and a significant slowdown in the growth of developing economies.
However, recent forecasts suggest a turnaround in the second quarter of 2009, and
stronger growth prospects for the second half of the year and for 2010. Nevertheless,
activity levels are likely to remain well below pre-crisis levels and important policy
challenges will need to be faced. Macroeconomic policies are expected to continue to
focus on restoring financial sector health and supporting the recovery until it is well
established, while preparing to exit the period of eased monetary conditions adopted
in response to the crisis.
The domestic economy was not spared the effects of the global recession. In the second
quarter of 2009 the economy recorded a third successive quarterly contraction, although
the rate of contraction slowed relative to that of the previous quarter. Consistent with
global growth developments, domestic economic growth is expected to improve in the
coming quarters. Domestic inflation has continued to trend downwards, reaching a level
just above the inflation target range in September 2009.
In this Monetary Policy Review the latest developments in inflation and the factors that
impact on inflation are analysed. Recent monetary policy developments are reviewed,
and the outlook for inflation and the inflation forecast are presented. In addition, three
issues are examined in boxes. The first box examines the degree of pass-through and
the speed of adjustment in banks’ deposit and lending rates in response to changes
in the benchmark repurchase rate in South Africa during the period since the
introduction of the inflation-targeting monetary policy framework. The second box
discusses asset-backed securitisation by South African banks, and the final box
discusses the compilation and characteristics of the composite leading business cycle
indicator for South Africa.
Recent developments in inflation
This section analyses recent trends in the main inflation indices and reviews
developments in the main determinants of inflation in the South African economy.
The evolution of indicators of inflation
The measure of inflation targeted by the South African Reserve Bank (Bank), the yearon-year percentage change in the headline consumer price index (CPI) for all urban
areas, has declined continuously since April 2009 to marginally above the inflation
target range of 3 to 6 per cent. After recording 8,4 per cent in April, the inflation rate
decreased to 6,1 per cent in September (Figure 1), largely as a result of falling food
price inflation and lower petrol prices.

Food and non-alcoholic beverages, housing and utilities, and miscellaneous goods and
services have remained the highest contributing categories to the inflation rate over the
period since April 2009 (Table 1). The contribution of food and non-alcoholic beverage
prices decreased from 2,1 percentage points to the overall inflation rate of 8,4 per cent
in April 2009, to 0,9 percentage points in September 2009 when overall inflation was
6,1 per cent. This was due to a decrease in the prices of most food categories. Except
for a temporary decrease of 0,2 percentage points in June 2009 that was reversed by
July, the contribution of the housing and utilities category to inflation remained at
1,8 percentage points until September, when it recorded 1,7 percentage points.
Electricity prices remain a significant contributor to this category. The transport
category has contributed to the fall in the inflation rate since April 2009, largely as a
result of a lower petrol price. The contribution of transport to inflation declined from
0,2 percentage points in April to -0,7 percentage points in July before moderating to
-0,2 percentage points in September.
Table 1
Contributions to CPI inflation
Percentage change over 12 months* and percentage points

Mar
Apr
May
Jun
Jul
Aug
Sep

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

Miscellaneous goods and services ....

Source: Statistics South Africa
Monetary Policy Review November 2009
South African Reserve Bank
Percentage change over 12 months

Figure 1
Consumer price inflation: Targeted inflation*
* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban
areas thereafter
Source: Statistics South Africa
The reason for the negative contribution of the petrol price to the inflation rate is evident
from Figure 2. The year-on-year inflation rate calculates the change in the price of a good
compared to the price of the good in the same month of the previous year. Despite the
fact that the petrol price has only decreased on four occasions in the past 11 months,
the petrol price in 2009 has been consistently lower than in the corresponding months
of 2008 and has, therefore, contributed negatively to the year-on-year inflation rate.
Total food price inflation has fallen significantly from its peak in August 2008, when it
recorded 19,2 per cent, to 4,9 per cent in September 2009. Figure 3 shows that the food
items contributing to this continued decline include bread and cereals (for which the
South African Reserve Bank

Monetary Policy Review November 2009
Cents per litre
Apr
Jan
Feb
Mar
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Figure 2
Comparison of monthly petrol prices for 2008 and 2009

1 000
1 100

Percentage change over 12 months

Figure 3
Targeted inflation* and food inflation
All food items
Meat
Vegetables
Bread and cereals
Milk, cheese and eggs
Targeted inflation measure
-10

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

inflation rate has fallen from 17,7 per cent in April 2009 to -2,0 per cent in September
2009) and meat (for which inflation declined from 10,5 per cent to 4,1 per cent over the
same period). Inflation rates for vegetable prices and for milk, cheese and egg prices have
remained above that of overall food prices. Vegetable price inflation increased in
September for the first time since February 2009, although milk, cheese and eggs price
inflation has continued to decline.
Table 2 considers the effect of excluding a number of categories from the CPI inflation
rate in the period since April 2009. If petrol prices were excluded, the inflation rate for the
remaining items in the CPI would have been higher than the headline rate throughout the
period under review. In September 2009 the inflation rate for CPI excluding petrol prices
was 7,1 per cent, compared with 6,1 per cent for the headline rate. By contrast, food and
non-alcoholic beverage prices exerted upward pressure on the headline CPI inflation rate
until August. However, for September, excluding this category results in a CPI inflation
rate of 6,4 per cent, above the headline rate. If petrol prices, and food and non-alcoholic
beverage prices are excluded from the CPI, the inflation rate for the remaining items was
7,5 per cent in September. Finally, if energy were also excluded, the inflation rate would
have been lower at 7,1 per cent in September; this can be explained by the recent large
year-on-year increases in the price of electricity which have placed upward pressure on
the CPI inflation rate.
Table 2
The effect of food, petrol and electricity prices on headline inflation
Percentage change over 12 months

Mar
Apr
May
Jun
Jul
Aug
Sep

CPI excluding food and NAB* prices...

CPI excluding food, NAB and

CPI excluding food, NAB, petrol

NAB: Non-alcoholic beverage
Source: Statistics South Africa
Goods inflation fell to within the inflation target range in July 2009 and continued to
decline, recording a 12-month rate of 4,9 per cent in September (Table 3). This was
largely due to the significant decreases in non-durable goods price inflation over the
period. The inflation rates for durable and semi-durable goods have oscillated at
relatively low levels since April 2009. Services inflation has remained high and has shown
signs of price stickiness. It declined to 7,6 per cent in June 2009, rose to 8,1 per cent
in August and then decreased once more to 7,8 per cent in September.
Overall administered price increases have remained subdued in 2009 (Table 4). The yearon-year changes in total administered prices appear to have bottomed in June 2009
(-1,2 per cent) and subsequently rose to 3,2 per cent in September 2009. Although the
regulated component of administered prices has recorded significant negative inflation
rates since April, mainly due to lower petrol prices, inflation for the unregulated
component rose from 6,9 per cent in June to 9,3 per cent in July and 9,8 per cent in
September. This was largely the result of an increase in the inflation rate of assessment
rates, which doubled over the period.
Monetary Policy Review November 2009
South African Reserve Bank
Table 3
CPI: Goods and services inflation
Percentage change over 12 months

Mar
Apr
May
Jun
Jul
Aug
Sep

Source: Statistics South Africa
Table 4
Administered prices
Percentage change over 12 months

Mar
Apr
May
Jun
Jul
Aug
Sep

Source: Statistics South Africa
The year-on-year rate of inflation of domestic output measured by the producer price
index (PPI) continued to decline in 2009, decreasing from 2,9 per cent in April to
-3,7 per cent in September (Figure 4). The rate of decline in the PPI has been moderated
South African Reserve Bank

Monetary Policy Review November 2009
Percentage change over 12 months

Details regarding changes to the PPI in this period are documented in Statistical Release
P0142.1, February 2008, by Statistics South Africa
Source: Statistics South Africa
Figure 4
PPI for domestic output and imported commodities
-30
-20
-10

Domestic output: Manufacturing
Domestic output: Electrical energy
Domestic output
Imported commodities

somewhat by large year-on-year increases in the price of electricity, which rose by
27,4 per cent in July and 28,1 per cent in September. The PPI for imported commodities
inflation rate has been negative since the beginning of 2009, mainly as a result of
developments in the foreign-exchange rate of the rand during this period.
The rate of change in food prices in the PPI, measured at both the agricultural and
manufacturing levels, has remained below the rate of food price changes recorded in the
CPI (Figure 5). The year-on-year inflation rate for food prices in the CPI was 4,9 per cent
in September, compared to PPI food price inflation of -1,8 per cent at the manufacturing
level and -5,8 per cent at the agricultural level.
Factors affecting inflation
Monetary policy decisions are made on the basis of current and expected developments
in the wider macroeconomy. Recent developments in some of the main variables
influencing inflation in South Africa are reviewed in this section, while the outlook for
these variables and their likely impact on inflation are discussed in a later section.
International economic developments
The most recent International Monetary Fund (IMF) data show that global growth fell from
3,0 per cent in 2008 to a projected -1,1 per cent in 2009, the first outright contraction in
the world economy since the IMF began collecting real gross domestic product (GDP)
data in 1970 (Table 5). The data reflect a synchronised contraction of advanced
economies and a significant slowing of the growth rates of developing economies.
The financial shocks of September and October 2008 and their aftermath clearly illustrated
the effects of financial stress on real economic activity in the global economy. The United
States (US) alone has lost more than 7 million jobs since the recession began in December
2007, and the unemployment rate reached a 26-year high in September 2009. Potential
output growth rates were impacted negatively in all the advanced economies, and activity
Monetary Policy Review November 2009
South African Reserve Bank
Percentage change over 12 months

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

PPI: Food at agricultural level
Consumer prices – food
PPI: Food at manufacturing level
in the housing and financial sectors slumped. Weaker demand resulted in a noticeable
increase in excess capacity that is projected to keep inflation in advanced economies
close to 0 per cent in 2009. In the emerging economies, stronger disinflationary forces
in some regions also prompted modest reductions in October of the IMF’s April
projections for inflation, notwithstanding the upward revisions to output growth for these
countries. The IMF forecasts that the pace of world inflation will slow markedly in 2009
to 2,5 per cent from 6,0 per cent in 2008.
Table 5
Annual percentage change in real GDP and consumer prices
Real GDP
Consumer prices*

(estimate)
(estimate)

Other emerging-market and

Commonwealth of Independent States ....

Zimbabwe excluded
Source: IMF World Economic Outlook, October 2009
Although real growth in the largest economies in the Group of Twenty (G-20) has been
severely affected during the global recession, most of them already appear to have
embarked on a path to recovery. The rate of contraction in economic activity moderated
in the second quarter of 2009 in the US, the euro area, Italy, Spain, the United Kingdom
(UK) and Canada. Economic activity in some advanced economies stabilised towards
the middle of 2009, with positive growth resuming in either the second or third quarter.
Economic conditions also improved in the second quarter of 2009 in most emergingmarket economies partly due to improved demand in advanced economies. However,
the US economy is expected to record negative growth of 2,7 per cent in 2009,
compared with positive growth of 0,4 per cent in 2008. The US is projected to record
deflation of 0,4 per cent in 2009, compared with an inflation rate of 3,8 per cent in 2008.
In Japan, following a dismal first quarter of 2009, there are signs that output is stabilising.
Improved consumer confidence, progress in inventory adjustment, expansionary fiscal
policies, and strong performance by other Asian economies are expected to lift growth
in the coming quarters. The IMF, nevertheless, forecasts another year of negative GDP
growth in Japan of 5,4 per cent in 2009 following the decline of 0,7 per cent recorded
in 2008. The IMF also forecasts a return to deflation of 1,1 per cent for Japan in 2009
after the inflation of 1,4 per cent recorded in 2008.
South African Reserve Bank

Monetary Policy Review November 2009

In addition to efforts to stabilise, restore and reform the banking sector, the European
Economic Recovery Plan was launched in December 2008 to restore confidence and
bolster demand through a co-ordinated injection of purchasing power. The overall
fiscal stimulus in the euro area, including the effects of automatic stabilisers, amounts
to 5 per cent of GDP. Real GDP in the euro area is, nevertheless, projected to decline
by 4,2 per cent in 2009 from the 0,7 per cent real growth recorded in 2008. Inflation
in the euro area is projected to fall to 0,3 per cent in 2009 from the 3,3 per cent
recorded in 2008.
The IMF forecasts that the UK will record negative growth of 4,4 per cent in 2009
compared with positive real growth of 0,7 per cent recorded in 2008. Inflation in the UK
is projected to decelerate from 3,6 per cent in 2008 to 1,9 per cent in 2009.
As global trade flows contracted, China suffered a ten-month decline in exports,
dampening growth in the region and pulling the nationwide expansion rate down to
6,1 per cent in the first quarter of 2009 – the slowest pace in almost a decade.
However, the Chinese government is using a US$586 billion stimulus package and
record bank lending to build railways, roads and power plants in the country, and the
IMF forecasts that China will grow by 8,5 per cent in 2009 compared with 9,0 per cent
in 2008. India is expected to record growth of 5,4 per cent in 2009 compared with
7,3 per cent in 2008.
The global slowdown has had a significant impact on Africa and the continent is
expected to record growth of only 1,7 per cent in 2009, compared with 5,2 per cent in
2008. The decline in global trade dampened economic expansion in all countries in
sub-Saharan Africa as their terms of trade deteriorated. Inflation in Africa is expected to
fall slightly from 10,3 per cent in 2008 to 9,0 per cent in 2009.
Oil prices
After falling significantly in the second half of 2008 to levels below US$35 per barrel at the
end of the year, Brent crude oil prices rose in the first two quarters of 2009 to around
US$70 per barrel in early June (Figure 6). Prices declined briefly in early July 2009, amid
concerns about weakening energy demand and excess supply, before rising to around
US$72 at the end of August and then fluctuating within a US$64–US$79 band in
September and October. This was against the backdrop of contradictory projections for
the global economy.
The oil market remained in contango in 2009 (where near-term oil contracts cost less
than those maturing further out) as relatively large stockpiles of physical oil tended to
keep a lid on near-term prices. In recent months there have also been indications that
the Organization of the Petroleum Exporting Countries (OPEC) has had difficulty in
ensuring that member countries adhere to output target cuts; these factors have
contributed to futures prices trending lower. Other factors weighing on the oil price
were the announcement in September 2009 that Russia’s oil output expanded
beyond 10 million barrels per day – more than that of Saudi Arabia – and in October
militants in Nigeria (producer of some of the world’s most sought-after grades of
crude oil) appeared to accept an amnesty. However, the longer-term oil price outlook
has, in general, been underpinned by an improving global economic outlook and
rising equity prices. On 4 November 2009 the futures prices for Brent crude oil to be
delivered in May and June 2010 were around US$82 per barrel and US$83 per
barrel respectively.
Monetary Policy Review November 2009
South African Reserve Bank
International monetary policy developments
Financial market turbulence and deteriorating growth prospects prompted aggressive
monetary loosening in the course of the past 12 months. Decisive and concerted policy
actions are yielding signs of early recovery, and G-20 countries have stated their commitment
to maintaining supportive monetary, fiscal and financial sector policies until a durable recovery
is assured. All the major central banks have cut policy interest rates to unusually
accommodative levels to revive credit, and the IMF and the Organisation for Economic Cooperation and Development (OECD) do not expect a reversal of these policies until the
second half of 2010. The challenge for policy-makers is to prepare for an orderly unwinding
of the extraordinary levels of public intervention, without undermining the recovery.
Most central banks have eased official policy rates since the onset of the global financial
crisis (Table 6), and a number of them have implemented unconventional monetary
policy measures in response to the deteriorating economic conditions and dissipating
inflationary pressures. Since the release of the May 2009 Monetary Policy Review, official
interest rates have been reduced by central banks in Brazil, Canada, Chile, the Czech
Republic, Denmark, the euro area, Hungary, Iceland, India, Indonesia, Mexico, New
Zealand, Poland, Russia, Sweden, Thailand and Turkey.
Recently, the interest rate cycle has been reversed in Israel, Australia and Norway. In these
countries the economic contraction was seen to be over and policy has become more
focused on inflation concerns.
The United States Federal Reserve (the Fed) unanimously decided to keep the target
rate unchanged at a record low of 0 to 0,25 per cent at meetings of the Federal Open
Market Committee (FOMC) in August, September and November 2009, and reiterated
at its most recent meeting that it would keep rates on hold for an “extended period”. The
FOMC opted to extend its mortgage-backed securities (MBS) and agency debt
purchase programmes until the end of the first quarter of 2010, and committed itself to
reducing the pace of purchases.
South African Reserve Bank

Monetary Policy Review November 2009
Figure 6
Price of Brent crude oil

J M M J S N
M M J S N
J
J M M J S N
M M J S N
J
M M
J
M M J S N
J
US dollar per barrel

Brent crude spot price

Futures prices (21 September 2009)

Futures prices (21 October 2009)

Futures prices (4 November 2009)
Source: Bloomberg

Table 6
Selected central bank interest rates
Per cent
Latest decision
(change in
Countries
1 Sep 2008
5 Nov 2009
percentage points)
2,00
0,00-0,25
04 Nov 2009
(0,00)
0,50
0,10
30 Oct 2009
(0,00)
4,25
1,00
05 Nov 2009
(0,00)
5,00
0,50
05 Nov 2009
(0,00)
3,00
0,25
20 Oct 2009
(0,00)
4,60
1,25
25 Sep 2009
(-0,10)
4,50
0,25
28 Oct 2009
(0,00)
5,75
1,50
29 Oct 2009
(0,25)
2,75
0,00-0,75
17 Sep 2009
(0,00)
7,25
3,50
04 Nov 2009
(0,25)
8,00
2,50
29 Oct 2009
(0,00)
4,25
0,75
26 Oct 2009
(0,00)
7,47
5,31
29 Sep 2009
(0,00)
3,50
0,50
05 Nov 2009
(0,00)
9,00
6,50
04 Nov 2009
(0,00)
3,50
2,00
28 Oct 2009
(0,00)
5,25
2,00
09 Oct 2009
(0,00)
3,63
1,25
24 Sep 2009
(0,00)
3,75
1,25
21 Oct 2009
(0,00)
9,00
4,75
27 Oct 2009
(0,00)
13,00
8,75
21 Oct 2009
(0,00)
7,75
0,50
13 Oct 2009
(0,00)
8,25
4,50
16 Oct 2009
(0,00)
3,50
1,25
05 Nov 2009
(0,00)
8,50
7,00
20 Oct 2009
(-0,50)
6,00
3,50
28 Oct 2009
(0,00)
11,00
9,50
30 Oct 2009
(-0,50)
16,75
6,75
16 Oct 2009
(-0,50)
15,50
11,00
05 Nov 2009
(-1,00)
Source: National central banks
The Governing Council of the European Central Bank (ECB) left the policy rate
unchanged at recent meetings and affirmed that it had no precommitment on when to
withdraw the emergency measures introduced to fight the financial crisis, but that it
would take the required steps at the appropriate time. The Bank of England’s Monetary
Policy Committee (MPC) kept the policy rate unchanged at a record low of 0,50 per
cent at recent meetings and increased the stock of asset purchases in terms of the Asset
Purchase Facility. It announced in October 2009 that it would give more banks access to
its open-market operations and deposit facilities to help smaller institutions better
manage their liquidity.
Central banks in emerging-market economies have either held policy rates steady or
have lowered them further since the publication of the May 2009 Monetary Policy
Review. The Czech National Bank held the policy rate at a record low of 1,25 per cent
at its most recent meeting on signs that the outlook for inflation remained subdued. The
central bank of the Republic of Turkey lowered the policy rate by 50 basis points in
October 2009 after an MPC assessment that inflation was expected to remain at low
levels for an extended period, and that the ongoing recovery in economic activity would
be gradual and protracted.
The People’s Bank of China announced a continued “moderately loose” monetary policy
stance in September 2009 to cement China’s economic recovery further.
Monetary Policy Review November 2009
South African Reserve Bank
Exchange rate developments
Having recovered markedly in March and April 2009 as investor sentiment improved
around the world, the nominal effective exchange rate of the rand (NEER), measured
against a basket of 15 currencies, rose from 67,2 index points on 1 May to 68,6 index
points on 5 November 2009 (Figure 7). Over this period, the bilateral exchange rate of
the rand appreciated from R8,43 to R7,67 against the US dollar, and depreciated from
R11,26 to R11,37 against the euro.
The strengthening of the rand against the US dollar is largely due to the relative
weakness of the latter currency, which depreciated by approximately 12 per cent against
the euro over the period. Furthermore, dollar weakness has resulted in higher
commodity prices, which have supported the foreign exchange rate of the rand. This
phenomenon is not unique to the rand as other commodity-based economies have
experienced similar currency strength against the US dollar.
Labour markets
In recent months inflationary pressure emanating from the labour markets has been
moderating (Figure 8). Wage inflation measured in terms of the year-on-year changes in
nominal remuneration per worker in the formal non-agricultural sector, which recorded
just over 12 per cent in each of the quarters of 2008, slowed to 11,5 per cent in the first
quarter and 8,7 per cent in the second quarter of 2009. Labour productivity, measured
South African Reserve Bank

Monetary Policy Review November 2009
Index: 2000 = 100 (foreign currency per rand)
Rand per euro
Rand per US dollar
Figure 7
Exchange rates of the rand

M
M
J
S
N
J

M
M
J
S
N
J

M
M
J
S
N
J

Nominal effective exchange rate of the rand (NEER)

Rand per US dollar

Rand per euro (right-hand scale)

as the ratio of real value added to employment in the formal non-agricultural sector, rose
by 0,1 per cent in the first quarter of 2009, before declining by 0,5 per cent in the second
quarter. Economy-wide unit labour cost inflation, measured as wage inflation adjusted for
productivity changes in the formal non-agricultural sector, therefore declined to 11,3 per
cent in the first quarter of 2009 and 9,3 per cent in the second quarter, after having
recorded a year-on-year increase of around 12,6 per cent in the final quarter of 2008.
The average level of wage settlements reported for the first nine months of 2009 by the
Andrew Levy Wage Settlement Survey was 9,4 per cent (Figure 9), suggesting that wage
Monetary Policy Review November 2009
South African Reserve Bank
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


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

Per cent

2009*
Figure 9
Average annual inflation and wage settlements

CPI

Average wage settlements
* Data for 2009 are for the first nine months of the year

Sources: Andrew Levy Employment Publications and Statistics South Africa
-2

settlements are falling slowly when compared to the 9,8 per cent recorded for the year
2008. Settlements have ranged from 5 per cent in the paper/printing sector to 12,3 per
cent for the food/agriculture sector over the first nine months of 2009.
Demand and output
Real GDP contracted by 3 per cent on an annualised basis in the second quarter of
2009, following declines of 6,4 per cent in the first quarter of the year and 1,8 per cent
in the final quarter of 2008. Real value added by the primary, secondary and tertiary
sectors all continued to contract in the second quarter. The largest negative contribution
came from the manufacturing sector, where real value added declined by 10,2 per cent,
following a contraction of 22,1 per cent in the preceding quarter.
Real gross domestic expenditure also contracted during the second quarter of 2009
(Table 7). Inventory depletion, a contraction in final consumption expenditure by households, and slowing growth in final consumption expenditure by government and in gross
fixed capital formation resulted in real gross domestic expenditure contracting at an
annualised rate of 14,5 per cent during the quarter.
Table 7
Growth in real GDP and expenditure components
Per cent*

1st qr
2nd qr
3rd qr
4th qr
Year
1st qr
2nd qr
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 final consumption expenditure by households contracted by 5,8 per cent in the
second quarter of 2009, following a decline of 4,8 per cent in the first quarter of the year.
Household expenditure on durable goods has been particularly affected, declining by
18,8 per cent in the second quarter of 2009 and having contracted in each of the
preceding 6 quarters. Growth in real final consumption expenditure by general
government decelerated to 0,2 per cent in the second quarter of 2009, after having
increased at an annualised rate of 5,8 per cent in the first quarter. This deceleration is
mainly attributable to lower spending on the Defence Procurement Programme.
Following a revised annualised increase of 12,7 per cent in the first quarter of 2009,
growth in real gross fixed capital formation slowed to 0,1 per cent in the second quarter.
This deceleration mainly reflected substantially slower growth in real capital outlays by
public corporations, while those by private business enterprises declined at a similar rate
to that recorded in the first quarter of 2009. Real inventories declined by R52,9 billion in
the second quarter of 2009 compared with a decline of R16,6 billion in the first quarter.
South African Reserve Bank

Monetary Policy Review November 2009

Inventory depletion in the second quarter of 2009 was mainly evident in the
manufacturing and agricultural sectors.
Developments in the external sector of the economy resulted in the ratio of the deficit on
the current account of the balance of payments to GDP declining from 7,0 per cent in
the first quarter of 2009 to 3,2 per cent in the second quarter. The decline in the volume
of imports of goods and services outweighed a smaller decline in the volume of exports
of goods and services, resulting in the smaller deficit on the trade account in the second
quarter of 2009. Lower net income and other service-related payments to non-residents
meant that the shortfall in the country’s net services, income and current transfer
account with the rest of the world also narrowed significantly.
South Africa’s gross international reserve position strengthened from US$35,7 billion at
the end of July 2009 to US$39,8 billion at the end of October, partly due to a general
allocation of SDR 1,385 billion from the IMF in August and a special allocation of
SDR 179,9 million in September. The international liquidity position also improved from
US$34,7 billion at the end of July to US$38,8 billion at the end of October.
Real-estate and equity prices
A general easing in risk aversion became evident during the second half of 2009 as
financial markets globally displayed signs of cautious optimism regarding a recovery
in growth. The South African share market followed the upward movement in
international markets, benefiting from a recovery in commodity prices, the lowering of
domestic interest rates and continued non-resident interest. By contrast, the property
market remained in the doldrums, although there are some indications of a return to
positive growth.
The year-on-year changes in nominal house prices (Figure 10) have generally been
negative since the end of 2008, declining to rates last recorded more than 20 years ago.
The rate of change in the average price of residential property in the middle segment of
Monetary Policy Review November 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 10 House prices
the market, as measured by the Absa House Price Index, reached a recent low at a
negative rate of 3,5 per cent in April 2009, before improving to 2,6 per cent in October.
This was mirrored by the First National Bank House Price Index which recorded a similar
improvement from a negative year-on-year rate of 8,7 per cent in June 2009 to -1,0 per
cent in October. The change over 12 months in the Standard Bank median house price
recorded a decline of 4,6 per cent in October 2009.
Building statistics published by Statistics South Africa, summarised in Table 8,
indicate the deteriorating level of activity in the real-estate sector during 2009, while
suggesting bleak prospects for future construction activity. The real value of building
plans passed by larger municipalities during the first eight months of 2009, which
provides insight into future construction activity, decreased by 29,5 per cent
compared with the period January to August 2008. The real value of building plans
passed for residential buildings recorded a decline of 46,5 per cent measured on this
basis, with less pronounced decreases of 13,6 per cent recorded in the category for
additions and alterations, and 10,3 per cent in plans for non-residential buildings.
Table 8
Real value of building plans passed and buildings completed in
larger municipalities
Annual percentage change

2009*
Building plans passed

Buildings completed

Data for 2009 are for the first eight months of 2009 compared with the same period of the previous year
Source: Statistics South Africa
The real value of buildings reported as completed in larger municipalities during the first
eight months of 2009 decreased by 11,7 per cent when compared with the same period
a year earlier. Measured on this basis, the real value of residential buildings completed
declined by 25,2 per cent, while increases of 1,0 per cent for non-residential buildings
and 10,0 per cent for additions and alterations were reported.
Following global trends share prices on the JSE Limited (JSE) recorded a notable
recovery during 2009 (Figure 11). From its recent low of 18 121 index points on
3 March 2009 the FTSE/JSE All-Share Index (Alsi) increased by 43 per cent to 25 925
on 4 November 2009. The trend was consistent with international markets becoming
increasingly confident of a global economic recovery. Continued non-resident interest,
improvements in commodity prices and lower domestic interest rates ensured that the
buoyant share market conditions in the first ten months of 2009 were spread fairly
widely across the various sectors. The daily average price level of shares listed in the
resources sector increased by 40 per cent from 3 March to 4 November 2009. Over
the same period the industrial index recorded a gain of 44 per cent while the financial
South African Reserve Bank

Monetary Policy Review November 2009

index rebounded by 48 per cent as the lower interest rates and the appreciating
exchange value of the rand weighed favourably on the profitability prospects of
companies in these sectors.
Fiscal policy
The Medium Term Budget Policy Statement (MTBPS) was presented by the Minister of
Finance on 27 October 2009. The revised budget balance for 2009/10 is a deficit of
R183,8 billion, which represents 7,6 per cent of GDP (Table 9). This revised budget
balance is twice the deficit of 3,8 per cent of GDP projected in the Budget Review 2009.
Consolidated government revenue reflects the impact of lower earnings and reduced
consumption and imports on tax revenues, and is now expected to be
R657,5 billion in 2009/10, significantly lower than the estimate of R740,4 billion made in
February. Consolidated government expenditure in 2009/10 is expected to be slightly
higher than projected in February, rising from R834,3 billion to R841,4 billion. In the
medium term, projected deficits as a percentage of GDP are 6,2 per cent for 2010/11,
declining to 5,0 per cent for 2011/12, and to 4,2 per cent for 2012/13.
The estimated public-sector borrowing requirement (PSBR), reflecting the higher financing
requirements of government and the non-financial public enterprises, increased from
R88,9 billion in 2008/09 (3,8 per cent of GDP) to a revised R284,5 billion for 2009/10
(11,8 per cent of GDP). The PSBR is projected to remain relatively high over the medium
term as a result of the infrastructure programmes of the non-financial public enterprises,
declining to 11,2 per cent of GDP in 2010/11, to 9,4 per cent of GDP in 2011/12 and to
8,4 per cent of GDP in 2012/13. Net loan debt as a share of GDP has been revised
upwards from 25,6 per cent of GDP in the February Budget Review 2009 to 29,2 per cent,
and is projected to increase to 41,1 per cent of GDP by 2012/13.
Monetary Policy Review November 2009
South African Reserve Bank
Indices: 1 January 2007 = 100

FTSE/JSE All-Share Index
United States (S&P 500)
Euro area (DJ Euro Stoxx 50)
Japan (Nikkei 225)
Figure 11 Share price indices

Brazil (Bovespa)
India (Bombay Sensitive)
Malaysia (Kuala Lumpur Composite)
China (Shanghai A Share)
Sources: JSE Limited and I-Net Bridge
Table 9
Public finance data

Revised
Outcome
Budget
estimates
Medium-term estimates
Consolidated
government* (R billions)

As a percentage of GDP

Includes national government, provinces, social security funds and selected public entities
**
PSBR: Public-sector borrowing requirement
Source: National Treasury Medium Term Budget Policy Statement 2009
Monetary conditions
Growth in total loans and advances extended to the private sector remained lacklustre
in 2009, despite the cumulative effect of decreases in lending rates as monetary policy
eased in successive steps from December 2008 (Figure 12). The sluggish response in
the quantity of credit demanded to decreases in lending rates partly reflected the low
levels of consumer and business confidence associated with concerns over prospects
for income and employment, and impaired balance sheets on account of asset
market declines. The supply of credit has also been affected by stricter lending criteria
South African Reserve Bank

Monetary Policy Review November 2009
Percentage change over twelve months

Figure 12 Banks’ loans and advances by type
Mortgages
Instalment sale and leasing
Credit card advances
General advances
Overdrafts
Total loans and advances
-20
-10

applied by banks. Box 1 provides an analysis of banks’ deposit and lending rates over
the inflation targeting period.
Monetary Policy Review November 2009
South African Reserve Bank
Box 1 Analysis of banks’ deposit and lending rates over the inflationtargeting period
Credit extension to both households and companies has been slow to react to the easier monetary
policy stance adopted since December 2008 as weaker macroeconomic conditions continue to
affect the South African economy. Year-on-year growth in banks’ total loans and advances extended
has declined significantly from near record levels of around 25 per cent, on average, in 2007 to
single-digit growth in 2009. Growth in money supply followed a similar downward trajectory due to
deteriorating growth in household and corporate income and declining household wealth.
This box briefly examines the degree of pass-through and the speed of adjustment in banks’
deposit and lending rates in response to changes in the benchmark repurchase rate in South Africa
during the period since the introduction of the inflation-targeting monetary policy framework in
2000. The data are obtained from Banks Act BA returns (DI returns prior to 2008), submitted to
the Registrar of Banks.
The lending and deposit rates offered by banks are affected by their cost of funding which, inter
alia, is impacted by the money-market yield curve and, ultimately, the repurchase rate. Variable
deposit and lending rates, therefore, fluctuate along with changes in the repurchase rate – lending
rates at a margin above, and deposit rates at a margin below to slightly above the repurchase rate,
depending on maturity, risk, liquidity and prevailing economic conditions.
Deposit rates
An average calculated deposit rate or funding cost is derived by analysing banks’ interest outlays
against deposit liabilities1 (Figure B1.1).
The spread between deposit rates and the repurchase rate narrowed during the initial phases of
the previous and current monetary policy easing cycles, while adjustments to deposit rates also
tended to lag during policy tightening phases. Depositors, therefore, tended to receive a relatively
smaller interest benefit during monetary policy tightening phases, but received a relatively larger
interest benefit during monetary easing cycles. A much narrower spread between banks’ deposit
Per cent

Repurchase rate
Spread
Figure B1.1
Calculated average funding cost and the

repurchase rate
Average funding cost
-6
-3

Calculated as the ratio
of total rand-denominated
interest expenses to total
rand-denominated deposits.
South African Reserve Bank

Monetary Policy Review November 2009
rates and the repurchase rate was maintained in 20082 and early 2009 as banks probably
attempted to attract deposits during a period of decelerating real economic growth. The beneficial
rates that banks offered are especially evident in rates on longer term deposits, such as fixed
deposits (Figure B1.2).
Information on the actual reported interest rates on existing deposits offered by banks, illustrated
in Figure B1.3, also tends to paint a similar picture. While deposit rates vary depending on the client
and term of deposit, the rates on fixed deposits of less than one year for different economic sectors
displayed a close alignment with the repurchase rate. Interest rates on existing deposits lagged the
downward movement in the repurchase rate during 2009, with households receiving a somewhat
larger benefit relative to other client categories.
Per cent
Repurchase rate
Transmission account deposits
Figure B1.2
Deposit categories: Calculated average yields
Current account and call deposits
Notice and fixed deposits

Per cent
Figure B1.3
Client categories: Average 0–1-year fixed-deposit

rates (top five banks)

Repurchase rate

Central and provincial government – fixed deposits

Private non-financial corporations – fixed deposits

Household sector – fixed deposits

The implementation of
the Basel II accounting
framework in January 2008
may have influenced the
comparability of data over
the period of analysis.

Monetary Policy Review November 2009
South African Reserve Bank
Lending rates
The average calculated yield on banks’ total rand-denominated loans and advances was found to
fluctuate at around 240 basis points above the repurchase rate from 2001 to 2009. Some
narrowing occurred during 2002 and from 2006 to 2008 during the tightening phases of monetary
policy, suggesting that lending rates lagged the increases in the repurchase rate. Similarly, the gap
between lending rates and the repurchase rate widened when policy eased in 2003 and 2009. The
lagged response of lending rates probably contributed to the slowdown experienced in the growth
of credit extension in the wake of the monetary policy easing cycle. The repurchase rate and an
implied average lending rate3 are shown in Figure B1.4.
Figure B1.5 shows that most of the lending rates of the different loan categories fluctuated between
the repurchase rate and the prime rate (benchmarked at the repurchase rate plus 350 basis
points). Mortgage rates, a lower risk product due to its term and collateral requirements, fluctuated
Per cent

Figure B1.4
Calculated average interest rate on total loans and

advances, and the repurchase rate

Repurchase rate

Average lending rate

Spread

Per cent
Prime overdraft rate
Mortgage loans
Instalment sale and leasing finance
Figure B1.5
Calculated average interest rates on categories of

loans and advances compared to the repurchase

and prime rates
Repurchase rate
Credit card debtors
Overdrafts and loans

Calculated as the ratio
of total rand-denominated
interest income to total randdenominated loans and
advances.
South African Reserve Bank

Monetary Policy Review November 2009
around mid-way between the repurchase and prime rates, while interest rates on instalment sales
fluctuated closer to the prime rate. Overdrafts are generally subject to greater variation in lending
rates, while credit card debtors are charged a significantly higher premium for the privilege of
having access to a more flexible credit facility.
When comparing actual reported lending rates for households and companies, the interest rates
vary according to the loan category (Figure B1.6). In the case of mortgage loans, the rates for
households and companies appeared to be quite similar, while overdraft rates displayed a greater
variance between different economic sectors. Rates on overdrafts to the public sector are generally
substantially lower than those available to the private and household sectors.
Conclusion
This analysis suggests a complete long-term pass-through for most lending rates, but incomplete
immediate short-term pass-through of the policy rate to bank lending rates. However, there is no
evidence of an asymmetric response of lending rates to changes in the repurchase rate. Although
banks’ lending and deposit rates appear to have reacted in a broadly consistent way during the
period under review, there is some evidence of heterogeneity in the adjustments across lending
categories. Furthermore, there is evidence of a somewhat more lagged response of banks’ interest
rate adjustments over the most recent monetary policy cycle. While this may constrain lending
during an easing phase of the cycle, the relatively more favourable deposit rates that have prevailed
in the recent period should encourage renewed growth in money supply over the longer term.
Sources
Implied average interest rates were calculated from the aggregated information of bank returns:
BA100 Balance sheet (DI100 prior to January 2008)
BA120 Income statement ((DI200 prior to January 2008)
Average actual interest rates were extracted from:
BA930 Interest rates on deposits, loans and advances
Per cent
Per cent
Figure B1.6
Average lending rates (top five banks)

Repurchase rate

Private non-financial corporate sector
J
J
S
N
M
M

J
J
S
N
M
M

Mortgage rates
Overdraft rates
Household sector
Central and provincial government

Year-on-year growth in banks’ total loans and advances to the private sector fell back
from average growth of around 20 per cent in 2008 to a negative 0,2 per cent in
September 2009 – the slowest growth on record. Negative year-on-year rates of change
in total loans and advances were last recorded in May 1966. Growth over 12 months in
mortgage advances, which dominate the bank loans and advances aggregate, declined
notably from 24,5 per cent at the start of 2008 to 4,8 per cent in September 2009.
Growth in other loans and advances, which include general loans, overdrafts and credit
card advances, followed a similar downward trajectory, declining to negative growth
rates from May 2009. The securitisation of loans and advances by banks, a
phenomenon that gathered pace in South Africa before contracting sharply in the wake
of the turmoil in international markets in 2008, is discussed in Box 2.
Similar to the deceleration in credit extension, the year-on-year growth in broad money
supply (M3) fell back from average growth of 19,0 per cent in 2008 to 4,0 per cent in
September 2009 (Figure 13). During the same period a decline of similar magnitude
was recorded by the narrower M2 monetary aggregate. The M1 monetary aggregate,
which represents cash, cheque and other demand deposits, declined to negative
growth in the first three months of 2009, before improving to year-on-year growth of
1,2 per cent in September.
Monetary Policy Review November 2009
South African Reserve Bank
Percentage change over 12 months

Figure 13 Growth in monetary aggregates
-10
-5

M3
M1
M2
Box 2 Asset-backed securitisation by South African banks
The United States (US) sub-prime-related credit crisis placed renewed emphasis on the issuance
and use of financial derivatives and financing vehicles globally as securitisation of risky assets
served to amplify the extent of the crisis. Securitisation provides an avenue whereby nonmarketable loans and/or cash flows are replaced by negotiable securities issued in the capital
markets. By issuing such debt instruments, future cash inflows are turned into present cash.
Internationally, and especially in the US market, the securitisation of risky mortgage loans and the
use of financial derivatives and financing vehicles helped to transfer and spread the risk in an
increasingly leveraged global financial system. Securitisation transactions in these markets
accelerated after 2004 when the Basel II4 Accord on international bank regulation was published.
The second Basel Accord opened an arbitrage opportunity for banks through its recognition of the

Basel Accord: A set of
recommended common
banking standards agreed to
by the Basel Committee on
Bank Supervision in 1988, with
the focus on capital adequacy
and risk. The second Basel
Accord, known as Basel II,
became effective from 2008.
It focuses on three main areas,
namely minimum capital
requirements, supervisory
review and market discipline.
South African Reserve Bank

Monetary Policy Review November 2009
transfer of assets, or the risks related to them, and allowing for the exclusion of these assets from
risk-based calculations. This essentially enabled banks to reduce their capital requirements through
securitisation and contributed towards the acceleration in off-balance-sheet activity.
In South Africa the scale and extent of securitisation were limited by, inter alia, market size, lack of
demand and prudent supervision. The first issuance in the present decade of a mortgage-backed
securitisation to the value of R1 billion occurred in 2002. This was followed by the securitisation of
vehicle receivables, and other types of collateralised loans and advances in subsequent years.
Activity picked up from 2005 with securitisations amounting to around R10 billion for that year.
Issuance doubled in 2006 and increased further to over R30 billion in 2007. The issuance of
securitised bank assets virtually dried up in early 2008, when turmoil in international markets led to
risk aversion and a general tightening in credit conditions. An independent review of all
securitisation schemes affecting banks was commissioned by the Bank Supervision Department of
the South African Reserve Bank (the Bank) during April 2008.
Following the recommendations made by a large international locally based auditing firm, the
supervisory authority stated its intent to consider the proposals in order to ascertain the need to
revise the legislative framework. The report also noted that securitisation in South Africa was not
as complicated as in the US and in European countries, and that the assets housed in South
African schemes tended to have a high level of transparency. Risks related to securitisation
schemes were found to have been managed appropriately by the banks reviewed. Furthermore,
top-tier South African banks, on average, sourced only 4 per cent of their total funding from
securitisation, which was significantly less than that of international banks that struggled during the
liquidity crisis.
References
Wehinger, G. 2008. “Lessons from the financial market turmoil: Challenges ahead for the financial
industry and policy makers”. Financial Market Trends, Vol. 2008/2, No. 95. Paris: Organisation for
Economic Co-operation and Development.
South African Reserve Bank. 2009. Bank Supervision Department Annual Report 2008. Pretoria:
South African Reserve Bank.
R billions
Figure B2.1
Asset-backed securitisations by private-sector

banks – new issues

Instalment sale and leasing finance

securitised

Mortgage advances securitised

Other loans and advances securitised
Source: Bond Exchange of South Africa

Monetary policy
The global financial crisis resulted in the widespread adoption of more accommodating
monetary policy stances globally. South Africa’s monetary policy easing began in
December 2008, and in the four MPC meetings between then and April 2009 the
repurchase rate was reduced by 350 basis points (Figure 14). Since then, and following
the publication of the previous Monetary Policy Review, there were six meetings of the
MPC, and the repurchase rate was reduced by a further 150 basis points – by 100
basis points in May and a further 50 basis points in August. The repurchase rate
declined to a level of 7 per cent per annum, which was the same as the low point of
the interest rate cycle reached in 2005, and the lowest nominal policy rate since the
late 1970s. However, the inflation rate in 2009 was significantly higher than that which
prevailed in 2005.
The adjustment in the repurchase rate offset the 500 basis point monetary policy
tightening implemented between June 2006 and June 2008, and was over a considerably
shorter period. This decisive response reflected the severity of the global and domestic
downturn, and the consequent dissipation of inflationary pressures. However, during the
period under review, it appeared that the global and domestic recessions were reaching
their lower turning points, and, given the lag in the impact of monetary policy actions on
demand and inflation, the need for further stimulus was reduced.
During this period, the inflation rate remained outside the inflation target range, but the
inflation forecasts of the staff of the Bank consistently showed that the inflation rate was
expected to follow a persistent downward trend to within the target range. By the time
of the November 2009 meeting the latest inflation outcome (September) was 6,1 per
cent, only marginally outside the range. Although there were slight changes to the
forecast in the various meetings, as a result of changing assumptions of the exogenous
variables, the pattern remained relatively stable. The forecasts consistently showed that
CPI inflation was expected to enter the inflation target range on a sustained basis in the
Monetary Policy Review November 2009
South African Reserve Bank
Per cent

Prime overdraft rate
Repurchase rate
Three-month negotiable certificates of deposits rate
Figure 14 The repurchase rate and other short-term interest rates

second quarter of 2010 and to remain within the target range until the end of the
forecast period in the final quarter of 2011. However, the changing electricity price
assumptions reversed this favourable trend somewhat in the later part of the forecast
period. The most recent forecast presented to the MPC is discussed in greater detail
later in this review. Of concern to the committee was the fact that the central forecast
remained close to the upper end of the target, so that relatively small shocks to inflation
could result in a breach of the upper end of the target. During the period under review,
the main changes to exogenous assumptions related to the exchange rate and
administered prices, particularly petrol and electricity prices.
Inflation expectations are an important determinant of inflation outcomes, as they impact
on price and wage setting. During the past period, inflation expectations have been a
concern for the committee, as they did not appear to reflect fully the actual decline in the
inflation that had been taking place. According to the inflation expectations survey
conducted by the Bureau for Economic Research (BER) at Stellenbosch University,
inflation expectations for 2009 deteriorated during the second quarter of 2009. While a
downward trend for the subsequent two years remained, only the financial analysts
expected that inflation would be within the target range in 2010 and 2011. The survey
conducted in the third quarter of 2009 showed some improvement, but, on average,
remained above the upper end of the inflation target range, with inflation expected to
average 7,5 per cent in both 2010 and 2011. Again, only the financial analysts expected
that inflation would be within the target range in these years.
The outlook for the global economy featured prominently in the deliberations of the
committee, because of the linkages to the domestic economy. Whereas in the first few
months of the year the global economy was characterised by progressively worse
outcomes, by the May 2009 MPC meeting there were tentative signs that the global
recession was bottoming out as financial market conditions had become less restrictive.
During the subsequent months, there was greater optimism concerning the global
outlook, but there were some doubts about the strength and the sustainability of the
recovery. By September forecasts were generally being revised upwards, and the risks to
the global growth prospects were generally assessed to be on the upside. There were,
however, still concerns about the timing and extent of reversals of monetary and fiscal
policy stimuli, which could retard the rate of recovery. The pace of recovery was also
expected to be uneven across regions, with faster growth expected in emerging markets,
particularly those in Asia. As a result of weak demand and lower commodity prices, global
inflation pressures remained subdued and were not expected to place significant
pressures on domestic inflation despite the generally loose monetary conditions.
The domestic recession and the associated widening of the domestic output gap resulted
in downward pressure on domestic inflation. The output gap, which is calculated as the
difference between actual and potential output growth, is an important determinant of
inflation. While potential output is difficult to calculate with precision and may also have
declined over the past months, the output gap nevertheless remains wide. By the time of
the May meeting, the extent of the GDP growth contraction in the first quarter was
apparent. GDP had contracted at a quarter-on-quarter annualised rate of 6,4 per cent,
and capacity utilisation in the manufacturing sector had declined to 79 per cent in the
same period. At that time it was expected that negative growth would persist into the
second quarter, but the pace of contraction was expected to moderate. This was
confirmed by the quarter-on-quarter decline of 3,0 per cent, published in August.
In September 2009 the committee indicated that the lower turning point of the cycle may
have been reached, but that recovery in the short term would be relatively slow and
South African Reserve Bank

Monetary Policy Review November 2009

tentative. The South African Reserve Bank’s composite leading indicator indicated that
the economy was likely to resume positive growth by the end of the year. This was
consistent with other high-frequency indicators, including the Kagiso/BER Purchasing
Managers’ Index (PMI). By the October meeting, the three-month-on-three-month
growth rates in manufacturing and mining had become positive, further reinforcing the
positive growth outlook.
The subdued domestic expenditure was a persistent theme during the period under
review, and there were no signs that the easier stance of monetary policy was likely to
have imminent demand-led inflationary impacts. Wholesale and retail trade sales
contracted during this period, as did overall household consumption expenditure.
Expenditure on durable goods was particularly weak over the period. In October the
MPC noted that real retail trade sales had declined at a year-on-year rate of 7,0 per cent
in August, while in the three months to August there was a 1,0 per cent decline.
However, there were some signs that the negative trend of motor vehicle sales may have
reached its lower turning point in September 2009 with zero or slightly positive rates of
change being recorded on a month-on-month and quarter-on-quarter basis.
Trends in domestic credit extension reflected the weak state of domestic consumption
expenditure. The committee noted that supply-side developments may also have
contributed to these pressures, with the generally tighter credit criteria applied by banks
to both household and corporate sector borrowers. However, in October it was noted
that the Ernst & Young Financial Services Index had indicated that credit standards
applied by retail banks to loan applications continued to tighten in the third quarter of
2009, but at significantly lower levels.
Domestic expenditure was also constrained by negative wealth effects over the period.
Although equity prices had recovered significantly since their lows in March, they were
still significantly below the peaks reached in 2008. House prices also declined further
over the period, but the various house price indices indicated that there appeared to be
a moderation in the rate of decline in house prices. These factors, along with indications
that consumers were attempting to reduce their overall debt and repair impaired balance
sheets, were seen to be a constraint on consumption expenditure in the near term.
In the early stages of the global financial crisis, the rand exchange rate had depreciated
significantly, and the exchange rate was seen as one of the main upside risk factors to
inflation. However, during the period under review, as global risk aversion subsided and
commodity prices recovered somewhat, the rand appreciated along with a number of
emerging-market and commodity-producing currencies. The exchange rate, while still
relatively volatile, strengthened significantly and by October had appreciated since the
beginning of the year by about 20 per cent on a trade-weighted basis. The committee
recognised the vulnerability of the rand to changes in sentiment or risk aversion, and felt
that the risk to inflation from this source had declined over the period.
The risks posed to the inflation outlook by a number of other variables were also
perceived to have moderated somewhat. For most of 2008 and the early part of 2009,
food prices had posed an upside risk to the inflation outlook. Although food prices at the
producer price level had been moderating for some time, this was not initially reflected
at the consumer price level. At the May meeting the committee noted that although
manufactured food price inflation had declined to 8,4 per cent in April and agricultural
price inflation to 2,2 per cent, the moderation at the consumer price level was stubbornly
slow. At that time consumer food price inflation measured almost 18 per cent. Since
then the rate of deceleration of consumer food price inflation has increased and by
Monetary Policy Review November 2009
South African Reserve Bank
September it had declined to 4,9 per cent; below the average headline inflation rate of
6,1 per cent. Inflation at the producer price level continued to indicate that this
favourable trend was likely to continue.
International oil prices had been one of the main upside risk factors for the first part of
2008, but this changed later in the year when the oil price declined to a low of around
US$35 per barrel in the wake of the global downturn. Since then oil prices have doubled,
as global prospects improved and the US dollar depreciated, but are still well below the
peaks reached in 2008. However, the impact on domestic petrol prices was relatively
modest as the higher international oil prices were largely offset by the appreciation of the
rand exchange rate. Since May 2009 the domestic petrol price had increased by about
30 cents per litre.
While demand pressures remained benign, the committee consistently identified costpush pressures as being the main threat to the inflation outlook. Of particular concern
were wage settlements and administered price increases. During the period, nominal
wage increases were generally in excess of inflation. However, by October 2009 the
committee noted that there was evidence that nominal wage increases had been
moderating. The substantial electricity tariff increases requested by Eskom were seen as
the main longer-term threat to the inflation outlook. The request by Eskom for a trebling
of current electricity tariffs over the next three years will be decided upon by the National
Energy Regulator of South Africa (NERSA) in February 2010.
During this period the MPC continued to implement monetary policy within a flexible
inflation-targeting framework. While focusing on bringing inflation down to within the
target range over a reasonable time frame, the committee remained sensitive to cyclical
growth considerations. At the MPC meeting in May the risks to the inflation outlook were
still seen to be on the downside and the committee decided to reduce the repurchase
rate by 100 basis points. The view of the committee was that the widening output gap
contributed to an improved inflation outlook despite the relatively slow pace of disinflation.
The committee’s assessment of the downside risks was such that the additional
reduction in the repurchase rate would provide a stimulus to the economy without
creating significant additional inflationary pressures. At the subsequent meeting, in June
2009, the repurchase rate was kept unchanged. The committee was cognisant of the fact
that there had been significant monetary accommodation since December 2008, and felt
it prudent to pause and assess the impact of previous interest rate reductions.
By August 2009 the MPC had decided that the balance of risks to the inflation outlook
had tilted to the downside again as a result of the continued adverse output and
expenditure trends, along with favourable exchange rate and food price developments.
Accordingly, the committee decided to reduce the repurchase rate by a further 50 basis
points, bringing the cumulative decrease since December 2008 to 500 basis points.
At the subsequent meetings in September and October 2009 the risks to the outlook
were seen to be more balanced than before, particularly in the light of positive indications
that the economy was likely to emerge from the recession later in the year. At the same
time, the Eskom request for further electricity tariff increases imparted additional upside
risk to the outlook. This rebalancing of the perceived risks prompted an unchanged
monetary policy stance. At the November 2009 meeting the risks were assessed as
having remained more or less unchanged and so the repurchase rate was kept
unchanged at 7 per cent per annum.
South African Reserve Bank

Monetary Policy Review November 2009

The outlook for inflation
The outlook, risk and uncertainties relating to some of the factors that determine the
outlook for inflation are presented in this section.
International outlook
Recent data suggest that aggressive policy action by central banks and governments in
a large number of countries has provided the impetus for the global economy to bottom
out and regain traction. The huge policy responses by various governments have
enabled an incipient economic recovery, restored confidence, and allayed fears of global
financial collapse and deflation. The latest projections for growth in the G-20 countries,
published in the IMF’s October 2009 World Economic Outlook and incorporated in
Figure 15, show a marked turnaround in the forecasts for 2010 relative to the growth
rates achieved in 2009.
A similar reversal is foreseen for the global economy. After contracting by about 1,1 per cent
in 2009, world growth is projected by the IMF to reaccelerate to 3,1 per cent in 2010 (Table
10). This is comfortably above recent growth rates, but still well below the rates achieved
before the crisis. According to the latest projections, inflation in advanced economies is
expected to ease to 0,1 per cent in 2009 due to the contraction of global economic activity,
before accelerating to 1,1 per cent in 2010. Owing to moderation in energy and food prices,
annual consumer price inflation continued to decelerate in emerging markets as a group
during 2009. Inflation in emerging-market and developing economies is projected to
Monetary Policy Review November 2009
South African Reserve Bank
Figure 15 IMF forecasts for real GDP: G-20 countries

Sources: IMF World Economic Outlook database, October 2009
Annual percentage change
Russia
Mexico
Turkey
Japan
Germany
Italy
United Kingdom
European Union
United States
Argentina
Canada
France
South Africa
South Korea
Saudi Arabia
Brazil
Australia
Indonesia
India
China


decelerate further from 5,5 per cent in 2009 to 4,9 per cent in 2010. Despite upward
pressure from recovering commodity prices, global inflation is expected to remain subdued
through 2010, held back by significant excess capacity. Risks for sustained deflation appear
small, as core inflation and inflation expectations in most major economies are still holding
in the 1 to 2 per cent range.
Table 10
IMF projections of world growth and inflation for 2009 and 2010*
Per cent
Real GDP
Consumer prices**


Other emerging-market and developing countries....

IMF projections for 2009 as at April 2009 in parenthesis
**
Zimbabwe excluded
Source: IMF World Economic Outlook, October 2009
The US economy appears to be stabilising after contracting for four consecutive
quarters. It expanded at a higher-than-expected 3,5 per cent seasonally adjusted and
annualised rate in the third quarter of 2009 thanks to a recovery in consumer spending.
Financial markets have shown signs of improvement, and interbank lending has largely
returned to normal. Companies appear to be done with their cost cutting and this could
have laid the groundwork for economic growth in the third quarter of 2009. The
US$787 billion stimulus bill was also expected to have given GDP a boost in the third
quarter. High-frequency indicators point to a diminishing rate of deterioration, and
industrial production may be close to bottoming out; the inventory cycle is turning; and
business and consumer confidence has improved. These developments are consistent
with stabilisation of output during the second half of 2009 and with a gradual recovery
emerging in 2010.
Japan’s economy emerged from recession by improving significantly in the second
quarter of 2009, after a second significant double-digit rate of decline in GDP in the first
quarter of the year. Japan’s US$275 billion stimulus package was largely credited with
the rebound. The plan included massive public works projects, a “cash-for-clunkers”
programme to promote the replacement of old vehicles with new ones, and sending
consumers cheques amounting to about US$130 each. These initiatives helped drive
consumer spending up, but analysts have been cautious about labelling Japan’s
South African Reserve Bank

Monetary Policy Review November 2009

economic turnaround as a true recovery, as businesses cut inventories very low in prior
quarters. The increasing rate of deflation, unemployment rising to a record high in
September and jobless rates that are projected to rise above the 6 per cent level in 2010
are growing sources of concern. Another concern is that Japan’s fiscal stimulus has
grown the debt-to-GDP ratio to an all-time-high of 200 per cent.
Consumer and business survey indicators have been recovering in the euro area, but
data on real activity show few signs of stabilisation and thus activity is projected to
strengthen more slowly than elsewhere. Macroeconomic policies are providing support,
but much adjustment in the labour market still needs to be done. Rising unemployment
will weigh on consumption and activity, as will the region’s heavy dependence on the
banking sector. However, the two largest economies in the euro area recorded positive
growth in the second quarter of 2009. Germany rebounded from four straight quarters
of decline to grow at an annualised pace of 1,3 per cent in the second quarter of 2009.
A US$120 billion stimulus package, a US$25,9 billion business lending programme and
extensions of government-subsidised labour contracts helped Germany to emerge from
the recession. Business confidence in Germany rose to a one-year high, and consumer
confidence is at a 15-month high. France’s US$37 billion economic stimulus programme
helped bring the French economy back to positive growth in the second quarter of 2009
for the first time in more than a year. However, the fiscal deficit is forecast to rise to
between 7 per cent and 7,5 per cent of GDP in 2010, which is more than double the
3 per cent limit set by the European Union.
The OECD expects the UK’s real GDP to fall by 4,7 per cent in 2009, having previously
forecast it would shrink by 4,3 per cent. The UK is the only major economy for which
the OECD has forecast a larger contraction than previously, although the country has
shown signs that it is beginning to recover. In August the services sector grew at the
fastest pace in almost two years, while factory output has begun to rebound after
significant declines throughout the downturn. The latest business and consumer
confidence surveys show a slight improvement, and the UK government announced
plans to continue the nation’s stimulus efforts at least through next year.
Many developing countries posted growth in their GDP during the second quarter of
2009, benefiting from China’s strength, as well as unprecedented global stimulus and
following a sharp decline in economic activity in the first quarter of 2009. Estimates for
many developing economies were revised upwards by the IMF and the positive
feedback loop, launched by government stimulus, is expected to continue.
China has weathered the global downturn better than any other G-20 nation and the
Chinese economy has responded to reflationary measures. China’s GDP rebounded well
in the second quarter of 2009 as the economy was aided by a US$586 billion stimulus
package, increased bank lending and government support for exports. According to a
recent report from the Asian Development Bank, China’s state-controlled banking
system lent US$1,2 trillion more to Chinese businesses and consumers in the first seven
months of 2009 than during the same period a year ago. As a result, factory output,
construction and auto sales grew rapidly in the second quarter. Although the global
downturn resulted in a slowdown in China’s GDP growth to an annualised rate of 6,5 per
cent in the first half of 2009, the IMF has forecasted real growth of 8,5 per cent for 2009
and 9 per cent for 2010.
Monetary Policy Review November 2009
South African Reserve Bank
The IMF expects African economies to recover fairly quickly once the global economy
gains momentum. Debt levels in most countries on the continent are not a source of
concern, and fiscal and monetary policies are expected to remain supportive of recovery
in these countries. Both China and India have sharply increased trade with, and
investments in, Africa, which could further aid the region’s recovery. The strength of the
recovery would, nevertheless, be determined by the extent of the rebound in global
trade, favourable commodity prices and a pick-up in worker remittances.
Improving signs of recovery in a number of OECD countries resulted in the composite
leading indicator compiled by the OECD recording year-on-year increases of 0,7 per cent
in August and 3,4 per cent in September 2009 (Figure 16). These are the first positive
changes since November 2007. The JPMorgan Global Manufacturing PMI remained
above the neutral level of 50 for a third consecutive month in October 2009 at 54,4 after
a reading of 53 was recorded in September. The year-on-year rate of decline in the OECD
industrial production index decelerated to 11,3 per cent in August 2009.
Among leading advanced economies, only the UK, Italy, and Canada were still in
recession in the third quarter of 2009. The outlook for emerging economies is even
brighter, but some parts of the developing world are still experiencing difficult conditions
– notably parts of central and eastern Europe and Africa. The re-emergence of relatively
strong growth in parts of Asia and Latin America means that these regions are leading
the West out of recession. At the G-20 Summit in the US held in September 2009 steps
were announced to help the global economy transition to sustained growth and G-20
leaders gave the assurance that policy stimulus would continue until a durable recovery
is secured. However, the first tentative signs are emerging that some central banks are
scaling back their supportive policies and that the risks to growth are more balanced.
South African Reserve Bank

Monetary Policy Review November 2009
Percentage change over 12 months
Index points

OECD composite leading indicator

OECD industrial production index

JPMorgan global manufacturing PMI (right-hand scale)
Sources: OECD and JPMorgan
Figure 16 Selected indicators of global economic activity


Outlook for domestic demand and supply
Although real GDP growth has been negative in the past three quarters, there is a
general expectation among economists surveyed by Reuters in October that growth
in South Africa will improve moderately in the fourth quarter of 2009 and continue on
a positive trajectory in 2010 and 2011. With the exception of July, the Bank’s
composite leading indicator (discussed in Box 3) has increased each month since
April 2009, pointing to a probable recovery in economic conditions towards the end
of 2009. In August 2009 components such as average hours worked per factory
worker in manufacturing, the volume of domestic orders in manufacturing and the
annual percentage change in the number of new passenger vehicles sold have shown
improvements. In addition, commodity price and share price indices, as well as
leading trading-partner indicators, all point to economic recovery and an improved
export climate.
According to the latest Reuters consensus forecasts surveyed in October 2009, the
South African economy is expected to contract by 1,91 per cent in 2009, with the fourth
quarter of the year expected to show an annual increase of 1,94 per cent, followed by
positive growth of 2,83 and 2,91 per cent in the first and second quarters of 2010.
Growth in 2010 is expected to recover to 2,33 per cent and to 3,50 per cent in 2011.
In its October 2009 Forecast of Key Economic Variables, the BER projected a calendar
year real economic growth rate of -1,7 per cent in 2009 and 2,7 per cent in 2010,
followed by 3,7 per cent in 2011. According to the MTBPS released on 27 October
2009, real GDP is expected to contract by 1,9 per cent in 2009. However, the growth
rate is projected to be 1,5 per cent in 2010 and 2,7 per cent in 2011.
Monetary Policy Review November 2009
South African Reserve Bank
Box 3 The composite leading business cycle indicator
In monitoring the South African economy, the Bank regularly compiles and continuously analyses
three composite business cycle indicators – leading, coincident and lagging. The composite
leading business cycle indicator is a key indicator of the domestic economic outlook presented in
this Monetary Policy Review and this box briefly discusses the compilation and characteristics of
the composite leading business cycle indicator.
The Bank first published composite business cycle indicators in 1983. Composite business cycle
indicators are compiled by integrating various economic indicators into a single index. Various
factors, such as structural changes in the economy or the identification of new economic
indicators, necessitate the frequent reassessment of the constituent time series of the composite
business cycle indicators. For this reason the composite leading business cycle indicator was last
revised for in 2007. With every revision, a range of economic indicators is evaluated for possible
inclusion and all the time series are subjected to an appraisal system that rates business cycle
indicators according to the
-
economic significance of the process represented by the indicator;
-
statistical adequacy of the data;
-
historical conformity to, and timing relationship with, the business cycle;
-
smoothness of the time series; and
-
timeliness of the data.
The composite leading business cycle indicator currently comprises 12 economic indicators, which
have historically preceded turning points in the business cycle (Table B3.1).
The Bank determines the official reference turning points in South Africa’s business cycle in terms
of the growth cycle definition of business cycles and, according to this methodology, the most
recently identified peak in the business cycle occurred in November 2007. Therefore, the Bank’s
business cycle chronology, published regularly in its Quarterly Bulletin, represents reference
South African Reserve Bank

Monetary Policy Review November 2009
turning-point dates that distinguish between upward phases when the pace of growth in aggregate
economic activity exceeds its long-term growth trend, and downward phases when aggregate
economic activity either contracts or increases at a slower rate than its long-term growth trend.
Table B3.1 Component series of the composite leading business cycle
indicator and their contribution to the August 2009 data point
Component series
Contribution
BER: Average hours worked per factory worker in manufacturing (half weight)
Positive
Job advertisements: The Sunday Times (percentage change over 12 months)
Negative
BER: Volume of orders in manufacturing (half weight)
Positive
BER: Business confidence index
Negative
Number of building plans approved: Flats, townhouses and houses larger than 80 m2
Positive
Number of new passenger vehicles sold (percentage change over 12 months)
Positive
Gross operating surplus as a percentage of GDP
N/A
Interest rate spread: 10-year government bonds minus 91-day Treasury bills
Negative
Index of prices of all classes of shares traded on the JSE
Positive
Real M1 (six-month smoothed growth rate)
Negative
Commodity price index for South Africa’s main export commodities (US dollar based)
Positive
Composite leading business cycle indicator of South Africa’s major trading-partner
countries (percentage change over 12 months)*
Positive
*
The international business cycle indicator comprises the composite leading business cycle indicators of
eight of South Africa’s main trading-partner countries, weighted according to the value of South Africa’s
exports to each country
Periodic revisions of the composite leading business cycle indicator have ensured that this indicator
remains as reliable as possible in predicting movements in the business cycle. The leading business
cycle indicator exhibits a lead time of about 10 months, on average, on business cycle turning
points. The timing relationship of the composite leading business cycle indicator is shown in Table
B3.2 along with the reference turning points of the business cycle for the period since August 1981.
Table B3.2 Timing relationship between the composite leading indicator and
the reference turning points of the business cycle*
Reference turning points
Timing relationship in months
Peak
Trough
Peak
Trough
August 1981
-11
March 1983
-8
June 1984
-1
March 1986
-13
February 1989
-9
May 1993
-9
November 1996
-23
August 1999
-10
November 2007
-8
Average:
-101⁄2
-10
Median:
-9
-91⁄2
*
The minus sign means that this indicator leads the reference turning point

Monetary Policy Review November 2009
South African Reserve Bank
As is the case in other countries, there is a fairly large dispersion in the number of months by which
the leading indicator leads the reference turning points of various cycles. Although the composite
leading and other business cycle indicators provide invaluable information in this regard, a
reference turning point in the business cycle can only be determined accurately ex post. Various
other macroeconomic indicators, together with significant economic events and developments
occurring near a turning point, are subjected to comprehensive analysis to identify the reference
turning point accurately. Figure B3.1 shows the composite leading business cycle indicator over
the officially identified cycle from 1980.
The recent relatively consistent upward trend in the composite leading business cycle indicator
provides significant evidence that a reference trough in the business cycle should arrive towards
the end of 2009 or early 2010. The declining trend in the leading indicator that has persisted since
April 2007 appears to have been reversed. The composite leading indicator increased significantly
in August 2009, the fifth consecutive increase in the indicator since it reached a most recent low
in March 2009. Seven of the eleven component time series that were available for August 2009
increased, while four decreased (Table B3.1).
Countercyclical monetary and fiscal policy measures have paved the way for the domestic
economic recovery, but the ultimate outcome will depend in large measure on the sustainability of
the global recovery that is currently under way. South Africa’s business cycle has a relatively low
contemporaneous concordance with certain trading-partner growth cycles. However, given the
synchronised nature of the current global recession, the resumption of sustainable growth in the
domestic economy will be largely determined by a return to sustained global growth and the
associated strong rebound in global trade and commodity prices. Encouragingly, the International
Monetary Fund (IMF) has forecast a reacceleration of global growth to 3,1 per cent in 2010 in the
October 2009 World Economic Outlook.
References
Du Plessis, S J. 2004. “Reconsidering the business cycle and stabilisation policies in South Africa”.
Paper prepared for the 9th Annual Conference on Econometric Modelling for Africa, held at the
University of Cape Town, 30 June – 2 July. Available online at www.sciencedirect.com.
Venter, J C. 2007. “Revisions to the composite leading and coincident business cycle indicators”.
Quarterly Bulletin, June. Pretoria: South African Reserve Bank.
Venter, J C. 2009. “Business cycles in South Africa during the period 1999 to 2007”. Quarterly
Bulletin, September. Pretoria: South African Reserve Bank.
Index: 2000 = 100

Figure B3.1
Composite leading business cycle indicator

Downward phases of business cycle
As far as the quarterly analysis of manufacturing activity is concerned, the third quarter
2009 BER survey revealed that the net majority of respondents rating current business
conditions worse than those of a year ago decreased from 70 per cent to 53 per cent, with
20 per cent of respondents expecting business conditions to improve in 12 months’ time.
On the supply side, the pace of contraction in production volumes is slowing, while fixed
investment is expected to increase in a year’s time. On the demand side, net majorities
reporting lower sales and order volumes declined from 51 per cent to 47 per cent.
The seasonally adjusted Kagiso PMI, a barometer of domestic manufacturing activity,
increased from 45,9 index points in September to 47,6 index points in October 2009.
The October results showed continued signs of increased activity in the domestic
manufacturing sector, even though the index has not yet reached the break-even level
of 50. Both the business activity and the forward-looking new sales orders indices
increased, reaching 48,4 and 48,9 index points respectively. After rising uninteruptedly
for seven months, the index for expected business conditions declined slightly from
70,3 points in September to 67,9 index points in October. The backlog of sales orders
index increased from 34,4 to 41,6 points, while that of purchasing commitments rose
from 44,3 to 50,0 points. The inventories index decreased moderately to 42,9 in October
from 45,5 points in September 2009.
The level of business confidence, measured in terms of the Rand Merchant Bank
(RMB)/BER Business Confidence Index, declined to its lowest level in a decade, registering
23 index points in the third quarter of 2009, which was preceded by 26 points in the
second quarter of 2009 (Figure 17). 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 due to declines in all but one of
the retail subsectors, with overall confidence decreasing from 47 to 35 index points. On
the positive side, business confidence accretion in new vehicle trade occurred for three
consecutive quarters, climbing from 12 index points in the second quarter to 19 in the third
quarter of 2009. By contrast, confidence among wholesalers dropped to 17 points in the
third quarter, down from 36 index points in the second quarter of 2009. Although still low,
manufacturers’ confidence rose from 11 to 22 index points due to improvements in both
domestic and foreign sales volumes. Building contractor confidence changed slightly,
registering 24 index points in the third quarter, up from 23 in the second quarter.
South African Reserve Bank

Monetary Policy Review November 2009
Percentage
1980 82

98 2000 02

Sources: Rand Merchant Bank and Bureau for Economic Research
Figure 17 RMB/BER Business Confidence Index
Net positive
Net negative

The FNB Building Confidence Index, which measures the business confidence of all
the major role players and suppliers involved in the building industry, rose marginally
from an index value of 30 in the second quarter to 32 in the third quarter of 2009.
Three out of six sub-components of the index registered increases. Improvements in
confidence levels were recorded among building contractors (+1), manufacturers
(+23) and retailers of building materials (+13). Declines occurred in the case of
architects (-7), quantity surveyors (-4) and building sub-contractors (-15). However,
survey respondents do not expect business conditions to deteriorate significantly in
the fourth quarter of 2009.
During the third quarter of 2009 all consumer confidence sub-indices of the the
FNB/BER Consumer Confidence Index deteriorated. The economic performance subcomponent saw the largest decline, with the index falling by 6 index points to +11 during
the same quarter. The net percentage of consumers expecting their own finances to
improve declined by two index points, from +17 to +15 during the third quarter of 2009,
while the net percentage of consumers rating the present as an appropriate time to buy
durable goods declined by two index points, from -21 to -23.
Indicators of inflation expectations
Estimates of inflation expectations for the forecast period from 2009 to 2011 obtained
from the BER survey conducted during the third quarter of 2009 show that average
annual CPI inflation is expected to decline over the forecast years, although it is
expected to remain above the upper limit of the CPI inflation target range. Inflation
expectations in the third quarter are lower at all horizons than those surveyed in the
preceding quarter. As depicted in Figure 18, the average CPI inflation expectation for
2009 is 8,2 per cent, and 7,5 per cent for 2010 and 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 at least 2,2 percentage points.
Monetary Policy Review November 2009
South African Reserve Bank
Annual averages, per cent

Figure 18 BER surveys of headline CPI inflation expectations

Survey conducted during 2009:

1st qr

2nd qr

3rd qr
Source: Bureau for Economic Research, Stellenbosch University
The October 2009 Reuters survey of long-term forecasts for the South African economy,
which surveys a group of financial market analysts, reports that targeted CPI inflation is
expected to fall within the official target range of 3 to 6 per cent from the second quarter
of 2010 and is expected to stay within the target range until the end of the forecast
period in 2011 (Table 11). It is expected that CPI inflation will average 7,2 per cent in
2009, decline to 5,8 per cent in 2010, and record 5,9 per cent in 2011.
Table 11
Reuters survey of CPI forecasts: October 2009*
Per cent


(20)

(17)

*
September 2009 survey results in parentheses
Source: Reuters
Inflation expectations as 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, initially trended somewhat higher from the
middle of April 2009 to mid-July, rising to levels just exceeding the upper limit of the
inflation target range. The upward momentum was mainly the result of rising yields on
conventional bonds. Subsequently, break-even inflation over the different maturities
consolidated at lower levels as inflation prospects improved. On 4 November 2009 breakeven inflation in the four-year maturity range stood at 6,24 per cent, while that over
14 years indicated expectations of 5,77 per cent. The slight widening of the gap between
short- and longer-term break-even inflation rates suggests that market participants have
slightly better inflation expectations over the long term than over the short term.
South African Reserve Bank

Monetary Policy Review November 2009
Percentage points

Figure 19 Break-even inflation rates

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

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

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 16 and 17 November 2009, are reproduced in the
form of a fan chart in Figure 20. According to these projections, the targeted inflation
rate is expected to continue to trend downwards, moving below the upper level of the
inflation target range in the second quarter of 2010 and remaining within the target range
for the remainder of the forecast period.
The central projection, conditional on an unchanged repurchase rate, is for the average
quarterly CPI inflation rate to decelerate further to 6,1 per cent in the fourth quarter of
2009, then increase marginally in the first quarter of 2010, before moving below the
upper level of the inflation target range in the second quarter of 2010. It is then expected
to remain within the inflation target range, fluctuating between 5,3 per cent and 5,9 per
cent, until the end of the forecast period in the fourth quarter of 2011. The projections
for 2010 and 2011 are slightly higher than those presented to the previous MPC meeting
in October 2009.
Movements in oil prices, commodity prices, electricity prices and the exchange rate of
the rand that differ from those assumed in the model will impact on the central
projection, with alternative scenarios for movements in these variables generating more
optimistic or pessimistic outcomes for targeted inflation. The forecast makes provision
for electricity price increases of 25 per cent per annum for the next two years, which is
below the 45 per cent per annum proposed by Eskom. On balance, there is deemed to
be a neutral risk to the forecast of targeted inflation in Figure 20.
Monetary Policy Review November 2009
South African Reserve Bank
Per cent

Figure 20 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 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
There are positive signs that the worst of the global recession may be over. A number of
industrialised economies have experienced positive growth in the third quarter of 2009,
while growth in some emerging market economies has been robust. The recovery is not
expected to be smooth and even across countries and regions, and a number of risks
and concerns persist. While the global downturn was deep, the duration was probably
shorter than initially feared at the height of the financial crisis. Part of the reason was the
decisive intervention undertaken by governments in the form of significant monetary and
fiscal stimuli. However, these actions will have to be reversed at some point, and the
nature and timing of these exit strategies could impact on the speed and extent of the
recovery. There are also concerns that while global financial markets have become less
restrictive, it is not clear that the financial markets and banking systems, particularly in
the industrialised countries, have dealt fully with the toxic assets that were at the root of
the crisis. Furthermore, the global recovery will be dependent to a certain extent on the
recovery of consumption expenditure in the advanced economies. The housing market
in the US is still under pressure, and this may constrain consumption expenditure as
households attempt to rebuild their impaired balance sheets.
The recovery in the South African economy appears to be lagging that of the global
economy. Nevertheless, there are convincing signs that the low point of the current
growth cycle has been reached and that positive growth will resume by the fourth
quarter of this year. The global recovery has already been reflected in an improved export
performance in the past months. However, the domestic recovery is expected to be
hesitant, driven by the inventory cycle and fixed investment projects. Consumption
expenditure is expected to take a while longer to recover.
The global inflation environment remains benign. The relatively wide output gaps and
lower commodity prices have contributed to this outcome. Domestic inflation has also
responded to the weak demand conditions, and the inflation rate has reached a level
marginally above the inflation target range. This has allowed for a significant
500 basis point reduction in the repurchase rate since December 2008. By adopting a
forward-looking flexible approach, the MPC was able to provide some stimulus to the
slowing economy, while maintaining the focus on its price stability objective. Even
though some risks to the inflation outlook remain, the current monetary policy stance
is deemed adequate to moderate inflation further to within the target range, while
simultaneously allowing for the resumption of a positive growth trajectory.
South African Reserve Bank

Monetary Policy Review November 2009

Statement of the Monetary Policy Committee
28 May 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 downturn continues to have a negative impact on the domestic economy,
which experienced two consecutive quarters of contraction. The significant widening of
the domestic output gap has added further downside risk to the inflation outlook. The
downward trend in inflation is expected to continue, despite inflation being subject to
some inertia in the near term.
Domestic economic developments will be influenced to a large degree by the pace and
magnitude of the recovery in the global economy. There are tentative signs that the
global economy may have seen the worst of the downturn, but the recovery is expected
to be slow and protracted.
Recent developments in inflation
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas declined from 8,5 per cent in March 2009 to 8,4 per cent in April. The prices
of food and non-alcoholic beverages, which increased at a year-on-year rate of 13,7 per
cent, contributed 2,1 percentage points to the inflation outcome. Housing and utilities
contributed 1,8 percentage points. This category includes electricity and other fuels,
which increased by 29,4 per cent. Petrol prices declined by 17,5 per cent, while public
transport prices increased by 15,1 per cent.
The producer price index continued its downward trend in April when it increased at a
year-on-year rate of 2,9 per cent. Food price pressures moderated further with
manufactured food price inflation declining to 8,4 per cent, compared with 9,4 per cent
in March. Prices of agricultural products increased by 2,2 per cent.
The outlook for inflation
The most recent CPI inflation forecast of the Bank shows a relatively unchanged
outcome for the near-term as compared with that presented to the previous meeting of
the Monetary Policy Committee. Over the longer term, there appears to be a moderate
improvement. This forecast is similar to the Reuters consensus forecast of private
analysts who expect inflation to average 6,9 per cent and 5,7 per cent in 2009 and
2010 respectively.
The main upside risk to the inflation outlook comes from cost-push pressures, in particular
from electricity price increases. Eskom has applied to the National Energy Regulator of
South Africa (NERSA) for a 34 per cent interim increase in electricity tariffs, but there is still
uncertainty about the final adjustment. A number of municipalities have already budgeted
for significant electricity price increases in anticipation of higher Eskom tariffs.
In line with the less-negative global outlook, there has been a moderate recovery in
international oil prices. North Sea Brent crude oil has been trading at prices of around
US$60 per barrel during the past days, compared with an average of around US$50 per
barrel during April. These developments may result in a moderate increase in the
Monetary Policy Review November 2009
South African Reserve Bank
domestic petrol price in June. The impact of the higher international prices on domestic
petrol prices has been partly offset by exchange rate movements during the month.
Food price inflation remains well above average inflation, and has been lagging the
favourable developments at the producer price level and in the spot prices of agricultural
commodities. Food price inflation measured 17,9 per cent in August 2008 and has been
moderating persistently, but slowly, since then.
In the first quarter of 2009 gross domestic product (GDP) contracted at a quarter-onquarter annualised rate of 6,4 per cent, with mining and quarrying declining by 32,8 per
cent. The manufacturing sector, which contracted at an annualised rate of 22,1 per cent,
was the largest contributor to the negative GDP outcome. The weak manufacturing
performance was also reflected in the utilisation of production capacity in the
manufacturing sector, which declined from 82 per cent in the fourth quarter of 2008 to
79 per cent in the first quarter of 2009.
The GDP contraction was broad based, with general government services, personal
services and construction being the only sectors that exhibited positive growth. Civil
construction is expected to remain strong as the infrastructure programme proceeds.
However, other parts of construction are expected to remain under pressure as the value
of new building plans passed for both residential and non-residential construction declined
by 13,4 per cent in the first quarter of this year compared with the preceding quarter.
Recent high-frequency indicators suggest that the negative trend in GDP growth is likely
to continue during the second quarter of 2009, although at a more moderate pace of
contraction. Most analysts expect positive, but relatively low, growth in the final half of this
year. The composite leading and coincident business cycle indicators of the South African
Reserve Bank (the Bank) indicate continued weakness in the economy in 2009. In March
2009 the leading indicator declined by 15,1 per cent; the largest year-on-year decline on
record. The composite indicator declined at a year-on-year rate of 9,4 per cent in February.
The Investec Purchasing Managers Index (PMI) declined further to 35,6 index points in
April. However, expectations of business conditions six months ahead showed some
improvement.
Domestic demand conditions remain subdued. Real wholesale trade sales declined by
5,9 per cent on a year-on-year basis in March 2009 and by 1,8 per cent on a month-onmonth basis. Real retail sales recorded a 5,3 per cent year-on-year decline and a 1,9 per
cent month-on-month decline in March. Total new vehicle sales declined at a year-onyear rate of 44 per cent in April, with commercial vehicle sales declining by 51 per cent.
Vehicle exports were 31 per cent lower in April compared with the previous month.
Household consumption expenditure is expected to remain constrained by negative
wealth effects and tight credit conditions. The various house price indices show that
house prices have been falling in recent months. Although the All-Share Index on the
JSE Limited has recovered somewhat since its recent lows, it is still significantly lower
than the levels prevailing during 2008. Domestic credit extension continues to reflect
the lower demand for credit, as well as the wider spreads and 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 6,6 per cent in April. The rate of growth of instalment sale credit and leasing
finance declined by 0,1 per cent, reflecting the weak demand for durable goods.
Extension of bank overdrafts contracted by 6,8 per cent, while credit card advances
increased marginally.
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Monetary Policy Review November 2009

There are tentative signs that the downturn in the global economy may be bottoming out
as financial market conditions appear to have become less restrictive. However, there
are as yet few convincing indications that the recovery will be quick. At this stage it
appears that a protracted period of slow, below-potential growth is most likely, with
most analysts predicting some recovery later this year or early next year. Global inflation
pressures remain subdued and have declined in a number of economies.
Since the beginning of the year the rand has appreciated by around 13 per cent on a
trade-weighted basis. While the rand, along with other currencies, remains vulnerable to
further possible bouts of risk aversion, the risk to the inflation outlook has been reduced
by the relative strength of the rand.
Monetary policy stance
The evidence that was presented to the MPC suggests that the output gap has widened
further. This is expected to contribute to an improved inflation outlook, notwithstanding
some current inflation inertia. Accordingly, the MPC has decided to reduce the repurchase
rate by 100 basis points to 7,5 per cent per annum with effect from 29 May 2009.
Monetary Policy Review November 2009
South African Reserve Bank
Statement of the Monetary Policy Committee
25 June 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 domestic economy continues to show signs of stress in the wake of the global
economic downturn. Output growth remains negative, while trends in household
consumption expenditure have continued to deteriorate. There are, however, signs that
the downturn, both globally and domestically, may be nearing the lower turning point,
but the recovery is expected to be slow and protracted.
The inflation rate has continued its downward trend, which has been constrained by
relatively sticky services price inflation. While the widening output gap and weak
domestic demand pose a downside risk to the inflation outlook, these risks are
increasingly being offset by various cost-push and exogenous factors that are impacting
on the economy, as well as by deteriorating inflation expectations.
Recent developments in inflation
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas declined from 8,4 per cent in April 2009 to 8,0 per cent in May. Food price
inflation declined from 13,6 per cent in April to 12,1 per cent in May, but remains the
main contributor to the inflation outcome, having contributed 1,9 percentage points.
Housing and utilities inflation contributed 1,8 percentage points, mainly as a result of the
29,6 per cent increase in electricity prices and the 15,1 per cent increase in the cost of
maintenance and repairs. Services price inflation has remained unchanged at 8,4 per
cent since March 2009, while goods price inflation declined from 8,7 per cent to 7,6 per
cent over the same period.
Producer prices declined at a year-on-year rate of 3 per cent in May 2009. Nonetheless,
agricultural product prices increased at a year-on-year rate of 1,5 per cent, while
manufactured food product prices increased by 6,2 per cent.
The outlook for inflation
The most recent CPI inflation forecast by the staff of the South African Reserve Bank (the
Bank) shows that CPI inflation is still expected to continue its moderate downward trend,
to enter the target range during the second quarter of 2010, and to remain within the
target range for the rest of the forecast period ending 2011. A more favourable exchange
rate assumption has been offset by higher-than-expected petrol price increases and
inflation outcomes.
CPI inflation expectations, as measured by the Bureau for Economic Research (BER) at
Stellenbosch University deteriorated during the second quarter of 2009. Average
inflation expectations for 2009 increased from 8,3 per cent in the first quarter to 8,7 per
cent in the second quarter, mainly as a result of upward revisions by financial analysts.
While a downward trend for the subsequent two years remains, only the financial
analysts predict inflation to be within the inflation target range in the coming two years.
Overall, CPI inflation is expected to average 8,1 per cent and 7,9 per cent in 2010 and
2011 respectively.
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Monetary Policy Review November 2009

Inflation expectations, as measured by the yield differential between conventional and
inflation-linked bonds, also showed a moderate increase over the past weeks. However,
the break-even rate has generally remained within the inflation target range over the
short- to medium-term maturities.
The growth prospects for the economy remain a downside risk to the inflation outlook.
The output gap, which is the difference between actual and potential output growth, has
widened over the past few quarters. Following the 6,4 per cent contraction of gross
domestic product (GDP) in the first quarter of 2009, the most recent high frequency data
and indicators suggest that the negative trend in GDP growth is likely to have continued
during the second quarter of 2009. Mining production declined at a year-on-year rate of
10,6 per cent in April, but increased by 7,2 per cent on a month-on-month basis. Total
manufacturing production declined by 3,3 per cent in April 2009, compared with the
previous month, and by 21,6 per cent on a year-on-year basis.
The composite leading indicator as compiled by the staff of the Bank increased slightly
in April. The indicator suggests that the lower turning point in the cycle could be reached
later in the year. The Kagiso Securities/Bureau for Economic Research Purchasing
Managers’ Index remains at low levels, but recorded a slight increase in May, also
indicating an expectation that the economy may be approaching its lower turning point.
This is consistent with the Rand Merchant Bank/Bureau for Economic Research
Business Confidence Indicator, which declined further in the second quarter, but the rate
of decline has slowed.
The domestic growth prospects will be determined, to an important degree, by
international developments. The global downturn has resulted in a significant decline in
South Africa’s exports in the first quarter of 2009, leading to a wider deficit on the current
account of the balance of payments compared with the previous quarter. The outlook
for the global economy remains uncertain, but there is a general sense of cautious
optimism that the lower turning point of the cycle might have been reached. The general
view appears to be that the global economy will remain under pressure for most of this
year before beginning a slow recovery. Global inflation remains well contained.
Growth in domestic expenditure has remained subdued, with real domestic final
demand contracting by 1,5 per cent in the first quarter of 2009. Real final consumption
expenditure by households declined at a quarter-on-quarter annualised rate of 4,9 per
cent. Contractions in consumption were experienced in all broad categories of goods,
but there was a rebound in the growth of expenditure on services. Growth in real gross
fixed capital formation moderated to 2,6 per cent during the same period. The main
contributor to the 2,2 per cent increase in gross domestic expenditure was final
consumption expenditure by general government, which increased by 5,9 per cent.
Household consumption expenditure appears to have remained under pressure in the
second quarter of 2009. In April, real retail trade sales declined by 1,1 per cent
compared with the previous month, and by 6,7 per cent on a year-on-year basis. Real
wholesale trade sales increased by 0,7 per cent on a month-on-month basis, but
declined by 15,1 per cent on a year-on-year basis. While new vehicle sales in May
increased marginally compared with the previous month, the year-on-year decline
measured 32,9 per cent.
Household consumption expenditure is expected to remain constrained by tighter credit
criteria of banks and negative wealth effects. The various house price indicators all show
that house prices have continued to decline. The All-Share Index on the JSE Limited has
Monetary Policy Review November 2009
South African Reserve Bank
recovered somewhat from its lows in March, but is still substantially below the levels
recorded during the first half of 2008.
Growth in expenditure may also be affected negatively by the adverse trends in employment
growth. According to the Quarterly Employment Survey of Statistics South Africa, 179 000
jobs were lost in the formal non-agricultural sector during the first quarter of 2009.
The exchange rate of the rand has fluctuated against the US dollar between a range of
about R7,85 and R8,25 since the previous meeting of the MPC. As global risk aversion
has declined, a number of emerging-market economy currencies have appreciated and
since the beginning of the year, the rand has appreciated by approximately 15 per cent
on a trade-weighted basis.
As noted above, food price inflation remains the main contributor to the inflation
outcome, but the downward trend has continued, although at a slow pace. The spot
price of yellow maize has declined by about 40 per cent since June 2008, and is now
at levels last seen in the final quarter of 2006.
The main upside risk to the inflation outlook comes from cost-push pressures, particularly
from electricity price increases and other administered prices, as well as nominal wage
increases, which have generally been in excess of inflation. In the first quarter of 2009 the
increase in unit labour cost over four quarters amounted to 11,2 per cent.
The international oil price has re-emerged as a potential upside risk to the inflation outlook.
The price of North Sea Brent crude oil reached levels in excess of US$70 per barrel in the
past week, before declining to current levels of around US$67 per barrel. As a result of the
higher international product prices, a further petrol price increase is likely in July.
Monetary policy stance
The MPC has decided to keep the repurchase rate unchanged at 7,5 per cent per
annum. This decision is based on the economic and inflation analysis provided above.
The committee is fully cognisant of the fact that there has been significant monetary
accommodation since December 2008. The MPC remains fully committed to its
mandate of achieving and maintaining price stability.
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Monetary Policy Review November 2009

Statement of the Monetary Policy Committee
13 August 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
There are encouraging signs that the global slowdown may have reached its lower
turning point, although the speed and extent of the recovery are still subject to a high
degree of uncertainty. The South African economy appears to be lagging behind these
international developments and it is likely that the domestic economy contracted in the
second quarter of this year. The domestic economy remains constrained by weak global
and domestic demand.
Targeted inflation declined materially in June, but is still outside the inflation target range.
Expectations are that it will take some time before inflation returns to within the target
range on a sustainable basis. Cost-push pressures appear to be the main source of
upside risk to the inflation outlook.
Recent developments in inflation
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas declined from 8,0 per cent in May 2009 to 6,9 per cent in June. The main
contributors to the inflation outcome were food and non-alcoholic beverages, housing
and utilities, and miscellaneous goods and services. Each of these categories
contributed 1,6 percentage points to CPI inflation. Petrol prices declined at a year-onyear rate of 25 per cent, despite the 17 cents per litre increase in the petrol price in June.
Administered price inflation, excluding petrol prices, measured 9,1 per cent in June, with
electricity prices increasing by 28,6 per cent.
Producer prices declined at a year-on-year rate of 4,1 per cent in June, compared with
a decline of 3,0 per cent in May. Prices of mining and chemical products were the main
contributors to this trend, but there was also further moderation in food price inflation.
Prices of agricultural products declined at a year-on-year rate of 1,7 per cent, while
prices of manufactured food products increased at a rate of 3,7 per cent, compared with
a rate of 6,2 per cent in the previous month.
The outlook for inflation
The most recent CPI inflation forecast by the staff of the South African Reserve Bank
remained more or less unchanged compared with the previous forecast. However, CPI
inflation is still expected to continue its moderate downward trend, to enter the target
range during the second quarter of 2010 and to remain within the target range for the
rest of the forecast period ending in 2011.
These projections are broadly in line with the Reuters consensus survey of private-sector
analysts. The most recent survey for July indicates that analysts expect inflation to decline
to within the inflation target range during the second quarter of 2010, and to average
5,8 per cent and 5,6 per cent in 2010 and 2011 respectively. Expectations derived from
the yield differential between conventional government bonds and inflation-linked bonds
have remained within the inflation target range over the short- to medium-term maturities.
Monetary Policy Review November 2009
South African Reserve Bank
The outlook for the international economy appears to have improved. The cautious
optimism that the bottom of the cycle may have been reached continues to prevail,
although some analysts still doubt the strength and sustainability of this recovery. The
recovery is also not expected to be uniform across countries or regions. According to the
July 2009 World Economic Outlook of the IMF, global output is expected to contract by
1,4 per cent in 2009 before recovering to 2,5 per cent in 2010. The developed economies
are expected to grow by 0,6 per cent, while growth in emerging economies is expected
to average 4,7 per cent in 2010. At this stage, global inflation appears to be under control
despite the significant monetary accommodation in a number of advanced economies.
Domestic economic conditions remain subdued amid indications that the economy
contracted further in the second quarter of 2009, although at a slower rate of contraction
than in the previous quarter. Manufacturing production declined at a year-on-year rate of
17,1 per cent in June, and by 3 per cent in the three months to June 2009 compared
with the previous three months. The utilisation of production capacity in manufacturing in
May 2009 was 78 per cent; down from 84,4 per cent a year ago. The Kagiso/Bureau for
Economic Research Purchasing Managers’ Index (PMI) declined in July, indicating that the
difficult conditions in the manufacturing sector are likely to persist. However, according to
the PMI, expectations of business conditions six months ahead continued to improve.
Similarly, the Bank’s composite leading business cycle indicator increased for a second
consecutive month in May 2009, indicating the possibility of a recovery later in the year.
Household consumption expenditure growth continued to contract during the past few
months. New vehicle sales declined again in July, with total vehicle sales declining by
4,5 per cent in July compared with the previous month. Total vehicle exports declined by
12 per cent on a month-on-month basis, and by 60,3 per cent on a year-on-year basis.
Real retail trade sales contracted at a seasonally adjusted rate of 3,6 per cent in the
second quarter of 2009 compared with the first quarter. On a year-on-year basis, retail
sales declined by 6,7 per cent in June. The First National Bank/Bureau for Economic
Research Consumer Confidence Index increased moderately in the second quarter of
2009, although it is still at low levels.
The weak state of domestic demand is reflected in the rate of credit extension to the
private sector. Year-on-year growth in total loans and advances of banks to the private
sector declined from 6,3 per cent in April 2009 to 2,2 per cent in June. On a quarter-onquarter basis, negative growth of 1,8 per cent was measured in the second quarter of
2009. Year-on-year growth in mortgage advances moderated to 8,2 per cent in June,
while instalment sales credit and leasing finance, as well as other loans and advances,
experienced negative year-on-year growth. These declines are due, in part, to stricter
lending criteria being applied by banks.
The impact of negative wealth effects on domestic consumption expenditure may have
dissipated somewhat with the partial recovery of equity prices in the local and global
markets. Since the beginning of the year, the All-Share Index on the JSE Limited has
increased by about 14 per cent. However, the index is still significantly below the levels
reached in 2008. The various house price indices all show that house prices continued
to decline in July, but the pace of decline appears to be moderating.
The exchange rate of the rand has remained relatively volatile, but within a range that
has prevailed since May 2009 with the decline in global risk aversion. The exchange rate
of the rand has fluctuated between approximately R7,68 to the US dollar and R8,32 to
the US dollar since the previous meeting of the MPC. Since the beginning of the year,
the nominal effective exchange rate of the rand has appreciated by about 13 per cent.
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Monetary Policy Review November 2009

As noted above, food price developments continue to be a major factor in the overall
inflation outcomes. After months of relative stickiness, food price inflation at the
consumer price level appears to be responding to the favourable trends at the producer
price level. In June 2009 food price inflation declined to 9,8 per cent compared with a
rate of 16,1 per cent in January 2009.
The main upside risks to the inflation outlook emanate from cost-push pressures. The
international oil price has continued its stronger upward trend, as the outlook for the
global economy improves. The price of North Sea Brent crude oil has remained above
US$70 per barrel for most of the period since the previous meeting. Although domestic
petrol prices were reduced by 21 cents per litre in July, the current under-recovery
indicates that a further petrol price increase is likely in August.
Other adverse cost pressures include administered price increases, particularly
electricity prices, and wage increases that have generally been in excess of inflation.
According to Andrew Levy Employment publications, wage settlements in the first six
months of 2009 averaged 9,7 per cent. In the first quarter of 2009 the increase in unit
labour cost over four quarters amounted to 11,2 per cent.
Monetary policy stance
The MPC is of the view that, notwithstanding upside cost pressures, the adverse
economic conditions appear to tilt the balance of risks to the inflation outlook towards
the downside over the medium term. The MPC has, therefore, decided to reduce the
repurchase rate by 50 basis points to 7 per cent per annum with effect from
14 August 2009.
Monetary Policy Review November 2009
South African Reserve Bank
Statement of the Monetary Policy Committee
22 September 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
There are signs that the global economic recovery is under way, but the indications are
that the pace of recovery is likely to be slow and uneven, particularly in the industrialised
economies where banking sector concerns still persist. Domestic economic growth,
which has been negative in each of the past three quarters, is expected to improve in
the coming quarters. However, the domestic recovery is likely to be influenced by global
growth developments and is subject to a relatively high degree of uncertainty. Domestic
inflation has continued its downward trend, but some risks to the outlook remain.
Recent developments in inflation
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas declined to 6,4 per cent in August, compared with 6,7 per cent in July. The
main contributors to the inflation outcome were the categories of housing and utilities,
and miscellaneous goods and services. Food price inflation moderated further, with food
and alcoholic beverages increasing at a year-on-year rate of 6,8 per cent; down from
8,3 per cent in July.
Producer prices have continued their negative trend and declined at a year-on-year rate
of 3,8 per cent in July, compared with a decline of 4,1 per cent in June. Food price
inflation at the consumer level can be expected to abate as agricultural product prices
declined at a year-on-year rate of 1,7 per cent, while manufactured food product prices
increased at a rate of 0,8 per cent. Upside pressure on producer prices came from
electricity prices which increased by 27,4 per cent.
The outlook for inflation
The CPI inflation forecast by the South African Reserve Bank staff continues to indicate
that inflation is likely to return on a sustained basis to within the inflation target range by
the second quarter of 2010. CPI inflation is then expected to remain within the inflation
target range for the remainder of the forecast period until the end of 2011. Compared
with the previous forecast, the outlook is unchanged for 2009 and 2010, although there
is a slight improvement for 2011. The exchange rate of the rand has provided downside
pressure, which has more or less offset higher oil price assumptions and higher unit
labour costs over the period.
The most recent study of inflation expectations undertaken on behalf of the Bank by the
Bureau for Economic Research (BER) at Stellenbosch University indicates that inflation
expectations have improved somewhat, but remain, on average, above the upper end
of the inflation target range. Inflation is expected to average 7,5 per cent in both 2010
and 2011. This represents declines of 0,6 per cent and 0,4 per cent in these years
respectively, compared with the previous survey. Only the financial analysts expect
inflation to be within the target range in the coming two years. Since the previous
meeting of the MPC, the break-even inflation rates, as measured by the yield differential
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Monetary Policy Review November 2009

between conventional government bonds and inflation-linked bonds, declined across all
maturities to within the inflation target range.
Overall, the risks to the inflation outlook appear to be fairly evenly balanced. The main
upside risks continue to emanate from high increases in some administered prices,
particularly electricity prices, and increases in nominal unit labour costs well in excess of
the current inflation rate. Nominal unit labour cost increased over four quarters by 9,3 per
cent in the second quarter of 2009, compared with 11,3 per cent in the previous quarter.
International oil prices, which remain an upside inflation risk factor, have moderated
slightly since the previous meeting of the MPC and appear to have stabilised around
current levels of about US$70 per barrel. Domestic petrol prices increased by 36 cents
per litre in September, but the current over-recovery indicates that this increase may be
offset, to a large extent, in October, as a result of lower product prices and the recent
appreciation of the rand.
Growth in domestic final demand declined at an annualised rate of 3,5 per cent in the
second quarter of 2009. Household consumption expenditure contracted by 5,8 per
cent, compared with a decline of 4,8 per cent in the previous quarter. Durable goods
consumption was the most affected sub-category, declining by 18,8 per cent. New
vehicle sales declined at a year-on-year rate of 23 per cent in August, but there are signs
that the decline is levelling out. In July real retail and wholesale trade sales contracted at
year-on-year rates of 3,8 per cent and 13,8 per cent respectively, although retail sales
increased on a month-on-month basis.
Consumption expenditure is expected to remain constrained by negative wealth effects,
although there has been a marked recovery in the equity markets, which may relieve
these effects somewhat. Since the beginning of the year, the all-share index on the JSE
Limited has increased by about 20 per cent. House prices, however, have continued
their downward trend. The various house price indices, while still indicating negative
price trends, show that prices are declining at a slower rate.
Credit extension to the private sector continued to reflect both the weak household
consumption expenditure and the prevailing tighter credit criteria. Twelve-month growth
in banks’ total loans and advances declined to 2,1 per cent in July. Mortgage advances
declined to a year-on-year rate of growth of 6,4 per cent in July, while instalment sale
credit and leasing finance contracted by 3,2 per cent over the same period, as a result of
subdued demand for motor vehicles and other durable goods. Other loans and
advances, comprising credit card advances, bank overdrafts and general loans, declined
by 2,0 per cent. Lower levels of credit extension have resulted in a slight decline in
household debt as a percentage of household disposable income to 76,3 per cent in the
second quarter of 2009. The ratio of debt-service cost to household disposable income
declined from 10,9 per cent in the first quarter to 9,5 per cent in the second quarter.
Domestic output contracted by 3,0 per cent in the second quarter of 2009, but there
are early indications that the lower turning point may have been reached. However the
recovery is expected to be slow. The South African Reserve Bank composite leading
indicator increased for the third consecutive month in June and continues to predict a
recovery by the end of the year.
The rate of contraction in the manufacturing sector also shows signs of slowing down.
On a year-on-year basis, manufacturing output declined by 13,7 per cent in July, but it
increased at an annualised month-on-month rate of 3,0 per cent. The Kagiso/BER
Monetary Policy Review November 2009
South African Reserve Bank
Purchasing Managers Index (PMI) increased in July, although still at levels that indicate
negative growth. Mining production increased at a year-on-year rate of 4,8 per cent in
July. However, the real value of all building plans passed declined by 43,2 per cent in
July, with the slowdown in residential building plans being the main contributor.
The exchange rate of the rand continues to provide downside pressure on inflation and
has appreciated further since the previous meeting of the MPC when it was at a level of
around R8,10 to the US dollar. Since the beginning of the year, the rand has appreciated
by 26 per cent against the US dollar, and by 20 per cent on a trade-weighted basis.
The global economy appears to be recovering in response to concerted fiscal and
monetary packages that have been put in place. A number of industrialised economies
have experienced positive growth rates in the second quarter, while others have shown
a moderation in the rate of contraction. Many forecasts for the second half of the year
and for 2010 have been revised upward, but remain well below pre-crisis levels.
However, there are risks that the recovery may be short-lived should consumer demand
not improve further in the industrialised economies. While there have been some
improvements in financial market conditions, more still remains to be done. Global
inflation remains relatively subdued and poses no immediate risk to the domestic
inflation outlook.
Monetary policy stance
The MPC is of the view that the risks to the inflation outlook appear to be fairly evenly
balanced. Given the current policy stance, inflation is expected to continue moderating
and return to within the inflation target range during the forecast period. Accordingly, the
MPC has decided to leave the repurchase rate unchanged at 7 per cent per annum.
South African Reserve Bank

Monetary Policy Review November 2009

Statement of the Monetary Policy Committee
22 October 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 prospects for inflation returning to within the inflation target range by the second
quarter of 2010 remain promising. Domestic demand conditions continue to be
subdued and currently do not pose a significant threat to the inflation outlook. Economic
growth is expected to improve in the coming months, but is likely to remain below
potential for some time. Domestic growth prospects are dependent to an extent on the
global recovery, which appears to be uneven across countries and regions. However,
the medium-term inflation outlook has been affected adversely by possible further
significant adjustments to electricity tariffs.
Recent developments in inflation
There has been no publication of consumer price index (CPI) data since the previous
meeting of the MPC. The most recent data showed that the year-on-year inflation rate
as measured by the CPI for all urban areas declined to 6,4 per cent in August, compared
with 6,7 per cent in July. The main contributors to the inflation outcome were the
categories of housing and utilities, and miscellaneous goods and services.
Producer prices declined at a year-on-year rate of 4,0 per cent in August, compared
with a decline of 3,8 per cent in July. Food price inflation at the producer price level
continues to signal dissipating pressures on food prices at the consumer price level.
Agricultural product prices declined at a year-on-year rate of 2,0 per cent, while
manufactured food product prices increased at a rate of 0,1 per cent. Upside pressure
on producer prices came from electricity prices, which increased by 28,6 per cent.
The outlook for inflation
The CPI inflation forecast by the South African Reserve Bank staff continues to indicate
that inflation is likely to return to within the inflation target range, on a sustained basis,
by the second quarter of 2010. CPI inflation is then expected to stay within the inflation
target range for the rest of the forecast period until the end of 2011. Compared with the
previous forecast, the outlook showed a slight improvement for 2010 and 2011, mainly
as a result of the changed assumption regarding the rand exchange rate. No adjustment
has been made at this stage to the central forecast for possible further increases in
electricity tariffs over and above those that are already assumed in the baseline forecast.
A number of domestic and global factors have contributed to the persistent downward
pressure on inflation. The global economy shows continued signs of improvement, but
the recovery is not uniform across regions. The pace of recovery of most of the Asian
economies has been higher than that achieved in the main industrialised economies.
The timing and speed of the withdrawal of the fiscal and monetary policy stimuli may
have a bearing on the nature of the recovery in these economies. Global inflation is
expected to be constrained by the relatively weak demand from the industrialised
countries, although the US dollar movements may provide some upward pressure to
commodity prices.
Monetary Policy Review November 2009
South African Reserve Bank
There are some positive indications that the rate of contraction of the domestic economy
has declined and that the economy may emerge from the recession by the end of 2009.
However, the mixed picture from the published data shows that the recovery is likely to
be tentative, and the output gap is likely to remain positive for some time. The physical
volume of manufacturing output declined at a year-on-year rate of 15,0 per cent in
August and by 2,8 per cent on a month-on-month basis. However, in the three months
to August, compared with the previous three months, an increase of 0,8 per cent was
recorded. The Kagiso/Bureau for Economic Research (BER) Purchasing Managers Index
(PMI) increased markedly from 39,3 index points in August to 48,0 index points in
September. The index shows that new sales orders have increased significantly, while
manufacturers’ expectations of business conditions six months ahead improved to the
highest level since early 2007.
Other sectoral developments indicate that the physical volume of total mining production
increased in the three months to August, but contracted on a month-on-month basis,
while the real value of building plans passed continued to decline. The Rand Merchant
Bank (RMB)/BER Business Confidence Indicator (BCI) declined to a ten-year low in the
third quarter of 2009. The tentative nature of the domestic recovery is also reflected in
the composite leading business cycle indicator compiled by the South African Reserve
Bank, which declined marginally in July, following three consecutive monthly increases.
Consumption expenditure by households also remains subdued, with real retail trade
sales declining at a year-on-year rate of 7,0 per cent in August. In the three months to
August, there was a 1,0 per cent decline, compared with the previous three months.
Wholesale trade sales also declined further in August. Total new vehicle sales are also
well below their levels of a year ago. However, there are indications that the negative
trend may have reached its lower turning point with zero or slightly positive rates of
change being recorded on a month-on-month and quarter-on-quarter basis. The First
National Bank (FNB)/BER consumer confidence index declined in the third quarter of
2009 to a relatively neutral confidence level.
Credit extension to the private sector continued to reflect both the weak household
consumption expenditure and the prevailing tighter credit criteria. The Ernst & Young
Financial Services Index indicates that credit standards applied by retail banks to loan
applications continued to tighten in the third quarter of 2009, but at significantly lower
levels. Twelve-month growth in banks’ total loans and advances declined to 0,8 per cent
in August 2009. Mortgage advances increased by 5,6 per cent in August, while
instalment sale credit and leasing finance contracted by 4,2 per cent. Negative year-onyear growth rates were also recorded in credit card advances, bank overdrafts and
general loans.
There has been some recovery in asset prices in recent months, but wealth effects do
not appear to be posing an immediate threat to the inflation outlook. Domestic equity
prices have increased markedly since March, but are still significantly below the levels
reached in May 2008. The various house price indices indicate a moderation in the rate
of decline in house prices.
The exchange rate of the rand continues to provide downside pressure on inflation and
is currently trading at levels against the US dollar, similar to those prevailing at the time
of the previous MPC meeting. During the past month the rand traded in a range of
around R7,20 and R7,79 against the US dollar. The exchange rate of the rand has
appreciated by 28 per cent against the US dollar since the beginning of 2009 and by
20 per cent on a trade-weighted basis.
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Monetary Policy Review November 2009

The international oil price has increased in the past week, but does not pose an
immediate threat to the inflation outlook. Having averaged around US$70 per barrel for
a number of weeks, the price of North Sea Brent crude oil increased to current levels of
around US$76 per barrel, mainly as a result of the weaker US dollar and improved global
growth prospects. In October the domestic price of 95 octane petrol was reduced by
40 cents per litre as a result of both lower product prices and an appreciated rand
exchange rate.
The main risks to the inflation outlook emanate from cost pressures in the economy. The
trend of wage settlements still poses an upside risk to the inflation outlook. However,
there appears to be some evidence that nominal wage increases are moderating,
although increases have generally been above the inflation rate. According to Andrew
Levy Employment Publications, the average level of wage settlements amounted to
9,4 per cent in the first nine months of 2009 compared with 9,6 per cent in the
corresponding period of 2008. These increases are consistent with the Quarterly
Employment Survey (QES) of Statistics South Africa, which reported that growth in
average nominal remuneration per worker in the formal non-agricultural sector of the
economy moderated from 11,5 per cent in the first quarter of 2009 to 8,7 per cent in
the second quarter. Unit labour cost increases declined from 11,3 per cent in the first
quarter to 9,3 per cent in the second quarter.
The substantial electricity tariff increases requested by Eskom are seen to be the main
longer-term threat to the inflation outlook. Eskom has requested a trebling of the current
electricity tariffs over the next three years, and the National Energy Regulator of South
Africa (NERSA) is expected to make a decision in February 2010.
Monetary policy stance
The MPC is of the view that overall the risks to the inflation outlook have not changed
markedly since the previous meeting. Accordingly, the MPC has decided to leave the
repurchase rate unchanged at 7,0 per cent per annum. The MPC will continue to
monitor economic and financial developments, and will not hesitate to adjust the
monetary policy stance should the risks to the inflation outlook change materially.
Monetary Policy Review November 2009
South African Reserve Bank
Statement of the Monetary Policy Committee
17 November 2009
Issued by Ms G Marcus, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
There are signs that the domestic economy will continue on its recovery path, but
economic growth is expected to remain below potential for some time and dependent
to some extent on the pace of the global recovery, which still appears to be fragile and
uneven across regions. Economic growth is also expected to be constrained by
subdued domestic consumption expenditure. The domestic outlook for inflation remains
favourable as a result of weak demand pressures and the main threat to the inflation
outlook emanates from possible electricity price increases.
Recent developments in inflation
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas declined from 6,4 per cent in August 2009 to 6,1 per cent in September.
The single biggest contributor to the inflation outcome was the category of housing and
utilities which accounted for 1,7 percentage points. This was mainly due to the electricity
component which increased at a year-on-year rate of 29,1 per cent. Food price inflation
continued to moderate and at 4,9 per cent is now exerting downward pressure on
overall inflation. Goods price inflation measured 4,9 per cent, compared with services
price inflation of 7,8 per cent.
Producer prices declined for the fifth successive month in September, with the headline
producer price inflation measuring -3,7 per cent. Most categories in the index exhibited
low or negative year-on-year rates of inflation, apart from electricity, gas and water, and
tobacco products.
The outlook for inflation
The CPI inflation forecast by the South African Reserve Bank (the Bank) continues to indicate
that inflation is likely to return to within the inflation target range, on a sustained basis, by the
second quarter of 2010. There may, however, be temporary declines to within the target
range before then. CPI inflation is expected to remain within the inflation target range until the
end of the forecast period in the final quarter of 2011, when it is forecast to average 5,5 per
cent. Given the current uncertainty related to Eskom’s tariff application to the National Energy
Regulator of South Africa (NERSA), the forecast does not make provision for the higher
increases requested by Eskom, and electricity price increases of 25 per cent in 2010 and
2011 are assumed. The Bank’s forecast is in line with those of private-sector analysts.
According to the latest Reuters consensus forecast, inflation is expected to average 5,7 per
cent in 2010 and 5,85 per cent in 2011.
There are no major demand-side pressures on inflation, and the assessment of the
Monetary Policy Committee (MPC) is that there are no significant upside risks to the
inflation outlook emanating from this source.
Household consumption expenditure remains subdued. Real retail sales growth has
been negative, but there is further evidence that motor vehicle sales may have reached
their lower turning point. Although total vehicle sales in October were 12,5 per cent lower
South African Reserve Bank

Monetary Policy Review November 2009

than a year ago, when the three months to October 2009 are compared with the
preceding three months, an increase of 1,4 per cent was recorded. The recovery has
been in passenger vehicle sales and exports. Commercial vehicle sales are still declining.
Consumption expenditure is expected to remain subdued, despite the lower interest rate
environment, as a result of tighter lending conditions by banks, high levels of consumer
indebtedness, negative wealth effects or impaired household balance sheets, and higher
levels of unemployment.
Credit extension to the private sector reflects weak demand by households and the
corporate sector, and tight lending conditions by banks in response to higher perceived
risk and rising impaired advances. Twelve-month growth in banks’ total loans and
advances declined to -0,2 per cent in September 2009. Growth in mortgage advances
to the private sector declined further in September, measuring 4,8 per cent. The other
main categories of loans and advances, namely instalment sale and leasing finance,
credit card advances, bank overdrafts and general loans, all contracted.
Consumption expenditure is also constrained by high debt levels and negative wealth
effects, although asset values have recovered somewhat from their lows earlier in the
year. The all-share index on the JSE Limited is currently about 50 per cent higher than
the most recent lowest point in March of 2009. House prices also appear to be
recovering, with the various house price indices reflecting either small positive growth or
moderate declines in October.
Labour market developments are also likely to constrain household consumption
expenditure. According to the Quarterly Labour Force Survey, approximately 800 000
jobs have been lost since the beginning of the fourth quarter of 2008. The Quarterly
Employment Statistics show a decline of over 200 000 formal-sector jobs between the
beginning of the fourth quarter of 2008 and the end of the second quarter of 2009.
Domestic output appears to be recovering and the leading business cycle indicator of
the Bank has continued its positive trend. There are still some doubts about the speed
of recovery, and the output gap remains relatively wide. Most forecasts suggest that
positive growth will have resumed by the fourth quarter of 2009, but there is less
unanimity about the third quarter outcome.
The outlook is also not even across sectors. The monthly data suggests that the mining
sector contracted further in the third quarter, but the manufacturing sector performance
on a quarter-on-quarter basis was relatively robust. According to Statistics South Africa,
the physical volume of mining production declined by 7,5 per cent in the three months
to September compared with the previous three months. However, a more positive trend
may be expected in the fourth quarter.
The physical volume of manufacturing production increased by 2,6 per cent over the
same period. This outcome is consistent with the Kagiso/Bureau for Economic
Research Purchasing Managers Index which, although still reflecting a contraction in
manufacturing, has rebounded significantly and the forward-looking indicators in the
index are generally positive. There is a risk, however, that this recovery could be affected
by low consumption expenditure growth. The outlook for the construction sector
appears to be less favourable. The real value of building plans passed declined by
18,5 per cent on a year-on-year basis in August, while in the three months to August,
compared with the previous three months, a decrease of 27,7 per cent was recorded.
The First National Bank Civil Construction Index also declined significantly in the third
quarter of 2009.
Monetary Policy Review November 2009
South African Reserve Bank
Fiscal policy developments are not seen to be a threat to the inflation outlook. The
revised budgeted deficit of 7,6 per cent of gross domestic product announced in the
Medium Term Budget Policy Statement is to a significant extent due to lower tax
revenues – a result of low economic growth – and is therefore part of the workings of
the automatic stabilisers. The previous fiscal prudence has provided sufficient space for
increased borrowing to fund the shortfall. The deficit is expected to narrow as growth
gains momentum.
No significant upside risks to the inflation outlook are expected from food prices. Food
price inflation has declined to below 5 per cent, and this favourable trend is expected to
continue. Consumer food prices tend to lag food price developments at the producer
price level, and the latter have been either declining or rising marginally over the past
months. In October, manufactured food prices declined at a year-on-year rate of 1,8 per
cent, while agricultural product prices declined by 2,4 per cent. The current spot and
future prices of agricultural commodities indicate that no significant upward pressures
are expected in the near future.
For the past year petrol prices have exerted downward pressure on inflation as a result
of the appreciation of the rand and relatively low international product prices compared
to the previous year. However, these favourable base effects are not expected to
continue. Over the past few months the international oil prices have remained relatively
stable, but some account is taken in the forecast of possible increases in the
international oil price should the global recovery accelerate. In November the domestic
petrol price remained unchanged and, should current trends continue, a modest
increase in the petrol price is possible in December.
The rand has remained a positive factor in the inflation outlook, notwithstanding some
volatility during the month. Since the previous MPC meeting, the rand has traded in a
range of between R7,30 and R7,90 against the US dollar. The rand’s movements have
been influenced, to a large extent, by exogenous factors, in particular movements in the
dollar, a resumption in global capital flows to emerging markets and a recovery in
commodity prices. Since the beginning of the year the rand has appreciated by 20 per
cent on a trade-weighted basis.
The global economic recovery has been led by the emerging Asian economies. However,
the turnaround in the advanced economies is less certain. While there are positive signs,
the recent higher growth rates have been driven by a turn in the inventory cycle, and the
continued weakness in consumption expenditure in the United States in particular, and
rising levels of unemployment pose risks to the recovery. The nature and speed of exit
strategies from the previous stimulus packages also remain a risk to the outlook.
The global environment remains benign from an inflation perspective. Despite moderately
higher commodity prices, there are no significant risks to the global inflation outlook.
As in the past few meetings, the main risks to the inflation outlook are seen to emanate
from electricity price increases and the possible second-round effects thereof. In addition,
the trend of wage settlements continues to pose an upside risk to the inflation outlook.
Monetary policy stance
The MPC, having reviewed the global and domestic economic and financial
developments, has decided to maintain the current stance of monetary policy and to
leave the repurchase rate unchanged at 7 per cent per annum.
South African Reserve Bank

Monetary Policy Review November 2009

Abbreviations
Alsi
All-Share Index
BER
Bureau for Economic Research (Stellenbosch University)
BESA
Bond Exchange of South Africa
CPI
consumer price index
CPIX
consumer price index excluding mortgage interest costs
ECB
European Central Bank
FNB
First National Bank
FOMC
Federal Open Market Committee
G-20
Group of Twenty
GDP
gross domestic product
IMF
International Monetary Fund
JSE
JSE Limited
MBS
mortgage-backed security
MPC
Monetary Policy Committee
MTBPS
Medium Term Budget Policy Statement
NAB
non-alcoholic beverage
NCD
negotiable certificates of deposit
NEER
nominal effective exchange rate of the rand
NERSA
National Energy Regulator of South Africa
OECD
Organisation for Economic Co-operation and Development
OPEC
Organization of the Petroleum Exporting Countries
PMI
Purchasing Managers Index
PPI
producer price index
PSBR
public-sector borrowing requirement
RMB
Rand Merchant Bank
Stats SA
Statistics South Africa
the Bank
South African Reserve Bank
the Fed
Federal Reserve System
UK
United Kingdom
US
United States
Monetary Policy Review November 2009
South African Reserve Bank