Monetary Policy
Review
November 2011
Monetary Policy
Review
November 2011
Monetary Policy Review November 2011
© South African Reserve Bank
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording or otherwise, without fully acknowledging the Monetary Policy
Review of the South African Reserve Bank as the source. The contents of this publication are intended for general information
only and are not intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of
information, the South African Reserve Bank shall not be liable to any person for inaccurate information or opinions contained
in this publication.
Enquiries relating to this Review should be addressed to:

Head: Research Department


South African Reserve Bank

P O

Box 427

Pretoria 0001

Tel. 27 12 313-3668


ISSN: 1609-3194
Monetary Policy Review November 2011
Contents
Monetary Policy Review


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

Statement of the Monetary Policy Committee

Statement of the Monetary Policy Committee


Boxes


Figures


Evolution of real GDP forecasts for 2011 for the G7 and eurozone


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


Monetary Policy Review November 2011


Evolution of real GDP forecasts for 2012 for the G7 and eurozone


Tables


Real value of building plans passed and buildings completed in


Monetary Policy Review November 2011
Monetary Policy Review
Introduction
Since the previous Monetary Policy Review (MPR) was published in May 2011, the prospects for
global and domestic growth have deteriorated. Growth in a number of advanced economies has
slowed, and confidence levels have been undermined by renewed financial market turbulence,
generated in large part by the unresolved European sovereign debt crisis. Some advanced
economies face prolonged periods of economic adjustment, and although emerging markets
are expected to continue to outperform advanced economies, their growth will be affected by
the challenging environment. Heightened perceptions of risk by global investors have resulted in
increased volatility of capital flows worldwide. Recent shifts in capital flows have also impacted
on the domestic capital and foreign-exchange markets.
South Africa’s fragile and uneven domestic economic recovery is evident in recent economic
data. After providing the main support to the domestic recovery for the past two years,
growth in household consumption expenditure slowed markedly in the second quarter of
2011. Growth forecasts have been lowered following the deterioration in the global growth
outlook, the weaker-than-expected domestic growth outcome in the second quarter, and
the impact of industrial action on key sectors of the economy. Domestic inflation also picked
up during the period under review, with oil, food and administered prices rising strongly.
However, wage pressures have eased somewhat, and targeted inflation has remained within
the inflation target range of 3 to 6 per cent.
This MPR analyses the latest developments in inflation and the factors that impact on it. It
reviews recent monetary policy developments, discusses the outlook for inflation and presents
the South African Reserve Bank’s (the Bank) growth and inflation forecasts. In addition, topical
issues are addressed in boxes. The first box reports on the high-frequency reaction of the rand
per US dollar exchange rate to inflation surprises, and considers whether there is a negative
correlation between inflation surprises and changes in the nominal exchange rate in the very
short term. The second box provides an assessment of the accuracy of the forecasts of inflation
provided by the Bank’s suite of models.
Recent developments in inflation
This section reviews recent trends in the main inflation indices and analyses developments in
the main factors impacting on inflation in South Africa.
The evolution of inflation indicators
The year-on-year percentage change in the headline consumer price index for all urban areas
(CPI), the measure of inflation targeted by the Bank, increased from 4,2 per cent in April 2011 to
5,7 per cent in September (Figure 1). Headline inflation has remained within the inflation target
range of 3 to 6 per cent since February 2010.
Monetary Policy Review November 2011

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 1,5 percentage point increase in the inflation rate since April 2011 has been driven mainly
by increases in the food and non-alcoholic beverages (NAB) and transport categories (Table 1).
The contribution to the inflation rate from the food and NAB category has increased from
0,7 percentage points in April to 1,3 percentage points in September 2011. The transport
category has also seen significant price increases, primarily due to petrol price increases,
causing its contribution to increase from 0,6 percentage points in April to 1,1 percentage points
in September 2011. The inflation rate has also been supported by a steady but high contribution
from the housing and utilities category which has increased from 1,5 percentage points in April
and May to 1,6 percentage points for the period from June to September 2011.
Table 1
Contributions to CPI inflation
Percentage change over 12 months* and percentage points

Apr
May
Jun
Jul
Aug
Sep

Of which:

Source: Statistics South Africa
The year-on-year inflation rate for all food items increased from 4,8 per cent in April to 8,7 per
cent in September 2011. This increase is largely the result of rising inflation in the breads and
cereals, and the meat subcategories. The inflation rate for meat had risen by 3,8 percentage
points since April to 12,1 per cent in September, resulting in the contribution of meat to headline

Monetary Policy Review November 2011
inflation increasing from 0,4 percentage points in April to 0,6 percentage points in September
(Table 2). Similarly, the inflation rate for breads and cereals had increased by 4,7 percentage
points since April to 8,6 per cent in September, resulting in the contribution to headline inflation
increasing from 0,1 percentage points in April to 0,3 percentage points in September.
Table 2
Contributions of food subcategories to headline CPI
Percentage change over 12 months* and percentage points

Weight
Apr
May
Jun
Jul
Aug
Sep

Of which:

Please note that the contributions may not add up to the total due to rounding
Source: Statistics South Africa
Maize prices in South Africa continued to increase between April and November 2011, although
the prices of wheat and sunflower seeds remained relatively unchanged (Figure 2). Maize
and sunflower seeds traded at around export parity prices in 2011 due to good yields and
increased international prices, resulting in increased export opportunities. Wheat prices have
been at import parity as South Africa is a net importer of wheat. The export parity prices,
which reflect the notional prices at which South African producers could export commodities,
are calculated using international free-on-board (fob) prices, the exchange rate (rand per
Yellow maize SAFEX spot price
Figure 2 Selected commodity prices
Rand per ton


White maize SAFEX spot price
Rand per ton
Rand per ton
Rand per ton
Wheat SAFEX spot price
Sunflower seed SAFEX spot price

* Please note that the top blue line is the import parity price and the bottom blue line is the export parity price. These prices are the
theoretical upper and lower bound prices for commodities
Source: Grain South Africa
Monetary Policy Review November 2011

US dollar), financing, loading and transport costs. Import parity prices, which provide the
notional prices at which commodities could be imported, are calculated using international
fob prices, the exchange rate (rand per US dollar), import tariffs and insurance, financing and
transport costs.
Petrol prices have continued to increase, with the Gauteng price of 95 octane petrol rising
to R10,77 per litre in November 2011, exceeding the previous peak price of R10,70 per litre
recorded in July 2008. As Figure 3 shows, the increase in the past three months is mainly due
to a depreciation in the value of the currency. The exchange rate used in the calculations of the
petrol price depreciated from an average of R6,84 per US dollar in August to R8,00 per US dollar
in the November petrol price calculation. Furthermore, during October 2011 the retail margin
was increased by 4 cents per litre to cover the increased wages of service station industry staff.
Cents per litre
Cents per litre
Figure 3
South African petrol price

Exchange rate
Over (-)/Under (+) recovery
Movement in international product prices
Price change


Source: Department of Energy
Contributions to the change in
the petrol price
Level
Goods and services price inflation have both trended upward since April 2011 (Table 3). Yearon-year goods price inflation increased from 3,7 per cent in April to 5,8 per cent in September
2011. The greatest pressure came from non-durable goods inflation which increased from
6,8 per cent in April to 9,7 per cent in September. Inflation in the durable goods and semidurable goods categories remained below the lower level of the inflation target range over
this period. The durable goods category has continued to experience deflation, with prices
declining by 2 per cent in September. Services inflation increased from 4,7 per cent in April to
5,4 per cent in September 2011.

Monetary Policy Review November 2011
Table 3
CPI: Goods and services inflation
Percentage change over 12 months

Apr
May
Jun
Jul
Aug
Sep

Source: Statistics South Africa
The measures of core inflation in Figure 4 (defined as year-on-year headline inflation excluding
selected administered and volatile prices) show that food, petrol and energy prices continue
to place upward pressure on headline inflation. Compared with overall headline CPI inflation
of 5,7 per cent in September, core inflation was 4,9 per cent for CPI excluding petrol prices,
5,2 per cent for CPI excluding food and non-alcoholic beverage prices, and 3,8 per cent for
CPI excluding food, non-alcoholic beverages, petrol and energy prices. However, these core
inflation measures have all been trending upwards during 2011, reflecting general upward
pressure on inflation.
Percentage change over 12 months

* NAB: Non-alcoholic beverages
Source: Statistics South Africa
Figure 4
The effect of food, petrol and energy prices on

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

Administered price inflation has remained significantly above the upper level of the inflation
target range (Table 4). Movements in electricity and petrol prices have made the most significant
contribution to the high and increasing administered price inflation rate, contributing over half of
the increase each month since April 2011. Electricity prices contributed 3,0 percentage points
to administered price inflation in September (electricity and other fuels prices, a category
dominated by electricity prices, increased at a year-on-year rate of 17,3 per cent in September).
Rising petrol prices over the period increased the contribution of this component to administered
price inflation from 3,7 percentage points in April to 5,4 percentage points in September 2011.
Assessment rates and water have also contributed significantly to overall administered price
inflation over the period.
Monetary Policy Review November 2011

Table 4
Contributions to administered prices
Percentage change over 12 months* and percentage points
Weights

CPI
API
Apr
May
Jun
Jul
Aug
Sep
Regulated component

Unregulated component

Motor vehicle registration fees.

Primary and secondary

Source: Statistics South Africa
The year-on-year inflation rate measured in terms of the producer price index (PPI) for domestic
output was 10,5 per cent in September; a 3,9 percentage point increase from the rate of
6,6 per cent recorded for April 2011 (Figure 5). This is mainly due to high year-on-year increases
Percentage change over 12 months

Details regarding changes to the PPI in this period are documented in statistical release
P0142.1, February 2008, issued by Statistics South Africa
Source: Statistics South Africa
Figure 5
PPI for domestic output and imported commodities
Domestic output
Domestic output: Electricity
Domestic output: Manufacturing
Imported commodities
-30
-20
-10

Monetary Policy Review November 2011
in the prices of electricity (26,7 per cent), mining and quarrying (17,7 per cent) and products
of petroleum and coal (27,1 per cent) in September 2011. The year-on-year increase in the PPI
for imported commodities rose to 10,7 per cent in September, mainly due to an increase of
36,3 per cent in the price of crude petroleum and natural gas.
After declining for an extended period, the price of food at the agricultural level in the PPI for domestic
prices rose by 8,9 per cent on a year-on-year basis in May 2011 (Figure 6). This rate then moderated
to 3,6 per cent in August 2011 before increasing sharply in September to 9,9 per cent as a result of
increases in the inflation rates for the vegetables and the fruits and nuts subcategories. The yearon-year percentage change in the price of food at manufacturing level in the PPI for domestic prices
has continued to increase since April 2011, rising to 8,8 per cent in September.
Percentage change over 12 months
Source: Statistics South Africa
Figure 6
Food prices in the PPI and CPI


PPI: Food at agricultural level
PPI: Food at manufacturing level

CPI: Food
Box 1
The high-frequency response of the rand–US dollar rate to inflation surprises1
The median expectation in the financial markets for inflation in South Africa for the May 2002 to April 2003
period was 10,4 per cent in mid-May 2003.2 When the data were released on 30 May 2003 at 11:30
Johannesburg time (GMT+2), they revealed an inflation rate of 8,5 per cent – an exceptionally large inflation
surprise (and good news about inflation). The currency market’s response to the official announcement of an
inflation rate that was two percentage points lower than the earlier market expectation was a sharp and
immediate depreciation of the currency (see Figure B1.1).3
Although inconsistent with the conventional wisdom that inflation is “bad” for the exchange rate, the direction
of the currency’s movement in response to this inflation surprise is not uncommon. Anecdotal evidence
frequently indicates that at least some currencies consistently appreciate in response to unexpectedly high
inflation and depreciate in response to unexpectedly low inflation. Recent research has shown the theoretical
basis for this outcome.4
Farrell, Hassan and Viegi assess the high-frequency reaction of the rand–US dollar rate to inflation surprises
to see if there is a negative correlation between inflation surprises and changes in the nominal exchange
rate in the very short term (five minutes before, and five minutes after the inflation announcement) and
whether it has changed with the adoption of inflation targeting.
1 Greg Farrell, Shakill Hassan and Nicola Viegi, “The High-Frequency Response of the Rand–US Dollar Rate to Inflation
Surprises”, South African Reserve Bank Discussion Paper (2011a, forthcoming).
2 Bloomberg conducted a market survey of expected inflation in mid-May (the last survey before the official release). The
rates refer to annual South African consumer price index excluding mortgage interest cost for metropolitan and other
urban areas (CPIX) inflation.
3 Note that press reports in the weeks before the announcement (and an admission of an error in the computation of
CPIX by the Minister of Finance shortly before the announcement) suggest that at least some market participants
expected some degree of revision (and hence a “surprise”), but not its magnitude, nor with certainty.
4 See Richard Clarida and Daniel Waldman, “Is Bad News About Inflation Good News for the Exchange Rate? And, If So,
Can That Tell Us Anything About the Conduct of Monetary Policy?” in Asset Prices and Monetary Policy, ed. John
Campbell, ch. 9, (Chicago and London: University of Chicago Press, 2008) 371–392; and Greg Farrell, Shakill Hassan
and Nicola Viegi, “Minimal Conditions for Bad News About Inflation to Cause Currency Appreciation on Impact”, South
African Reserve Bank Discussion Paper (2011b, forthcoming. Paper originally presented at the Biennial Conference of
the Economic Society of South Africa, Stellenbosch University, Stellenbosch, South Africa, 5–7 September 2011).
Monetary Policy Review November 2011

Rand per US dollar
Rand per US dollar
Figure B1.1 Exchange rate behaviour on 30 May 2003

Five-minute rand–US dollar rates over 24 hours
Five-minute rand–US dollar rates around 11:30

The high-frequency response of the South African rand to inflation surprises is to appreciate (respectively
depreciate) on impact when inflation is higher (respectively lower) than expected, but only under inflation
targeting. For the period before the adoption of inflation targeting, bad news about inflation is bad news
for the currency. The exchange rate response is also larger when inflation is outside the central bank’s
target range. (Figure B1.2 and B1.3).
Per cent

Figure B1.2 High-frequency rand–US dollar returns around inflation

announcements

10-minute return (100*log differences)
Sources: Olsen and Associates, and own calculations


Monetary Policy Review November 2011
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 outlooks for these variables and their likely
impact on inflation are discussed in a later section.
International economic developments
Recent data suggest that growth in some of the advanced economies has weakened against
the backdrop of financial market turbulence, generated in large part by the unresolved European
sovereign debt crisis. Financial market concerns about government debt have spread beyond
the smaller economies in the euro area, despite the progress made in cutting budget deficits,
and heightened risk aversion has resulted in increased volatility of capital flows globally and a
flight from what are perceived to be more risky emerging-market assets. These developments
have impacted on international capital and foreign-exchange markets.
In its September 2011 World Economic Outlook (WEO) the International Monetary Fund (IMF)
estimates growth in the United States (US) at 1,5 per cent in 2011, compared with 3,0 per cent
in 2010 (Table 5). Economic growth in the euro area is estimated at 1,6 per cent for the year 2011
compared with 1,8 per cent in 2010. In the United Kingdom (UK), growth of just 1,1 per cent is
Percentage change over 12 months
Percentage change over 12 months
Figure B1.3 Inflation surprises


Actual release value

Bloomberg survey median
Sources: Bloomberg, Statistics South Africa and own calculations
Inflation surprise
This implies that the market expects the bank to raise interest rates in response, with short-term
movements in the currency still perceived as largely unpredictable. This is consistent with a credible
inflation-targeting policy in South Africa.
Monetary Policy Review November 2011

projected for 2011, compared with 1,4 per cent in 2010. For Japan, the IMF estimates negative
growth of 0,5 per cent for 2011 compared with a positive 4 per cent in 2010. Economic growth
in emerging and developing economies has continued to outperform that of the advanced
economies. For developing Asia, IMF data show real output growth of 9,5 per cent in 2010 and
8,2 per cent in 2011. Headline inflation in emerging and developing economies increased from
6,1 per cent in 2010 to 7,5 per cent in 2011.
Table 5
Annual percentage change in real GDP and consumer prices
Real
GDP
Consumer
prices

(estimate)

(estimate)

Source: IMF World Economic Outlook, September 2011
The IMF cautions that projections for some smaller advanced economies, as well as for
emerging and developing economies, do not yet fully reflect the downward revisions to growth
in the major advanced economies. These downward revisions are evident in the evolution of
real gross domestic product (GDP) forecasts for 2011 for the Group of Seven (G7) and euro
area countries published by Consensus Forecasts (Figure 7). The consensus forecast for the US
was revised down by 1 percentage point between May and October 2011. Significant downward
revisions to other G7 countries over this period include Canada (0,6 percentage points), the
UK (0,6 percentage points), Japan (0,5 percentage points), and Italy (0,3 percentage points).
The consensus forecast for Germany was raised by 0,1 percentage points between May and
October 2011 while that of France remained unchanged. The forecast for the eurozone was
revised down by 0,1 percentage points.
Economic growth projections have been negatively affected by a significant deterioration in overall
global creditworthiness. According to Institutional Investor’s most recent semiannual Country
Credit Survey, the debt and budget crises in Western Europe and the US, and political upheavals
across the Middle East and North Africa (MENA) led to countries in these regions posting sizable
declines in creditworthiness. Most of the rest of the world showed only modest adjustments. The
picture is mixed in Africa, with most of the creditworthiness gains reflecting commodities-based
economic strength. The gainers include South Africa (up 3,5 points) and Angola (up 2,6 points).
Conversely, Swaziland declined by 5,2 points, and Namibia dropped 3,1 points. 1

Harvey D Shapiro,
“Brazil Grows, But the Global
Credit Picture is Otherwise
Murky”, Institutional Investor,
13 September 2011, http://
www.institutionalinvestor.
com/Popups/PrintArticle.
aspx?ArticleID=2898625.

Monetary Policy Review November 2011
Annual percentage change

Source: Consensus Forecasts
Figure 7
Evolution of real GDP forecasts for 2011 for the G7 and

eurozone (surveys conducted during 2010 and 2011)
United States
Eurozone
Italy
-1

Japan
Germany
Canada
United Kingdom
France
J
J
J
F
M
M
A
A
S
O
N
D
J
J
J
F
M
M
A
A
S
O
N
D
Oil prices
The price per barrel of Brent crude oil rose to a high of US$126 per barrel at the end of April 2011
as supplies from the Middle East tightened and investors anticipated a more robust economic
recovery (Figure 8). The subsequent decline in the oil price was initially aided by increased
supply from the Organization of the Petroleum Exporting Countries (OPEC) and the release
of crude oil and petroleum stocks from strategic emergency reserves by International Energy
Agency (IEA) members. An increase in US crude oil inventories and escalating risks to the global
growth outlook in recent months resulted in a continued decline in the oil price from US$114 per
barrel early in September to around US$101 per barrel early in October. Although the oil price
subsequently rose temporarily to US$115 per barrel in mid-October (mainly due to renewed US
dollar weakness), the downward trend resumed thereafter and declined to US$108 per barrel in
early November. The oil price has returned to levels that prevailed before the unrest in the MENA
region as signs of slowing growth in the US, China and Germany heightened concerns that fuel
demand will suffer.
Figure 8
Price of Brent crude oil

US dollar per barrel
Source: Bloomberg

Monetary Policy Review November 2011

However, in contrast to the market that prevailed in 2008, the futures market signals tighter nearterm market conditions than are expected for contracts maturing further out (Figure 9). Futures
contracts for delivery in the first and second quarters of 2012 are currently trading at around
US$102 per barrel.
Figure 9
Brent crude futures prices

US dollar per barrel

Brent crude spot price

Futures prices (29 Apr 2011)
Source: Bloomberg

Futures prices (30 Jun 2008)

Futures prices (11 Nov 2011)

Futures prices (30 Sep 2008)

International monetary policy developments
A cooling global economy and the threat from Europe’s debt crisis have refocused attention away
from inflation risks to avoiding a slide back into recession. Policy rate increases have been limited
primarily to developing nations with robust growth and upward inflationary pressures (Table 6),
while policy rates have been kept stable or decreased in a number of developed countries and
some developing countries who are concerned about the effect of increased global economic
uncertainty on the pace of economic recovery. The European Central Bank (ECB) decreased
interest rates in November; the US – still at the zero-lower-bound – has instead chosen to “twist”
the maturities of its Treasury holdings in an effort to keep market interest rates low; and the UK has
embarked on an additional round of quantitative easing. China and India have continued to tighten
monetary policy due to concerns about inflationary pressures, but smaller open economies have
chosen to keep interest rates stable or decrease them.
In August the United States Federal Reserve System (the Fed) announced its commitment to
maintaining the current, exceptionally low level of the federal funds rate at least up to 2013.
Following its meeting in September, the Fed also announced that it would rebalance its Treasury
holdings to cut longer-term borrowing costs and that it was taking these new steps to try to
boost the economy by making credit cheaper. The Fed said it would “twist” US$400 billion of its
US$1,66 trillion in Treasury holdings into longer-dated debt. About 30 per cent of the purchases
would be in the 20- to 30-year range. The Fed intends buying US$400 billion of Treasury
securities with maturities between 6 and 30 years by June 2012, and selling an identical amount
of shorter-term Treasuries (maturities from three months to three years).
The ECB reduced interest rates by a quarter of a percentage point to 1,25 per cent in November
at the first policy meeting chaired by its new President Mario Draghi, after having raised interest
rates further in July 2011 due to continuing concerns about inflationary pressures. In August
and October measures were introduced to help relieve increasing strains in some European
financial markets, including the introduction of additional long-term refinancing operations and
the launch of a second covered bond purchase programme (called CBPP2) to the value of
€40 billion.

Monetary Policy Review November 2011
Table 6
Selected central bank interest rates
Per cent
Countries
17 May 2011 14 Nov 2011
Latest decision
(Change in percentage points)
0,00–0,25
0,00–0,25
2 Nov 2011
(0,00)
0,00–0,10
0,00–0,10
27 Oct 2011
(0,00)
1,25
1,25
3 Nov 2011
(-0,25)
0,50
0,50
10 Nov 2011
(0,00)
1,00
1,00
25 Oct 2011
(0,00)
1,30
1,20
3 Nov 2011
(-0,35)
1,75
2,00
27 Oct 2011
(0,00)
2,25
2,25
19 Oct 2011
(0,00)
0,00–0,75
0,00–0,25
15 Sep 2011
(0,00)
4,75
4,50
1 Nov 2011
(-0,25)
2,50
2,50
27 Oct 2011
(0,00)
3,00
3,00
24 Oct 2011
(0,00)
6,31
6,56
30 Sep 2011
(0,00)
7,25
8,50
25 Oct 2011
(0,25)
6,75
6,00
10 Nov 2011
(-0,50)
3,00
3,00
11 Nov 2011
(0,00)
4,50
4,50
20 Oct 2011
(0,00)
3,00
3,25
11 Nov 2011
(0,00)
1,75
1,875
29 Sep 2011
(0,00)
2,75
3,50
19 Oct 2011
(0,00)
12,00
11,50
19 Oct 2011
(-0,50)
5,00
5,25
13 Oct 2011
(0,00)
4,50
4,50
14 Oct 2011
(0,00)
0,75
0,75
3 Nov 2011
(0,00)
6,00
6,00
25 Oct 2011
(0,00)
4,25
4,50
9 Nov 2011
(0,00)
8,25
8,25
28 Oct 2011
(0,00)
6,25
5,75
20 Oct 2011
(0,00)
4,25
4,75
2 Nov 2011
(0,25)
7,50
12,00
10 Oct 2011
(2,75)
Source: National central banks
The ECB also boosted liquidity to the European banking sector through, among other things, a
dollar lending facility launched in September 2011.
The Bank of England’s Monetary Policy Committee (MPC) continued to maintain the bank rate
at 0,5 per cent at its most recent meeting in November. Concerns about the effect of the euro
zone sovereign debt crisis on the economy, along with already weak domestic demand and
low levels of credit extension, led the committee to increase the size of the asset purchase
programme by £75 billion in October.
In early August 2011 the Swiss National Bank narrowed the target for the three-month London
Interbank Offered Rate (LIBOR) to closer to zero. In September it set a minimum exchange rate
at CHF 1,20 per euro. Sweden’s Riksbank indicated in September that slowing growth and low
underlying inflationary pressures had resulted in the decision to hold the interest rate at 2,0 per
cent and temporarily to halt further interest rate increases, effectively lowering the Riksbank’s
expected interest rate path. Interest rates in emerging markets in Europe have mostly been kept
stable given the economic climate, although Poland raised interest rates in June and Turkey cut
interest rates in August.
Monetary Policy Review November 2011

The Bank of Japan (BoJ) has kept interest rates at as close to zero as possible over the period
under review. In August and October 2011 the bank announced that it would increase the total
size of the Asset Purchase Programme by a combined total of ¥15 000 billion, and in October
the BoJ announced that it would extend the deadline for applications for loans supplied to
financial institutions and central organisations of financial co-operatives in the disaster areas by
six months to 30 April 2012.
Interest rates have been raised by India, China, Taiwan and Thailand in the period since the
previous MPR was published in May 2011. Monetary policy in China has remained tight, with
key interest rates increasing in July and banks’ reserve requirements increasing in June. In
India interest rates increased on four occasions from 7,25 per cent in May to 8,50 per cent in
October due to concerns over high inflation and high inflation expectations. In August the Bank
of Thailand raised its key rate for the seventh time in as many meetings to 3,5 per cent, as part
of a process of returning the policy interest rate to more normal levels.
In August and October Brazil’s Copcom voted to decrease the selic rate by 50 basis points,
effectively reversing the increases announced in 2011. This move was to help mitigate the effect
of the continued uncertainty about the pace of the global economic recovery on the Brazilian
economy, at a time when the Copcom felt that price pressures were easing. In June 2011 the
central bank of Chile raised interest rates for the fifth time this year to 5,25 per cent, due to
inflationary pressures in the economy. However, the monetary tightening has been halted during
the meetings held since, due to concern about weaknesses in the global economy. The Bank
of Mexico has continued to keep interest rates stable.
Exchange rate developments
The foreign-exchange rate of the rand has been highly volatile in recent months as risk aversion
took hold of global foreign-exchange markets once more. Figure 10 shows that the Volatility
Index (VIX® ) published by the Chicago Board Options Exchange (CBOE) – which measures
the options-implied volatility of the US Standard and Poor’s (S&P) 500 index and serves as a
popular indicator of global investors’ perception of risk – rose sharply in July and August 2011,
and has since remained at elevated levels. This volatility has been reflected in the exchange
rates of a number of emerging-market and/or commodity currencies.
Rand per US dollar
Index


Figure 10
The VIX® and the rand–US dollar exchange rate
Source: Bloomberg
May
Aug
Jun
Jul
Sep
Oct
Nov

Rand per US dollar
VIX® (right-hand scale)

Monetary Policy Review November 2011
The nominal effective exchange rate of the South African rand (NEER), measured against a
basket of 15 currencies,2 averaged just below 76 index points between May and July 2011, and
then depreciated to a low of 64,4 index points on 23 September before recovering slightly to its
current value of 66,5 index points on 11 November 2011 (Figure 11). The real effective exchange
rate measured against the same basket of currencies depreciated by 2,4 per cent from
113,4 index points in May 2011 to 110,7 index points in August.
Index: 2000 = 100 (foreign currency per rand)
Rand per US dollar
Rand per euro
Figure 11
Exchange rates of the rand

Nominal effective exchange rate of the rand
(NEER)

Rand per US dollar
Rand per euro (right-hand scale)
Measured on a bilateral basis against the US dollar, the rand fluctuated between R6,63 at the
beginning of May 2011 and R8,28 on 23 September, subsequently recovering to R7,96 on
11 November. Measured against the euro, the rand depreciated from R9,54 on 11 July 2011 to
R11,22 on 23 September, before recovering to R10,88 on 11 November.
The recent volatility in the rand exchange rate has mirrored that in a number of other emergingmarket and/or commodity currencies. Compared to a base of 100 index points on 3 May
2011, all currencies in Figure 12 depreciated against the US dollar, particularly in August and
September. On 11 November 2011 the rand stood at 120 index points, the Mexican peso at
117 index points, the Turkish lira at 117 index points, the Brazilian real at 111 index points and
the Australian dollar at 107 index points.

The weighted
average exchange
rate of the rand is
based on trade in,
and consumption of,
manufactured goods
between South Africa
and its most important
trading partners. The
methodology applied is
described in an article
in the December 2008
Quarterly Bulletin.
The weighted average
exchange rate of the
rand is calculated
against 15 currencies.
The weights of the
five major currencies
are in brackets: Euro
(34,82), US dollar (14,88),
Chinese yuan (12,49),
British pound (10,71),
Japanese yen (10,12).
Index: 2000 = 100.
Monetary Policy Review November 2011

Indices: 3 May 2011 = 100
May
Jun
Jul
Aug

Sep
Oct
Nov
Figure 12
Exchange rate performance against the US dollar

Turkish lira

Australian dollar


Sources: Reuters and own calculations

South African rand

Canadian dollar

Brazilian real

Mexican peso
Portfolio flows to the domestic equity and bond markets have also been volatile, in line with
the experiences of emerging-market economies around the world. Non-resident purchases of
South African bonds slowed in 2011, when compared with 2010, and investment in domestic
equities has declined (Figure 13). Cumulative non-resident net purchases in the bond market
were R51,2 billion by the week ending 11 November 2011 compared with net purchases of
R70,9 billion in the comparable period in 2010. In the share market non-residents were net
sellers in 2011, with cumulative net sales of R17,5 billion by 11 November 2011 (compared to
cumulative non-resident share purchases of R26,4 billion at the same stage in 2010).


Figure 13
Non-resident net purchases of domestic bonds and equities
R billions

Net equity purchases
* Net purchases of bonds and equities for the month of November cumulative to 11 November 2011
Source: JSE Limited
Net bond purchases

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov*
Dec

Monetary Policy Review November 2011
Labour markets
Unit labour costs, calculated as the ratio of remuneration per worker to labour productivity,
accelerated in the second quarter of 2011. Figure 14 shows that the year-on-year percentage
change in nominal unit labour cost increased from 5,4 per cent in the first quarter of 2011 to
6,4 per cent in the second quarter. This was due to growth in labour productivity remaining
unchanged in the first two quarters of the year, as employment levels remained stable, while the
rate of increase in remuneration per worker rose from 6,4 per cent to 7,4 per cent.
Percentage change over four quarters

Figure 14
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

The Andrew Levy Wage Settlements Survey for the third quarter of 2011 reported that the
average level of wage settlements fell from 8,2 per cent in March 2011 to 7,7 per cent in
September 2011 (Figure 15), influenced by uncertainties about economic growth and relatively
stable inflation.
Per cent

2011*
Figure 15
Average annual inflation and wage settlements

CPI

* Data for 2011 are for the first nine months of the year
Sources: Andrew Levy Employment Publications and Statistics South Africa
-2

Average wage settlements
Monetary Policy Review November 2011

The levels of settlements reached in the third quarter of 2011 ranged from 3 per cent in the food/
manufacturing sector to 10 per cent in the retail, transport and food/agricultural sectors. The
survey reported that 78 per cent of wage settlements were for one year, 16,9 per cent for two
years and 5,1 per cent for three years.
Figure 16 shows total employment in the formal and informal non-agricultural, agriculture and
private household sectors between the first quarter of 2008 and the third quarter of 2011 as
reported by Statistics South Africa’s Quarterly Labour Force Survey. Total employment declined
from 13,844 million in the fourth quarter of 2008 to 12,975 million in the third quarter of 2010,
a loss of 869 000 jobs, before increasing to 13,319 million in the third quarter of 2011. The
unemployment rate fell from 25,3 per cent in third quarter of 2010 to 25,0 per cent in the third
quarter of 2011.
Thousands

Figure 16
Total employment
Source: Statistics South Africa Quarterly Labour Force Survey

The total employment increased by 343 000 between the third quarter of 2011 and the
corresponding quarter of 2010. The sectoral contributions indicate that employment in the
community and social services industry increased the most, rising by 158 000 jobs. By
contrast, employment in the utilities sector declined by 26 000 jobs; the highest loss recorded
over the period.
Demand and output
Real GDP increased by 1,3 per cent on an annualised basis in the second quarter of 2011,
following growth of 4,5 per cent in both the fourth quarter of 2010 and the first quarter of
2011 (Table 7). Widespread industrial action, which continued into the third quarter of 2011,
contributed to this subdued outcome. Real value added by both the primary and secondary
sectors contracted in the second quarter. The largest negative contribution came from the
manufacturing sector, where real value added declined by 10,2 per cent.
Real gross domestic expenditure also slowed down significantly from an annualised growth rate
of 7,9 per cent in the first quarter of 2011 to 1,3 per cent in the second quarter.
Consumption expenditure by households has, to date, been the main driver of growth. However,
in the second quarter of 2011, growth in consumption expenditure moderated to an annualised
rate of 3,8 per cent, compared with an increase of 5,2 per cent in the first quarter. Consumption
expenditure is expected to remain constrained, to some extent, by low rates of credit extension
and continued debt deleveraging by households. The ratio of household debt to disposable
income declined further to 75,9 per cent in the second quarter of 2011 from a peak of 82,0 per
cent in the first two quarters of 2008.

Monetary Policy Review November 2011
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

Imports of goods and services.......................... 7,8

Gross domestic product.................................. 4,8

* Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data
** Constant 2005 prices
Real final consumption expenditure by general government contracted at an annual rate of
0,1 per cent in the second quarter of 2011, after having increased by 9,5 per cent in the first
quarter. This deceleration is mainly attributable to the fact that in the second quarter no
armaments were acquired by government in terms of the defence procurement programme, in
contrast to significant purchases in the first quarter.
A positive development was the further acceleration in the growth of real gross fixed-capital
formation, albeit off a low base, from an annualised rate of 3,1 per cent in the first quarter to
4,1 per cent in the second quarter. Nevertheless, the ratio of gross fixed capital formation to GDP,
at 18,9 per cent, is still well below the peak of 24,6 per cent measured in the fourth quarter of 2008.
The level of real inventory accumulation slowed from the first to the second quarter of 2011 – real
inventory investment (annualised, at 2005 prices) amounted to R5,6 billion in the second quarter
of 2011 compared with R9,3 billion in the first quarter. The slower accumulation of inventories was
evident in most of the sectors, with the exception of the mining and manufacturing sectors.
In the first half of 2011 imports rose more strongly than exports, resulting in smaller trade surpluses
in both the first and second quarters. Successive supply shocks weakened demand from tradingpartner countries early in 2011 and these developments, together with a moderate increase in the
shortfall on the services, income and current transfer account of the balance of payments, gave
rise to a widening of the current-account deficit. The ratio of the deficit on the current account of
the balance of payments to GDP increased from 1 per cent in the fourth quarter of 2010 to 3,1 per
cent in the first quarter of 2011 and to 3,3 per cent in the second quarter.
South Africa’s gross international reserve position declined from US$50,0 billion at the end of
June 2011 to US$49,7 billion at the end of September, before increasing to US$50,3 billion at
the end of October. The international liquidity position rose from US$47,2 billion at the end of
June to US$47,9 billion at the end of September and US$49,2 billion at the end of October.
Real-estate and equity prices
Global developments have impacted significantly on the FTSE/JSE All-Share Index (Alsi) in the
period since May 2011. From a level of 32 384 index points on 27 May 2011, the index declined
to a low 28 391 index points on 8 August. This was in line with international experiences, as
contagion effects from the European sovereign debt crisis, concerns over France’s AAA rating,
and S&P downgrading of the US credit rating from AAA to AA+ impacted on markets. Stock
market volatility continued into September and October due to uncertainty over downgrades for
French banks and concerns that a number of European banks were highly exposed to indebted
nations such as Greece. Greece’s call at the beginning of November 2011 for a referendum on
the Euro deal agreed to on 27 October 2011 to reduce its debt burden added to volatility in the
global equity markets.
Monetary Policy Review November 2011

Trends in four major South African stock price indices that comprise the Alsi are shown in
Figure 17. Since August 2011, the volatilities of these four indices have tended to move in line
with developments in global stock markets.
Index

FTSE/JSE All-Share Index
FTSE/JSE Industrial Index
Figure 17
Domestic share price indices

FTSE/JSE Resource Index
FTSE/JSE Financial Index
Sources: JSE Limited and I-Net Bridge
The year-on-year percentage changes in nominal house prices published by Absa, Standard
Bank, First National Bank (FNB) and Lightstone all currently show modest increases despite
having diverged since mid-2011 (Figure 18). The year-on-year percentage change in the
Standard Bank median house price index slowed from 3,4 per cent in April 2011 to 0,6 per cent
in September, while the extended repeat sales house price index of Lightstone continued to
decelerate from a peak of 5,9 per cent in July 2010 to 2,4 per cent in September.
Percentage change over 12 months

-10
-5

Absa House Price Index

First National Bank House Price Index
Sources: Absa, Standard Bank, First National Bank and Lightstone
Figure 18
House prices

Standard Bank House Price Index

Lightstone House Price Index

Monetary Policy Review November 2011
By contrast, the rate of change in the Absa House Price Index shows a recovery, increasing from
negative 1,1 per cent in March 2011 to 5,6 per cent in October. Similarly, the rate of increase in
the FNB national average house price index continued to improve from 1,3 per cent in February
2011 to 4,5 per cent in October 2011.
The FNB estate agent survey indicates that the estimated average time taken to sell a house in the
third quarter of 2011 was approximately 17 weeks, considerably higher than the nearly 6 weeks
taken in 2005/6. The proportion of properties sold at less than the asking price was 91 per cent
in the third quarter of 2011 compared with 30 per cent in 2004. Sellers’ initial asking prices for
houses sold decreased by 13 per cent on average in the third quarter of 2011.
Table 8 shows that the annual percentage changes in the total values of both buildings
completed and plans passed have been negative for four years. All subcomponents of the real
value of buildings completed contracted at a slower rate in 2011 than in 2010, and both the
residential and non-residential components of the total value of building plans passed increased
in 2011 compared to 2010.
Table 8
Real value of building plans passed and buildings completed in
larger municipalities
Annual percentage change

2011*
Building plans passed

Buildings completed

* Data for 2011 are for the first eight months of 2011 compared with the same period of the previous year
Source: Statistics South Africa
Fiscal policy
The Minister of Finance presented the Medium Term Budget Policy Statement (MTBPS) on
25 October 2011. In contrast to the more restrictive fiscal policies that have had to be adopted
in several countries because of high initial debt levels, South Africa’s fiscal stance remains
countercyclical. Government debt is set to rise to about 40 per cent of GDP by 2015, after which
it is expected to stabilise and decline. Government aims to achieve fiscal consolidation by shifting
the composition of public expenditure towards investment and economic development in order
to ensure sustainable long-term economic growth. The Minister announced that measures
to promote industrial development and expand trade opportunities would be strengthened.
Financial support for housing and urban infrastructure investment would also be extended while
funding for employment programmes and training would be increased.
The MTBPS calls for greater accountability, transparency and moderation in remuneration
across public and corporate sectors. Substantial improvements in public-service remuneration
and increases in employment have raised the wage bill to about 42 per cent of government
revenue over the past four years. The MTBPS provides for a 5 per cent cost-of-living adjustment
for public-sector employees, implemented with effect from April each year, while similar
adjustments to social grants are assumed in the expenditure estimates.
Monetary Policy Review November 2011

The revised budget balance for 2011/12 is a deficit of R164,6 billion, which represents 5,5 per
cent of GDP (Table 9). This revised budget balance is larger than the deficit of 5,3 per cent
of GDP projected in the Budget Review 2011. Consolidated government revenue reflects the
impact of lower earnings and reduced consumption and imports on tax revenues, and is now
expected to be R814,2 billion in 2011/12, significantly lower than the estimate of R824,5 billion
made in February. Consolidated government expenditure in 2011/12 is expected to be slightly
lower than projected in February, declining from R979,3 billion to R978,8 billion. In the medium
term, projected deficits as a percentage of GDP are 5,2 per cent for 2012/13, declining to
4,5 per cent for 2013/14, and to 3,3 per cent for 2014/15.
Table 9
Public finance data
2010/11
2011/12
2012/13 2013/14 2014/15
Outcome Budget
Revised
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 2011
The estimated public-sector borrowing requirement (PSBR), reflecting the higher financing
requirements of government and the non-financial public enterprises, increased from
R177,5 billion in 2010/11 (6,5 per cent of GDP) to a revised R241,5 billion for 2011/12 (8,1 per cent of
GDP). With the higher main budget deficit set out in the MTBPS, the PSBR is projected to remain
relatively high over the medium term before declining to 7,8 per cent of GDP in 2012/13 and to
5,1 per cent of GDP in 2014/15. Net loan debt is projected to increase to 39,7 per cent of GDP
by 2014/15.
Monetary conditions
Growth in private-sector credit extension has remained subdued at around 6 per cent per
annum over the period under review, despite interest rates being at 30-year lows. The recovery
in the growth in total loans and advances following the 2008/09 recession has been slow when
considered in historical context (Figure 19). Following the recessions of 1974/75, 1982/83, 1985,
and 1990/92, the growth in total loans and advances had returned at least once to the longterm average rate of above 15 per cent within the current 27-month period.

Monetary Policy Review November 2011
12-month growth, per cent
Figure 19
Historical trends in total loans and advances at times

of recession
-5


Months after start of recession
Months before start of recession
Recessions:

1982Q1–1983Q1

1974Q4–1975Q1

2008Q4–2009Q2


1990Q2–1992Q4

1985Q1–1985Q3

Long-term average (1973/10–2011/07)
The year-on-year growth in banks’ total loans and advances was 5,5 per cent in May 2011 and
rose to 6,1 per cent in July before declining to 5,3 per cent in September (Figure 20). Credit
extension has been underpinned by the performance of the general advances component,
which recorded year-on-year growth of 17,9 per cent in August and 12,9 per cent in September.
Mortgage advances, which constitute just over half of the outstanding balance for total loans,
grew by just 2,2 per cent in September, consistent with the weak levels of activity in the
residential and commercial property sectors.
Percentage change over 12 months
-20
-10

Figure 20
Banks’ loans and advances by type

Mortgages

Instalment sale and leasing finance

Credit card advances

General advances

Overdrafts

Total loans and advances

Monetary Policy Review November 2011

Monetary growth was below the growth in nominal GDP during the period under review. The
year-on-year growth in the M3 monetary aggregate, which had slowed early in 2011, remained
relatively stable for most of the period and then rose somewhat in September (Figure 21). Growth
in M3 increased marginally from 6,1 per cent in May to 6,2 per cent in August 2011, before rising
to 6,8 per cent in September. By comparison, M2 growth rose from 5,5 per cent in May to
6,1 per cent in August, and to 8,3 per cent in September.
Percentage change over 12 months

Figure 21
Growth in monetary aggregates
-10
-5

M3
M1
M2
Monetary policy
A global economic recovery and slowly rising inflation pressures marked the first half of the year
before giving way to significantly weaker economic prospects, diverging inflation trajectories and
sharply higher uncertainty. With South Africa’s headline CPI remaining within the inflation-targeting
band of 3 to 6 per cent despite gradually rising food and petrol prices and the economic recovery
weakening significantly, the monetary policy stance remained unchanged for the year (Figure 22).
The potential for cost–push pressures to raise headline consumer prices, rising unit labour costs
and administered prices presented the most serious upside risks to the inflation forecasts for 2011
and 2012. A deepening of the financial crisis in Europe, and potential for a downturn in the global
and domestic economy were the primary downside risks considered by the MPC.
Per cent

Prime overdraft rate
Repurchase rate
Three-month negotiable certificates of deposit rate
Figure 22
The repurchase rate and other short-term interest rates

Monetary Policy Review November 2011
In the months up to May, most economic indicators and growth projections for key economies
remained favourable, suggesting a moderate and sustained economic recovery. The MPC
noted the strong growth in manufacturing and the uneven character of the global recovery, with
robust growth in emerging-market economies combined with modest but stronger growth in
most advanced economies. The MPC felt there were convincing signs that the global economic
recovery would be sustained.
These initially favourable economic growth trends deteriorated in mid-2011, resulting in markedly
lower expectations for much of the world for the latter half of the year and extending into 2012.
Many global growth projections had tended to downplay the role of rising commodity prices as
a potential drag on global growth and looked past contemporaneous events that had negative
real economy effects, such as the tsunami and its aftermath in Japan or the unfolding of the
Arab Spring and the impact of higher oil prices. With hindsight, each of these factors may have
played a stronger role in undermining growth momentum than had been previously estimated.
By July and August of this year concerns about the recovery were sharply exacerbated by rising
tension associated with key fiscal and sovereign debt issues in the US and Europe. Weaker
economic growth, policy indecision and financial tensions interacted with one another and
contributed to a serious deterioration in the global economic outlook.
The MPC noted the risks reflected in increasing credit default swap (CDS) spreads for Europe’s
peripheral economies, the developing political turmoil in the Middle East and North Africa,
and the potential for medium-term disruption to global supply chains from the crisis in Japan.
Although the latter risk turned out to be less damaging to regional and global growth, the
developing sovereign debt crisis in Europe and fiscal policy concerns in the US contributed
much more strongly to global financial uncertainty. In Europe the crisis worsened in the run-up
to the November meeting of the committee.
The sovereign debt concerns facing peripheral European countries evolved into a dual crisis of
financial institutions weak balance sheets and ineffectual regional policy-making in the eurozone.
These risks intensified between May and November, resulting in the focus of concern shifting to
the larger economies of Italy and Spain, and to some extent France. The MPC expressed high
levels of concern about the need to resolve the sovereign debt crisis fully to restore confidence
and reduce volatility in financial markets. A disorderly write-down of debt was identified as a
potential trigger for systemic financial difficulties. By November the committee observed little
meaningful progress in resolving those issues, and recognised the need to be prepared and
capable of responding to adverse effects on the South African economy.
The worsening financial and policy environment contributed to deteriorating economic outcomes
across the world economy. Global economic growth prospects were clearly less benign by
August 2011 and confirmed by the revisions to projections set out by the IMF in September.
The larger downward revisions related to the advanced economies. The MPC felt, however,
that there was insufficient clarity on whether the stalled state of advanced economies would
translate into a recession.
For much of the year emerging-market economies exhibited robust economic growth. Some
emerging markets show signs of overheating, with high and rising inflation and growth well
above estimates of potential. A combination of country-specific dynamics and the spillover
effects of deterioration in advanced economies, however, suggested that emerging markets
would also begin to slow and be subjected to greater volatility in risk perceptions, capital flows
and exchange rate movements.
The MPC took a stronger view over time on the importance of downside risks to the global
economy, and in particular the role of the European crisis. Monetary accommodation in key
advanced economies was expected to persist for the foreseeable future, particularly where
fiscal policy was constrained.
For much of the first half of 2011 the global recovery was seen to be supporting South Africa’s
economic recovery, and stronger confidence in businesses and households. A sustained
and moderate recovery and reasonably well-contained price pressures were expected. The
Monetary Policy Review November 2011

Rand Merchant Bank (RMB)/ Bureau for Economic Research at Stellenbosch University (BER)
Business Confidence Index (BCI), Kagiso/BER Purchasing Managers Index, and the Bank’s
composite leading business cycle indicator showed stronger real economic conditions.
The healthy performance of the economy in the first quarter of 2011, however, was not
sustained in the second. Following the 4,5 per cent annualised growth for the first quarter, the
economy slowed to 1,3 per cent in the second quarter. The MPC noted with growing concern
the increasing fragility of the economy and the hesitant nature of the recovery. The second
quarter growth rate reflected a combination of weaker growth elsewhere and faltering output
domestically, in part due to widespread industrial action. The RMB/BER BCI fell to below the
neutral 50 level in the second quarter of 2011. The Kagiso/BER Purchasing Managers Index
(PMI) weakened sharply in July in line with the decline in manufacturing output. The building
sector in particular continued to lag growth in the rest of the economy, with continued weakness
showing in house prices, mortgage advances, and indicators of future building plans. Having
increased through much of the year, capacity utilisation declined from July.
Gross fixed capital formation in the first and second quarters of 2011 exhibited a modest
recovery from the decline in 2010, growing by 3,1 per cent and 4,1 per cent respectively. Private-
and public-sector corporation investment increased, while the sustained decline in general
government investment appears to have ended. The Bank’s forecast shows a significantly
rising contribution to GDP growth in 2012 and 2013 compared with the modest contribution of
0,5 percentage points expected for 2011.
Household consumption had played a major role in sustaining growth in the economy in 2010
and into 2011. Moderate growth in household spending is expected to continue, although a
range of factors should constrain household spending from returning to its pre-crisis pace.
The MPC observed that although household net wealth had recovered partially since the
recession, it remained below the peak achieved in 2007, due in part to weak nominal house
price growth. Household debt as a percentage of disposable income has fallen from a high
of 82 per cent in 2008 to about 75,9 per cent of disposable income in the second quarter of
2011. This is still a high level compared to the average level of 64,3 per cent in 2005. Growth
in retail sales and new vehicle sales has been volatile, and consumer confidence moderate
and declining in recent months.
Credit demand from households has been very weak and lending conditions constrained. The
ratio of impaired advances to gross loans and advances, largely attributable to retail debt, had
remained at around 5,5 to 5,8 per cent in the first half of the year. The MPC expressed concern
over the lack of movement in this ratio despite growth in the economy. By the November meeting
the ratio of impaired advances had started to fall, reaching 5,1 per cent.
The third quarter also revealed further strengthening in the money supply and credit extension.
Credit advanced to corporates and for motor vehicle sales had shown greater signs of life
than other credit categories. By the end of September, general advances had grown by about
13 per cent. Mortgage advances have weakened over the course of the year, reflecting a distinct
faltering in the housing market recovery that was thought to be evident early in the year.
The considerably weaker trajectory of the domestic economy from the second quarter of the
year and downward adjustments of global growth have resulted in a lower forecast for average
growth in GDP. By September the forecast for 2011 GDP growth had declined to 3,2 per cent
from 3,7 per cent at the July meeting. The forecast for 2012 was similarly marked down from
3,9 per cent to 3,6 per cent, while the 2013 projection remained unchanged at 4,4 per cent.
The November forecast continued the downward trend in outlook for both the global economy
and South Africa. GDP growth for South Africa’s largest 15 trading partners (the measure used
in the Bank’s forecasting process) is expected to be 3 per cent for 2011, decelerating to 2,7 per
cent in 2012. The South African economy is projected to grow by 3,0 per cent in 2011 and by
3,2 per cent in 2012.
The modest global economic recovery of the first half of 2011 was associated with rising inflation
pressures driven primarily by global food and oil prices. Food and oil price pressures drove up
the imported component of consumer prices in many economies, with the risk of pass-through

Monetary Policy Review November 2011
into broader consumer prices or measures of core inflation higher in countries experiencing
strong economic growth. In some economies, property market buoyancy and GDP growth
running above potential output were indicative of a broadening in inflationary pressures. Some
rapidly growing emerging-market economies began to shift to a tighter monetary policy stance
early in the year. In advanced economies, core measures of inflation remained somewhat
muted, reflecting weak underlying demand conditions.
Early in 2011, the MPC raised concerns about the extent of international food price pressures
caused by changing weather patterns, rising demand for food in emerging markets and tight
food supplies. Sharply rising wheat prices late in 2010 posed a potential challenge for South
Africa, although the impact on consumer prices was moderated by increases in the exchange
rate of the rand. The Bank’s inflation forecast set out the potential for food prices to put sustained
upward pressure on headline consumer price inflation through the year, despite the view that
global food prices were seen to be peaking around the middle of 2011.
At the March MPC meeting the Bank’s inflation forecast remained within the target range,
despite the headline CPI projection increasing by about half-a-percentage point in 2012. By
the May meeting the headline CPI forecast had increased to above the top end of the target
band for the final quarter of 2011 and peaked at 6,3 per cent in the first quarter of 2012 before
moderating somewhat. The July forecast saw headline inflation peaking at about the same time
and level, and then remaining stuck at around 6 per cent for several quarters in 2012 and then
declining. The primary driver of the increase in the headline CPI forecast was higher international
oil prices. With the softening in global economic conditions in August and September, the
Bank’s inflation forecast showed the peak expected in the first quarter of 2012 at 6,2 per cent
before declining to average 5,5 per cent in the final quarter of 2013.
The Bank’s November forecast reflected a somewhat sharper rise in monthly food and petrol prices in
2011, offset somewhat by weaker demand-side pressures in 2012 and 2013. Headline CPI is forecast
to average 5 per cent for 2011, 6 per cent for 2012 and 5,5 per cent for 2013. The peak is expected
in the first quarter of 2012 at 6,3 per cent before returning to within the target in the fourth quarter. A
core measure of inflation excluding food, petrol and energy remained well contained.
Oil prices had moderated significantly before sharply increasing as the crisis in Libya unfolded in
February and oil exports slowed dramatically from that country. Tighter supply was accompanied
by large swings in oil prices as futures prices reacted to the release of oil stocks by the International
Energy Agency in June. The MPC expressed its concern that the future trajectory of oil prices
had become less clear. In September the committee noted that oil prices would be affected
by the extent to which the Chinese economy slowed in coming months. The combination of
strong global demand and falling supply were expected to keep international oil prices at elevated
levels. Since December 2010 the petrol price increased by a cumulative 232 cents per litre or
27,5 per cent, with a large increase in October caused by the depreciation of the rand.
The prospect of sustained high wage settlements presented a further risk to the inflation
outlook. Wage settlements started to moderate in 2011 with strong growth in 2010 of
8,2 per cent easing to 7,5 per cent in the first and second quarters of 2011. The MPC noted
that continued moderation of unit labour cost growth could contribute meaningfully to low
inflation and employment creation, although negative outcomes posed a significant upside
risk to the outlook.
The firm exchange rate of the rand for much of 2010 and 2011 has had a moderating effect on
domestic inflation, primarily by dampening the impact of rising prices for imported food and
oil. The exchange rate has also enabled a sustained low repurchase rate. Yet the MPC also
noted over the course of its meetings that bouts of global risk aversion – associated in 2011
mostly with the low interest rate environment and events in the US and Europe – have resulted
in large swings in capital flows to South Africa and in volatility in the value of the currency.
Volatility increased dramatically in August and September as events came to a head in these
major economies, and the rand depreciated sharply. Between the September and November
meetings of the MPC, the rand has traded in a range against the US dollar of between
R7,70 and R8,50. Since January, the rand has depreciated by 19 per cent against the dollar, by
24 per cent against the euro and by 18 per cent on a trade-weighted basis.
Monetary Policy Review November 2011

The MPC noted that the extent and persistence of the depreciation trend will have a determining
impact on the degree to which the currency’s movements present an upside risk to the inflation
forecast. In September the MPC deemed the risk to be relatively moderate but rising.
Expectations of future inflation play a key role in the monetary policy toolkit and are watched with care
by the MPC. The January committee meeting noted that expectations held by business executives
and trade unionists continued to decline in line with the moderating inflation trend at that time.
Financial analysts, however, had already begun shifting to a less sanguine view of future inflation.
The second quarter of 2011 revealed a bottoming out of inflation expectations and over the next
few months inflation expectations followed the general upward trend in the Bank’s inflation
forecast, driven largely by global food and oil price pressures. The September and November
MPC discussions revealed inflation expectations hovering at the upper end of the target range.
At the time of the September meeting, market analysts expected an upward policy rate change.
By the November meeting, the expectation of policy rate normalisation had been pushed out
significantly by the majority of analysts. Market-based expectations of long-run future inflation,
as measured by breakeven inflation rates on longer-term debt, tended to rise above the short-
and medium-term forecasts of inflation.
In the context of extraordinary global tensions and changes to growth and inflation trajectories,
the MPC held the view that the inflation risks facing South Africa primarily lay in cost–push
pressures emanating from international food and oil prices. The committee emphasised its
concern that these prices could feed into headline CPI and generate expectations of rising
inflation that would have serious negative economic effects. The committee also expressed
its concern at the possibility that moderating unit labour cost outcomes, which will tend
to support growth and employment creation, could be reversed. The MPC repeatedly cautioned
that it would closely monitor indications of second-round effects arising from cost–push pressures.
Domestic economic developments, and since May the global growth trajectory, have weakened
demand pressures in the economy and may have lessened the build-up of significant secondround inflation effects. Despite the expected peak in headline CPI in early 2012 at 6,3 per cent,
the trajectory shows re-entry into the target band later in the year without a policy adjustment.
The September MPC meeting felt that the downside risks to inflation from a disorderly debt
workout in Europe and weak domestic growth prospects were delicately balanced against
ongoing cost–push pressures. The November meeting suggested that while core inflation was
expected to be contained, there was greater potential for marginally worse inflation expectations
for 2012 and on balance upside risks to the headline inflation outlook.
The outlook for inflation
The prospects, risk and uncertainties relating to some of the factors that determine the outlook
for inflation are presented in this section.
International outlook
The global economic outlook has deteriorated markedly since the previous MPR was published in
May 2011, and growth forecasts for 2012 have generally been revised downwards in recent months
(Figure 23). The tide had begun to turn in May as economic data, especially for manufacturing,
softened worldwide and some investors became concerned about the end of the Fed’s second
round of quantitative easing that ended in June. Successive negative shocks – including the
tsunami in Japan and the deepening euro area debt crisis – have contributed to an increasingly
fragile economic recovery in recent months. Mixed signals on the US economic outlook, S&P’s
downgrading of the US’ credit rating on 5 August, and a sovereign debt crisis that pushed
government bond yields in Spain, Italy and Greece to euro-era records also impacted negatively
on global investor, business and consumer sentiment.
In its September WEO, the IMF sharply downgraded its growth forecasts for the US, the euro
area, and the UK, warning that strong action was needed to prevent a return to recession. Given
escalating risks to the global recovery, it cautioned policy-makers in leading economies not to
tighten fiscal policy too sharply but, nevertheless, expects the recent financial turmoil to delay
rather than derail the economic recovery in advanced countries.

Monetary Policy Review November 2011
Annual percentage change
Source: Consensus Forecasts
Figure 23
Evolution of real GDP forecasts for 2012 for the G7 and

eurozone (surveys conducted during 2011)
United States
Eurozone
Italy
-1

Japan
Germany
Canada
United Kingdom
France
J
J
J
F
M
M
A
A
S
O
N
D

As Table 10 shows, global output is projected to expand by 4,0 per cent in 2012 and the growth
forecast for advanced economies has been reduced to 1,9 per cent. On balance, the IMF expects
continued, uneven expansion and deems risks to its growth projections to be mainly to the
downside given continued concerns about sovereign debt in the euro area.
Table 10
IMF projections of world growth and inflation for 2011 and 2012
Per cent
Real GDP
Consumer prices


Source: IMF World Economic Outlook, September 2011
In the US growth is expected to be higher in 2012 than in 2011, although the IMF has reduced its
projection for 2012 by 0,9 percentage points to 1,8 per cent, with risks to the outlook remaining
elevated. Euro area growth is expected to decline in 2012, with the IMF expecting real GDP to
expand by about 1,1 per cent.
Monetary Policy Review November 2011

In November the European Commission more than halved its euro area GDP growth forecast for
2012 to 0,5 per cent, citing the risk of an ongoing fiscal crisis leading to recession in the region.
In Japan the earthquake and tsunami on 11 March had a greater-than-anticipated effect on
international supply chains and global growth, but industrial production rebounded in the second
half of 2011. The IMF projects GDP growth in Japan to improve significantly from a negative
0,5 per cent in 2011 to 2,3 per cent in 2012. The growth forecast for the UK is projected to increase
moderately to 1,6 per cent in 2012 from 1,1 per cent in 2011.
There has also been a pronounced slowdown of growth in emerging-market and developing
economies. The IMF expects the major countries in this group to continue to grow faster
than the advanced economies, but also expects them to remain vulnerable to contagion
effects from a possible significant slowdown or recession in these economies. Growth in
these countries is projected to be 6,1 per cent in 2012, with developing Asia projected to grow
by 8,0 per cent. China is projected to continue to grow at rates of around 9,0 per cent in 2012,
while India is projected to achieve growth well above 7,0 per cent per annum for the year.
The IMF projects that consumer-price growth in the global economy will decline to 3,7 per cent
in 2012 from 5,0 per cent in 2011. Consumer price inflation is expected to slow in 2012 in both
advanced economies (from 2,6 to 1,4 per cent) and emerging and developing countries (from
7,5 to 5,9 per cent).
Selected indicators of global economic activity are shown in Figure 24. The Organisation for
Economic Co-operation and Development (OECD) index of composite leading indicators,
designed to give a broad indication of economic activity six months ahead, suggests a slowdown
in economic activity into early 2012. It declined by 1,3 per cent in September 2011, compared
with the corresponding month of the previous year. The year-on-year rate of change in the
OECD industrial production index likewise slowed significantly from 5,8 per cent in February to
3,0 per cent in August 2011. The JPMorgan global manufacturing Purchasing Managers’ Index
(PMI) has also declined from a level of 57,4 in February 2011 to 50,0 in October.
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 24
Selected indicators of global economic activity


Outlook for domestic demand and supply
According to the Bank’s latest quarterly projection, annual average growth in real output is
expected to be 3,0 per cent in 2011, followed by 3,2 per cent in 2012 and 4,2 per cent in 2013
(Figure 25). The lower forecast is mainly a result of the lower-than-expected economic growth
outcome in the second quarter and downward revisions to global growth.

Monetary Policy Review November 2011


Percentage change at seasonally adjusted annualised rates

Figure 25
Real GDP growth forecast
The 2011 MTBPS forecasts slightly higher annual average economic growth of 3,1 per cent in
2011 and 3,4 per cent in 2012. For the years 2013 and 2014 GDP growth is forecast to reach
4,1 per cent and 4,3 per cent, respectively, as global uncertainties decrease and confidence
strengthens. The Reuters October 2011 survey showed that financial analysts, on average,
expect annual GDP to increase by 3,2 per cent in 2011, followed by 3,3 per cent in 2012 and
4,0 per cent in 2013.
The seasonally adjusted Kagiso/BER PMI had risen for the third time since July, when it registered
46,4 index points, to reach 50,5 in October 2011, moving back above the neutral level of
50 (Figure 26). The business activity index posted 50,9 index points, and new sales orders improved
to 51,6 index points. Purchasing commitments registered 55,4 index points and expected business
conditions rose to 62,4 index points in October, up from 60,8 points in September.
Index points
Sources: Kagiso Securities and Bureau for Economic Research, Stellenbosch University
Figure 26
Kagiso PMI

Employment
Kagiso PMI
Expected business conditions

According to the Ernst & Young/BER retail survey, the percentage of wholesalers rating business
conditions as satisfactory declined from 47 in the second quarter of 2011 to 31 in the third
quarter. The Ernst & Young/BER retail confidence index gained 1 index point to reach a level of
48 during the third quarter.
Monetary Policy Review November 2011

The Bank’s composite leading business cycle indicator decreased in August 2011, having also
decreased in July (Figure 27). Ten of the eleven component time series that were available for
August decreased, while one increased. The major negative contributors to the movement in
the leading indicator in August were the year-on-year percentage change in the composite
leading business cycle indicator of South Africa’s major trading-partner countries, followed by
the prices of all classes of shares traded on the JSE. The only positive contribution came
from the export commodity price index. Since February 2011, the leading indicator has been
following a moderate downward trend, pointing to a possible slowdown in aggregate economic
activity in the months ahead.
Index: 2000 = 100

Figure 27
Composite leading business cycle indicator

The RMB/BER BCI fell sharply from 48 index points in the second quarter of 2011 to 39 index
points in the third quarter. Business confidence declined in the new vehicle trade, manufacturing
and wholesale trade sectors, but increased in the retail trade sector. Confidence in the building
sector remained low and declined marginally from 21 index points in the second quarter to
20 index points in the third quarter.
Index
Net positive
Net negative

Figure 28
RMB/BER business confidence

Downward phases of the business cycle
Sources: Rand Merchant Bank and Bureau for Economic Research, Stellenbosch University

88 1990

2000 02

According to the BER Manufacturing Survey, manufacturing business confidence declined from
51 index points in the second quarter of 2011 to 36 points in the third quarter, with the net majority

Monetary Policy Review November 2011
reporting general business conditions as worse than a year ago rising from 8 per cent to 33 per
cent. The net majority who reported a rise in domestic sales volumes fell from 26 per cent during
the second quarter to 3 per cent in the third quarter, while the net majority reporting an increase
in domestic orders fell from 14 per cent to 1 per cent. The percentage of total respondents rating
the present level of output as below capacity rose from 67 per cent to 74 per cent.
The FNB/BER Building Confidence Index declined marginally from 24 index points in the
second quarter of 2011 to 23 index points in the third quarter. Three quarters of respondents
in the surveyed sectors of the building industry rated the prevailing business conditions as
unsatisfactory. The confidence of quantity surveyors, sub-contractors and building material
merchants increased, while that of architects, main contractors and building material
manufacturers declined relative to second quarter.
The FNB/BER Consumer Confidence Index (CCI) declined from +11 index points in the second
quarter of 2011 to +4 index points in the third quarter. The fall in the third quarter can mostly be
attributed to a large decline in the percentage of consumers expecting an improvement in the
economy. The percentage of consumers expecting an improvement in their own finances also
declined, while the percentage rating the present as an unsuitable time to buy durable goods
remained almost unchanged relative to the second quarter.
Indicators of inflation expectations
Inflation expectations play an important role in price setting and wage negotiations, and
are therefore an important factor in determining future inflation outcomes. The BER survey
of inflation expectations undertaken in the third quarter of 2011 shows that average inflation
expectations remain within the target range, rising from 5,5 per cent in 2011 to 5,9 per cent in
2013 (Figure 29). However, expectations have increased from the time the previous survey was
undertaken in the second quarter of 2011. The average inflation expectation for 2011 has risen
from 5,3 per cent in the second quarter of 2011 to 5,5 per cent in the third quarter. The average
inflation expectation for 2012 and 2013 also increased in the third quarter by 0,1 percentage
points to 5,9 per cent.
Annual averages, per cent


Figure 29
BER surveys of headline CPI inflation expectations

Survey conducted during 2011:

1st qr
Source: Bureau for Economic Research, Stellenbosch University

2nd qr

3rd qr
According to the BER survey results, all respondent groups revised their 2011 inflation forecast
upwards in September 2011. Financial analysts forecast that consumer headline inflation would
remain below 6 per cent over the entire 2011–13 period, while business now expects inflation
Monetary Policy Review November 2011

to breach the upper inflation target limit and reach 6,1 per cent in 2012, before accelerating to
6,3 per cent in 2013. Trade unions expect inflation to reach 6 per cent in 2012 before moderating to
5,9 per cent in 2013.
The Reuters survey of long-term forecasts for the South African economy shows the forecasts
for CPI inflation rising in 2012. The mean CPI forecast is for inflation of 5,1 per cent in 2011,
5,8 per cent in 2012 and 5,6 per cent in 2013 (Table 11). The inflation forecasts were relatively
unchanged between September and October 2011.
Table 11
Reuters survey of CPI inflation forecasts: October 2011*


(17)

(12)

* September 2011 survey results in parentheses
Source: Reuters
Figure 30 shows the inflation expectations associated with break-even inflation rates, measured as
the yield differential between South African government CPI inflation-linked bonds and conventional
nominal bonds of similar maturity, assuming constant inflation and liquidity risk premia over the
period until the bond matures. In September break-even rates rose as a result of sharp increases
in government bond yields and a weakening in the foreign-exchange rate of the rand. Increased
risk aversion resulted in non-resident investors selling emerging-market economies’ bonds (including
South Africa’s) due to eurozone sovereign debt issues, and there was an expectation of increased
bond issuance to be announced in the MTBPS. Break-even rates then reversed as non-residents
returned to the domestic bond market in October and National Treasury announced a less-thanexpected long-term bond issuance on 25 October 2011.
Percentage points

Figure 30
Break-even inflation rates

Spread between R189 and R206 bonds (2- to 3-year maturity)

Spread between R197 and R186 bonds (12- to 15-year maturity)

Monetary Policy Review November 2011
The South African Reserve Bank inflation forecast
The most recent projections of the Bank’s core quarterly inflation forecasting model, presented to
the MPC meeting on 8–10 November 2011, are reproduced in the form of a fan chart in Figure 31.
According to these projections, the inflation forecast of the Bank has shown a modest increase
since the previous meeting of the MPC. The targeted inflation rate is expected to continue to
trend upwards, moving above the upper level of the inflation target range from the fourth quarter
of 2011 to the third quarter of 2012, before returning to 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 peak at an average rate of 6,3 per cent in the first quarter of 2012, then
decline gradually to average around 5,2 per cent in the final quarter of 2013. Movements in oil
prices, electricity prices or the exchange rate of the rand that differ from those assumed for the
forecast 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 17,3 per cent per annum in the third quarters
of 2012 and 2013.
Per cent
Figure 31
Targeted inflation* forecast

* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban areas thereafter

Given the central projection for targeted inflation as the most likely outcome, the risks to the
forecast in Figure 31 are viewed as being skewed slightly to the upside. Uncertainty regarding
future developments in cost–push pressures and the exchange rate pose an upside risk to the
outlook, which more than offsets the downside risks from possible contagion effects from the
European crisis and associated slow growth.
Note:
The fan chart uses confidence bands to depict varying degrees of certainty. The darkest
band of the fan chart covers the most likely 10 per cent of probable outcomes foreseen
for inflation, including the central projection. Each successive band, shaded slightly
lighter and added on either side of the central band, adds a further 10 per cent to the
probability, until the whole shaded area depicts a 90 per cent confidence interval (see
Box 4 “Understanding the fan chart” on p. 27 of the March 2001 Monetary Policy Review).
Monetary Policy Review November 2011

Box 2 An accuracy analysis of inflation forecasts
Despite the high degree of uncertainty involved in economic forecasting, forward-looking projections
of inflation and other variables play a critical role in any monetary policy decision-making process.
Forecast errors arise from a variety of sources, including misspecification of economic relationships,
data revisions, unforeseen shocks to the economy and incorrect or partial assumptions for exogenous
input into the models. Models are always imperfect as they are simplified facsimiles of the real world.
Monetary Policy Committee (MPC) decisions are based, in part, on the forecast and on the analysis
and assessment of other information, coupled with the balance of risks affecting the baseline forecast.
The South African Reserve Bank (the Bank) compares the accuracy of its forecasts of headline
consumer price inflation produced by its core model, 1 the Autoregressive Integrated Moving Average
(ARIMA) model and the disaggregated inflation model against the Reuters Consensus Forecast.2
A number of descriptive statistics are used in the assessment of the accuracy of the inflation
forecast. The most frequently used error measures are the mean errors (measuring bias in terms of
systematic over- or underestimation) and the root mean squared errors (relating errors to the
variability of the series).
The average forecast errors of the Bank’s models and that of the Reuters Survey (the average of the
participants) for the period May 2003 to September 2011, presented in Figure B2.1, are negative and
biased downwards. This bias indicates that both the Bank and the Reuters participants, on average,
underestimated the actual outcome of headline consumer price inflation over the medium-term
forecast horizons, that is, two-quarters-ahead to four-quarters-ahead forecasts.


Figure B2.1 Average forecast error

Reuters consensus forecast

ARIMA model
Source: Reuters and own calculations
Core model
Disaggregated inflation model
Quarters ahead
Supply-side shocks in 2007 and 2008 – largely unexpected changes in international commodity, oil
and food prices – contributed to a sharp acceleration of quarterly rates of year-on-year headline
inflation. This exceeded 13 per cent in the third quarter of 2008. These exceptional shocks resulted in
large consecutive negative forecast errors dominating the outcome of the average forecast error.
1 The core model is a simultaneous-equation macroeconometric model consisting of 27 stochastic equations and
several identities. It provides a well-defined conceptual framework for macroeconomic analysis. The ARIMA model is
based on the historical properties of the series, which is intended for the very short term. In the disaggregated inflation
model the main components of the headline consumer price index are forecast individually and then aggregated with
the appropriate weights to calculate the forecast of headline consumer price index.
2 The Reuters Survey is published monthly and contains forecasts of several macroeconomic variables over a relatively
long time span. The forecasters consist of economists from major investment banks, corporations, consulting firms
and academic institutions, using different methods and models to produce their forecasts. On average, the survey
contains 22 forecasts each month, and many of the forecasters have participated in the survey for several years.

Monetary Policy Review November 2011
In Figure B2.2 it is evident that the Bank’s models are considerably more accurate than that of the Reuters
Consensus Forecast over the one-quarter-ahead horizon when comparing the respective root mean square
errors. However, as the forecast horizon extends and uncertainty rises, the gap in the forecast accuracy declines.


Figure B2.2 Root mean square error

Reuters consensus forecast

ARIMA model
Source: Reuters and own calculations
Core model
Disaggregated inflation model
Quarters ahead
The Bank’s forecasting performance is also compared with the 16 individual forecasters or institutions that
participate consistently in the Reuters Survey.3 The results show that the forecast produced by the Bank’s
core model is consistently the best over the one-, two and three-quarters-ahead forecast period, with only
the ARIMA model slipping to the fourth position over the four-quarter-ahead forecasting period.
3 The Reuters Consensus Forecast is treated in this instance as a forecasting entity in its own right. It is therefore not
the average of the forecast errors of all the participants in the Reuters Survey. All other participants are identified by a
number only and the same number is attached to a particular participant throughout the analysis and forecast
horizon.
Assessment and conclusion
The global economy remains extraordinarily turbulent. Efforts at global, regional and national
levels to make policy decisions underscore the complexity of the world’s current economic and
financial difficulties. Since the previous meeting of the MPC, there has been little meaningful
progress towards resolving the sovereign debt crisis that is engulfing the euro area. Coalition
governments in some countries may help to unlock tough decisions. Advanced economies
generally need to achieve more rapid economic growth rates but this goal remains hampered
by policy uncertainty, slow deleveraging by households and financial institutions, and blocked
credit channels.
Growth in emerging-market economies has up to now supported the overall growth rate of
the world economy. Forecasts for emerging markets are being marked down because of their
sensitivity to growth in advanced economies. Downward revisions are likely to remain limited,
however, as China and India avoid hard landings and the US avoids a recession more comfortably
than expected a few months ago. Emerging markets that are more dependent on growth in
advanced economies, such as in Latin America and Central Europe, should experience more
significant economic slowdowns.
Monetary Policy Review November 2011

For advanced economies, headline inflation should be expected to moderate in line with
declining economic activity and the softer trend in commodity prices. Inflation remains quite
high in many emerging-market economies, although in recent weeks some moderation has
been seen. Economic growth concerns and financial fragility suggest that monetary policy in
advanced economies is expected to remain accommodative for a considerable period. This
policy stance may support a continuation of the somewhat higher rate of global price inflation
experienced in 2011 despite weaker growth. The rise in prices has been caused primarily by
supply pressures on resources and food that will only gradually ease over the longer term.
The heightened uncertainty of advanced economy developments and weaker growth has had
implications for the pattern of global capital flows and exchange rates in emerging markets.
Capital flows to emerging-market economies and commodity producers may remain strong
over the medium and long term, even as short-term flows are volatile. This implies that inflation
expectations need to remain well anchored around a sound inflation target to ensure that
temporary shocks have minimal effects on inflation or the economy more generally. A clear
price stability objective implemented within a flexible inflation-targeting framework is central to
the Bank’s approach.
The South African economy has been significantly affected by global developments and
domestic constraints to the recovery. The domestic recovery remains hesitant and confidence
low. Domestic demand pressures on inflation are restrained at this point in time but various
supply-side factors have resulted in a deterioration of the inflation outlook. The subdued
character of domestic demand is expected to keep core inflation contained. Food and petrol
prices, and administered prices more broadly, are the drivers of the poorer outlook. Compared
to the May assessment a more protracted, but relatively small, breach of the inflation target is
expected in 2012.
Cost–push pressures and sustained exchange rate depreciation are the primary upside risks to
the inflation outlook. Downside risks emanate from the potential contagion effects of the crisis in
Europe and negative spillover effects on global economic growth. While the MPC viewed these
risks overall to be skewed to the upside, the committee is aware of the dangers of a disorderly
resolution of the crisis, and the systemic implications for the global and domestic economy, and
remains ready to act appropriately should the need arise.

Monetary Policy Review November 2011
Statement of the Monetary Policy Committee
21 July 2011
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC), the global economic
outlook has deteriorated. Events in the eurozone appear to have entered a new phase, with the
focus moving from the peripheral countries to some of the larger economies in the region. The
global systemic risks posed by any failure to overcome the sovereign debt crisis are enormous,
and are exacerbated by the potential failure to resolve the debt ceiling crisis in the United States
(US). These events are taking place against the backdrop of a slowdown in growth in many of
the advanced economies.
The domestic economic recovery has continued, but in a hesitant manner. The strong
performance of the economy in the first quarter of the year is unlikely to have been repeated
in the second quarter, and growth prospects will also be dependent on global developments.
Domestic inflation has been increasing in line with expectations, driven mainly by cost-push
pressures, but more broad-based pricing pressures are beginning to emerge.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas increased to 5,0 per cent in June 2011, from 4,6 per cent in May. As was the case in the
previous few months, the main contributions to the inflation outcome came from food, housing
and utilities, and transport categories which, together, accounted for 3,6 percentage points
of the 5,0 per cent outcome in June. Food price inflation continued its marked upward trend,
measuring 7,3 per cent in June, from 6,3 per cent in May. Petrol and electricity prices increased
at rates of 21,4 per cent and 19,0 per cent respectively in June. Administered price inflation
excluding petrol was unchanged in June at 9,3 per cent.
The underlying inflation trends have remained relatively moderate. In May and June CPI excluding
food and petrol measured 3,7 per cent and 3,9 per cent respectively, while CPI excluding food,
petrol and electricity measured 3,2 per cent and 3,5 per cent in these months.
Year-on-year producer price inflation has displayed some volatility in recent months, partly
as a result of commodity price fluctuations. Producer prices increased by 6,6 per cent and
6,9 per cent in April and May respectively, compared with 7,3 per cent in March. Price increases
in electricity and products of petroleum and coal were major contributors to the PPI outcome,
but there were also significant increases in food prices, which had until recently remained
subdued. Agricultural prices increased by 6,8 per cent in May, from 2,1 per cent in April, while
manufactured food prices increased at rates of 3,4 per cent and 4,8 per cent in April and May
respectively.
The inflation forecast of the Bank has shown a slight near-term deterioration since the previous
meeting of the MPC. Inflation is now expected to breach marginally the upper end of the
target range in the final quarter of 2011, and to average 6,3 per cent in the first quarter of
2012. Thereafter it is expected to remain at the upper end of the target range for the next two
quarters, before declining somewhat in the final quarter of the year. The forecast period has
been extended to the end of 2013 and inflation is expected to decline gradually during the year,
to measure 5,6 per cent in the final quarter of 2013. The Bank’s forecast of core inflation shows
a moderately rising trend, peaking at around 5 per cent in the second quarter of 2012.
Inflation expectations for 2011 as reflected in the survey conducted by the Bureau for Economic
Research (BER) at Stellenbosch University had been declining for six consecutive quarters, but
remained unchanged in the second quarter of 2011. Expectations for 2012 increased marginally,
but remained within the target range, and declined for 2013. The average inflation expectation
for the three main categories of respondents was 5,3 per cent for 2011 and 5,8 per cent for the
next two years.
Monetary Policy Review November 2011

Inflation expectations as measured by the Reuters survey of financial analysts showed very little
change when compared to the forecasts at the time of the previous MPC meeting, with inflation
expected to remain, on average, within the upper end of the target range until the end of 2013.
Inflation expectations as reflected in the break-even inflation rates of the inflation-linked bonds
have moderated slightly since the previous meeting.
The MPC assesses the risks to the global economic environment to be on the downside, and
continued weakness in the economies of the US and United Kingdom has extended the likely
duration of monetary accommodation, particularly in the face of declining fiscal stimuli.
Risks relating to debt sustainability in peripheral Europe have intensified, with further ratings
downgrades to some countries. The focus has also moved beyond the periphery to larger
countries such as Spain and Italy. As long as the sovereign debt crisis is unresolved, confidence
will not be restored and periodic bouts of risk aversion can be expected to contribute to a high
degree of volatility in financial markets. There are concerns that a disorderly write-down of this
debt could have systemic implications because of the high exposure of European banks to the
debt of these countries.
By contrast, there are encouraging trends in other parts of the world. The reconstruction of the
Japanese economy in the wake of the natural disasters has begun to have some positive impact
on that country’s growth rate. Growth in emerging markets has generally remained strong, and
fears of a marked slowdown in Chinese growth have been allayed somewhat by robust second
quarter growth performance.
Global inflation has been driven primarily by food and oil price developments. There are, however,
some indications that these price pressures may have peaked. Both the International Monetary
Fund and Food and Agricultural Organization food price indices have shown a flattening out
since the beginning of the year. International oil prices have contributed to, and in turn have also
been constrained by, the slowdown in global growth.
The bouts of risk aversion relating to developments in the euro area have impacted on the
volatility of the rand exchange rate. Since the previous MPC meeting, the rand has fluctuated
within a range of R6,67 and R7,02 against the US dollar. The current level of the rand exchange
rate against both the dollar and the euro has remained more or less unchanged since the
previous MPC meeting. In recent months the rand has also been affected by a number of actual
and expected direct investment transactions, and by net purchases of bonds and equities by
non-residents totalling around R32,6 billion since the beginning of May. Net bond purchases by
non-residents amounted to R34,1 billion, while net sales of equities amounted to R1,5 billion.
From a macroeconomic perspective, the rand has remained relatively strong despite heightened
global risk aversion, and despite continued purchases of foreign exchange by the Bank with
the support of National Treasury. Between September 2009 and August 2010, the rand dollar
exchange rate fluctuated in the range of around R7,40 to R7,80. Since September of 2010, the
rand has generally traded in the range of around R6,60 to R7,00, apart from a short period in
early 2011 when it breached the R7,20 level.
The domestic economic recovery remains fragile. Annualised GDP growth in the first quarter
of 2011 measured 4,8 per cent, driven primarily by a 14,5 per cent growth in the manufacturing
sector. This performance is not expected to be sustained in the second quarter: the monthly
data for manufacturing-sector output in April and May suggest that unless there is a major
upside surprise in June, the positive contribution of the sector to second quarter growth is likely
to be minimal. The Kagiso Purchasing Managers Index, while still indicating positive growth in the
sector, has declined for three consecutive months. Some of the slowdown in manufacturing can
be ascribed to temporary factors such as the impact of the earthquake in Japan on the global
motor industry supply chain. The outlook for the sector will also be influenced by developments
in Europe, which is a significant market for South African-manufactured exports. Growth in the
physical volume of mining production was weak in April and May.

Monetary Policy Review November 2011
Growth in gross fixed capital formation improved in the first quarter of 2011 to register an
annualised growth rate of 3,1 per cent. This was mainly due to the higher levels of investment
by public corporations. Growth in private-sector fixed capital formation, while rising, was still
subdued at 2,7 per cent.
Despite the expected growth slowdown in the second quarter, the forecast of the Bank for
gross domestic product growth in 2011 and 2012 remains unchanged at 3,7 per cent and
3,9 per cent respectively, while growth in 2013 is expected to average 4,4 per cent. With a
potential output growth rate of around 3,5 per cent, the estimates of the Bank show that the
output gap, although closing, is still negative at around 2,5 per cent. This is consistent with
the fact that the levels of output in both the manufacturing and mining sectors are still below
pre-crisis levels, as is the level of capacity utilisation in the manufacturing sector. Business
confidence, as reflected in the Rand Merchant Bank/Bureau for Economic Research Business
Confidence Index, reversed its positive trend when it declined to below the neutral 50 level in
the second quarter of 2011. Confidence in the construction sector remains at an extremely low
level, and the real value of new building plans passed declined further in April.
Household consumption expenditure, which grew at an annualised rate of 5,2 per cent in the
first quarter of 2011, has been the main driver of the domestic growth recovery. There are
indications that this growth may have moderated in the second quarter. The robust growth in
real retail sales in April was more than offset in May when a month-on-month decline of 4,7 per
cent was measured, while the year-on-year growth rate was zero. New vehicle sales increased
by 12,6 per cent year on year, but declined by 4 per cent in the second quarter compared
with the previous quarter. The First National Bank/Bureau for Economic Research Consumer
Confidence Index increased marginally in the second quarter of 2011, but remains below levels
reached in 2010.
The MPC expects household consumption expenditure to be constrained by a number of
factors, including subdued credit market conditions, high levels of household debt, negative
wealth effects and persistently high rates of unemployment.
Growth in total loans and advances extended by banks to the private sector remain relatively
subdued and grew at a year-on-year rate of 5,5 per cent in May, compared with 6,0 per cent in
April. Growth in “other loans and advances” , particularly general loans, was the major driver, as
growth in mortgage loans – the largest category of loans – was restrained at around 3 per cent,
in line with the weak housing market. The subdued state of the credit markets reflects in part
the high levels of consumer indebtedness, which measured 77 per cent of personal disposable
income in the first quarter of 2011. The ratio of impaired advances to gross loans and advances
has remained at elevated levels for some time but declined marginally to 5,73 per cent in May.
Wealth effects have been negatively affected by the subdued housing market. The various
house price indices indicate that house prices are falling in real terms, although there appears
to be some positive nominal growth. While the JSE is at relatively high levels, it is vulnerable
to correction in the event of a significant global slowdown. Although household net wealth
to disposable income has recovered somewhat since the recession, it is still below the peak
reached in 2007.
Employment trends have been improving slowly. According to the Quarterly Employment Survey
of Statistics South Africa, formal non-agricultural employment increased by 2,6 per cent in the
first quarter of 2011, compared with the first quarter of 2010. This represented an increase of
212 000 jobs, just over half the number of formal-sector jobs lost during the crisis. The majority
of jobs created have been in the public sector and the recovery in employment in the private
sector remains slow.
Wage settlement rates have been declining, with Andrew Levy Employment Publications
reporting an average overall wage settlement rate in collective bargaining agreements of 7,5 per
cent in the first half of 2011, compared with 8,2 per cent in 2010 as a whole. Similarly, nominal
unit labour costs, which account for productivity changes, moderated to 5,2 per cent in the
Monetary Policy Review November 2011

first quarter of 2011, from 7,7 per cent in the fourth quarter of 2010. However, given that most
of the wage negotiations take place in the second half of the year, and that some of the recent
high-profile settlements appear to have reversed the moderating trend, this positive outcome
could change. Should these higher trends set a precedent for other wage settlements, this
could represent a significant upside risk to the inflation outlook. The high trends in executive
remuneration increases are also cause for concern.
Food and oil price developments remain the major risks to the inflation outlook. As noted above,
international food prices appear to have levelled out. Domestic food price inflation has lagged
global trends, and further increases can be expected in the near term. However, these increases
could be constrained should the favourable global developments persist.
The price of Brent crude oil, currently at around US$117 per barrel, is at levels similar to those
prevailing at the time of the previous meeting of the MPC. The price has experienced some
volatility in recent weeks, particularly following the release of oil stocks by the International
Energy Agency in June, when the price declined to US$106 per barrel. Although supply
conditions are expected to remain tight, further upside potential is likely to be constrained by the
uncertain global growth outlook. These developments allowed for a 31 cent per litre reduction in
domestic petrol prices in July, following a 2 cent per litre decline in June. However, an increase
is expected in August.
The view of the MPC continues to be that the underlying inflation pressures are mainly of a
cost-push nature, notwithstanding signs of a possible moderate increase in underlying inflation.
Despite the upside risks posed by cost-push factors, the MPC sees a number of downside risks
to the inflation outlook, with the risks being seen to be delicately balanced. These risks include
the continued fragile nature of the domestic recovery and risks posed by the ramifications of a
possible disorderly debt default in the eurozone.
It is, however, recognised that should there be unexpectedly high inflation outcomes, particularly
with respect to underlying inflation trends, this could impact negatively on inflation expectations,
which to date appear to be relatively well anchored. For this reason, the MPC is not complacent
and will remain vigilant and continue to monitor closely any indications of second-round effects
on inflation emanating from these cost pressures and from the changing risk profile of the
inflation outlook.
In the light of the above, the MPC has decided to keep the repurchase rate unchanged at
5,5 per cent per annum, for the time being. The MPC will not hesitate to respond timeously to
signs that threaten to move inflation out of the target range on a sustained basis.

Monetary Policy Review November 2011
Statement of the Monetary Policy Committee
22 September 2011
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC) the downside risks to
the global and domestic growth prospects have increased. Growth in some of the advanced
economies has weakened against the backdrop of financial market turbulence, generated in
large part by the unresolved European sovereign debt crisis. Although economic growth in
emerging markets is expected to continue to outperform that of the advanced economies, these
economies are unlikely to emerge unscathed from the challenging environment. Heightened risk
aversion has resulted in increased volatility of capital flows globally and a flight from what are
perceived to be more risky emerging-market assets. These developments have impacted on
the domestic capital and foreign-exchange markets.
Recent data have confirmed the fragile and uneven nature of the domestic economic recovery,
and unfavourable forward-looking indicators are consistent with a downward revision of the
Bank’s economic growth forecast. At the same time, a number of exogenous factors have
continued to put upward pressure on domestic inflation. This combination of declining growth
and rising inflation poses a challenge to monetary policy going forward, and is a feature being
experienced in a number of emerging markets.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas
was unchanged at 5,3 per cent in August 2011. The categories of food, housing and utilities,
and transport together accounted for 3,7 percentage points of the August outcome. Although
food price inflation moderated from 7,5 per cent in July to 7,3 per cent, further acceleration is
expected in the coming months. Administered price inflation excluding petrol declined from
9,3 per cent in July to 8,8 per cent in August. Underlying inflation trends remained relatively well
contained with CPI excluding food, petrol and electricity declining from 3,9 per cent in July to
3,8 per cent in August.
Year-on-year producer price inflation followed a strong upward trend, increasing by 7,4 per
cent and 8,9 per cent in June and July respectively. Price increases in the categories of mining,
electricity, and products of petroleum and coal remained the major contributors to the PPI
outcome, but there were also significant contributions from chemical and other manufactures.
Food prices continued to trend higher: agricultural prices increased by 5,1 per cent and 6,2 per
cent in June and July respectively, while manufactured food prices increased at rates of 5,9 per
cent and 6,3 per cent in these months.
The inflation forecast of the Bank has remained more or less unchanged since the previous
meeting of the MPC. Inflation is still expected to breach marginally the upper end of the target
range in the final quarter of 2011 and to peak in the first quarter of 2012 at around 6,2 per cent
before returning to within the target range in the second quarter. Inflation is then expected to
decline gradually and to measure 5,5 per cent in the final quarter of 2013. The Bank’s forecast
of core inflation, which excludes food, petrol and electricity, shows a moderately rising trend,
peaking at around 5,1 per cent in the second and third quarters of 2013.
Inflation expectations, as reflected in the survey conducted in the third quarter of 2011 by the
Bureau for Economic Research at Stellenbosch University, on average remain within the target
range for the forecast period ending 2013. Inflation is expected to average 5,5 per cent in 2011
and 5,9 per cent in both 2012 and 2013. This represents slight upward adjustments for all three
years. While financial analysts and trade union officials expect inflation to remain within the
target range over the forecast period, business executives expect average inflation to exceed
moderately the upper end of the target range in the coming two years.
Inflation expectations as measured by the Reuters survey of financial analysts also remain fairly
stable at the upper end of the target range. According to the survey, inflation is expected to
average 5,8 per cent and 5,6 per cent in 2012 and 2013 respectively.
Monetary Policy Review November 2011

The growth performance in the advanced economies has remained weak. There is a general
expectation of even weaker outcomes in the near-term, although it is still unclear if the stalled
state that many economies find themselves in will translate into a recession. The International
Monetary Fund, in its latest World Economic Outlook, has reduced its forecast for growth in
the United States (US) by 1,0 per cent in 2011 and by 0,9 per cent in 2012 to 1,5 per cent and
1,8 per cent respectively. euro area growth has been revised down to 1,6 per cent and 1,1 per
cent in these two years. The risks are seen to be on the downside.
This slowdown comes against the backdrop of a deterioration in the sovereign debt crisis in
the euro area and the inability of the member countries to reach agreement on a credible and
workable solution. Concerns have also spread to the European banking sector, particularly to
those banks with exposures to peripheral Europe, resulting in ratings downgrades of a number
of French and Italian banks. Growth in the US is also being affected by continued weakness in
the housing market and political disagreements on the pace and nature of fiscal consolidation.
Emerging markets are still expected to experience faster growth than the advanced economies,
but remain vulnerable to contagion effects from a possible significant slowdown or recession
in the advanced economies. In line with the current two-speed global economy, inflation trends
are higher in the emerging economies, driven mainly by food and energy prices.
Over the past two years, the extraordinarily low interest rate environment in the advanced
economies has resulted in significant capital flows to emerging markets, with consequences
for their exchange rates and asset prices. However, the pattern of flows has not been smooth.
During bouts of global risk aversion, there has been a tendency for these flows to reverse to
so-called safe havens. Risk aversion associated with recent events in the US and Europe has
resulted in a high degree of volatility of flows to emerging markets, including South Africa.
Since the beginning of the year, non-residents have been net sellers of equities to the value of
R16,9 billion and net buyers of bonds to the value of R44,3 billion. However, since the beginning
of September, non-residents were net sellers of both bonds and equities valued at R4,6 billion
and R7,6 billion respectively.
These recent outflows, together with increased risk aversion, have contributed to the high
degree of volatility observed in the JSE All-share Index, in domestic bond yields and in the
exchange rate of the rand. Since the previous meeting of the MPC, the rand has traded in a
range against the US dollar of between R6,68 and R8,33 per US dollar, and has depreciated
by around 15,6 per cent against the dollar, by 11,0 per cent against the euro and by 12,7 per
cent on a trade-weighted basis. Since the beginning of the year the rand has depreciated by
18,6 per cent against the US dollar.
The depreciation of the rand poses a potential upside risk to the inflation outlook. However, the
degree of this risk will depend on the extent and persistence of the depreciation trend which, in
turn, will be influenced by the duration and intensity of global risk aversion. The rand tends to be
more sensitive to changes in global risk perceptions than most of its emerging-market peers. At
this stage, the MPC still considers the upside risk to the inflation outlook from this source to be
relatively moderate, but rising.
Domestic economic growth remains disappointing, with the negative output gap widening to
around 3 per cent in the second quarter of 2011 and gross domestic product (GDP) growing by
1,3 per cent, following the 4,5 per cent increase recorded in the first quarter. Both the primary
and secondary sectors contracted in the second quarter, while real value added by the tertiary
sector increased only marginally. Widespread industrial action, which continued into the third
quarter, contributed to this subdued outcome, and is expected to weigh negatively on thirdquarter prospects as well.
Recent high-frequency indicators are also not very favourable. Mining production contracted
at a year-on-year rate of 5,1 per cent in July, and by 4,3 per cent on a month-on-month basis.
Manufacturing output declined at a month-on-month and year-on-year rate of 6,0 per cent in
July, confirming the sharp decline to 44,2 index points observed in the Kagiso/BER Purchasing
Managers’ Index (PMI) in July. Despite a modest recovery in August to 46,7 index points, the

Monetary Policy Review November 2011
PMI remained below the neutral 50 level, pointing to a further possible contraction in the sector.
The construction sector also remains subdued with both the first First National Bank (FNB)
Building Confidence Index and the FNB Civil Construction Index remaining at very low levels,
while there was a further decline in the number of building plans passed in the third quarter.
Overall business confidence, as reflected in the Rand Merchant Bank (RMB)/BER Business
Confidence Index, has declined for two consecutive quarters, and at 39 index points is well
below the neutral level of 50. The Bank has lowered its forecast for average growth in 2011
to 3,2 per cent, down from 3,7 per cent, while the forecast for 2012 has been reduced from
3,9 per cent to 3,6 per cent. The forecast for 2013 remains unchanged at 4,4 per cent. The
lower forecast is a result of the lower-than-expected outcome in the second quarter, as well as
a downward adjustment to the global growth assumption. The risks to this outlook are seen to
be on the downside.
The lower growth trajectory does not bode well for employment creation, which has been
relatively muted. According to Statistics South Africa, employment in the formal non-agricultural
business sector increased by 0,1 per cent or 5,701 people in this second quarter of 2011.
The outcome was, however, negatively affected by the decline in public-sector employment
associated with the termination of contracts of temporary employees hired for the municipal
elections.
Consistent with the moderation in domestic production, growth in real gross domestic
expenditure also declined, from an annualised growth rate of 7,9 per cent in the first quarter of
2011, to 1,3 per cent in the second quarter. A positive development was the further acceleration
in the growth of real gross fixed-capital formation, albeit off a low base, from an annualised rate
of 2,7 per cent in the first quarter to 4,0 per cent in the second quarter. Nevertheless the ratio
of gross fixed capital formation to GDP, at 18,9 per cent, is still well below the peak of 24,6 per
cent measured in the fourth quarter of 2008.
Consumption expenditure by households has been the main driver of growth to date. However,
in the second quarter of 2011, growth in consumption expenditure moderated to an annualised
rate of 3,8 per cent, compared with an increase of 5,2 per cent in the first quarter. Real retail
trade sales increased at a year-on-year rate of 2,8 per cent in July, but declined by 0,7 per cent
in the three months to July compared with the previous three months. Growth in motor vehicle
sales, while still positive, has also declined. Consumption patterns may have been distorted
somewhat by the high base effects arising from the 2010 FIFA World CupTM tournament and
a clearer picture should emerge in August. The RMB/BER Consumer Confidence Index has
declined for two consecutive quarters, underlying the fragility of the outlook.
Consumption expenditure is expected to remain constrained to some extent by low rates of
credit extension and continued debt deleveraging by households. The ratio of household debt
to disposable income declined further to 75,9 per cent in the second quarter of 2011 from a
peak of 82,0 per cent in the first two quarters of 2008. Twelve-month growth in total loans and
advances extended by banks to the private sector has fluctuated around 6 per cent in the three
months to July. Mortgage advances, which is the largest category of credit, grew at a year-onyear rate of 2,9 per cent, consistent with the slow pace of recovery in the domestic property
market. The main driver of growth in credit extension was the category of other loans and
advances, in particular general loans which reflect primarily corporate-sector borrowing. This
category grew by almost 15 per cent in the year to end of July.
Nominal wage settlements have continued to moderate somewhat and have been lower than
many of the highly publicised initial demands. Nevertheless, wage increases have been well
above the upper end of the inflation target range.
The main upside risks to the inflation forecast continue to emanate from administered prices
and exogenous factors. Since the previous meeting of the MPC the price of Brent crude oil has
fluctuated in a range of around US$104 and US$118 per barrel. The outlook for the oil price will
be determined in part by global growth developments, and in particular by the extent to which
China is affected by the slowdown. The recent depreciation of the South African rand against
the US dollar is likely to contribute to a further increase in the domestic petrol price in October.
Monetary Policy Review November 2011

Food prices are also expected to maintain their upward momentum for some time. The major
global food price indices have remained relatively stable but at elevated levels during the past few
months. However, global wheat and maize prices have increased markedly, and have impacted
on the domestic prices of these commodities. These increases have been compounded by the
weaker exchange rate of the rand. The price of white maize, for example, has increased by over
70 per cent during the past year, but futures prices reflect some expected moderation in the
medium term.
The MPC remains of the view that the underlying inflation pressures are mainly of a cost–push
nature, and at this stage there is no evidence of significant second-round effects from these
increases. Although the inflation trend remains on an upward trajectory, both headline and core
inflation forecasts appear to be consistent with the continued attainment of the inflation target
over time. Demand-side pressures remain subdued and are expected to be constrained in the
short to medium term. Inflation expectations also appear to be relatively well anchored.
However, there have been some changes in the MPC’s assessment of the risks to the inflation
outlook. The recent volatility in the rand exchange rate has imparted a degree of upside risk
to the inflation forecast. Although the rand may not return to the elevated levels reached in the
earlier part of 2011, the MPC considers some of the recent volatility to be of a short-term nature,
influenced by the vagaries of global risk aversion. Downside risks are seen to come from the
heightened risks to global growth and its consequences for the domestic economy. The overall
risks to the inflation outlook are assessed to be delicately balanced. The MPC will continue to
assess the changing risk profile of the inflation outlook and monitor closely those factors that
could push inflation outside the target on a sustained basis.
In the light of the above the MPC has decided to keep the repurchase rate unchanged at
5,5 per cent per annum, for the time being. The MPC is, however, concerned at the potential
impact of the current global turmoil on domestic economic prospects and stands ready to act
appropriately should the need arise.

Monetary Policy Review November 2011
Statement of the Monetary Policy Committee
10 November 2011
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC), there has been no
meaningful progress to resolving the sovereign debt crisis that is engulfing the euro area, with
the primary focus now on Italy and Greece. The interlinked nature of the debt crisis and concerns
about the banking sector in Europe, coupled with the inability of the advanced economies to
generate sustained growth, continues to weigh negatively on the global economic outlook.
The heightened uncertainty has had implications for the pattern of global capital flows and
exchange rates in emerging markets.
The domestic economic recovery remains hesitant. The relatively weak economy has ensured
that demand pressures on inflation are restrained at this stage. Nevertheless exogenous supplyside factors have resulted in a deterioration of the inflation outlook, with a more protracted
breach of the inflation target expected in 2012.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas
increased to 5,7 per cent in September 2011, up from 5,3 per cent in August. The categories of
food, housing and utilities, and transport together accounted for 4,0 percentage points of the
September outcome. Food price inflation accelerated from 7,3 per cent in August to 8,7 per
cent. Petrol and electricity prices increased by 26,2 per cent and 17,3 per cent respectively.
Administered price inflation, excluding petrol was unchanged at 8,8 per cent. CPI inflation
excluding food, petrol and electricity remained unchanged at 3,8 per cent in September.
Year-on-year producer price inflation continued its strong upward trend, increasing by 10,5 per cent
in September, from 9,6 per cent in August. These price developments were strongly influenced
by global commodity price movements as well as by the depreciation of the rand exchange
rate. Price increases in the categories of mining, electricity and products of petroleum and coal,
as well as other manufacturers remained the major contributors to the producer price inflation
outcome. Food prices also continued their higher trend, with agricultural prices increasing by
10,7 per cent and manufactured food prices by 8,8 per cent in September.
The inflation forecast of the Bank has shown a modest increase since the previous meeting of
the MPC. Inflation is expected to breach the upper end of the target range in the final quarter of
2011 and to peak in the first quarter of 2012 at around 6,3 per cent, before declining gradually
and returning to within the target range in the final quarter of 2012. Inflation is expected to
measure 5,2 per cent in the final quarter of 2013. The Bank’s forecast of core inflation, which
excludes food, petrol and electricity, continues to show a moderately rising trend, with the peak
of around 5,2 per cent expected in the first quarter of 2013.
Market expectations of inflation, as reflected in the Reuters survey of financial analysts, show
expectations to be anchored around the upper level of the inflation target range over the medium
term. In the October survey inflation was expected to peak at an average of 6,1 per cent in the
first quarter of 2012, and to measure 5,4 per cent by the second quarter of 2013. Break-even
inflation rates have moderated against most maturities since the previous meeting.
The global growth outlook continues to be characterised by heightened uncertainty, with weak
growth and declining consumer confidence in a number of the major advanced economies.
The protracted crisis in the euro area has now spread beyond the peripheral countries, despite
recent attempts to devise a credible and workable approach to contain the problem. The risks
created by these developments are likely to exacerbate the low or negative growth expected in
the region, amid increased fiscal austerity, tightened bank lending standards and deleveraging,
and tightening conditions in the European interbank markets. Weak growth is also forecast for
the United Kingdom and Japan.
Monetary Policy Review November 2011

On the positive side, fears of a return to recession in the United States (US) have dissipated
somewhat with a higher-than-expected growth outcome in the third quarter, driven mainly by a
recovery in household consumption expenditure. Although employment increased in the past
quarter, the unemployment rate is expected to remain at elevated levels for some time, along
with persistent weakness in the housing market.
Growth in many of the emerging markets has moderated during the year. Growth forecasts have
generally been revised down, and are sensitive to developments in the advanced economies.
China has experienced a policy-induced slowdown, but fears of a possible hard landing have
receded somewhat. Significant growth reductions have been experienced in a number of Latin
American and emerging European countries.
Headline inflation appears to have peaked in many of the advanced economies, and is
expected to moderate in line with declining economic activity and the softer trend in commodity
prices. Inflationary pressures remain at elevated levels in many of the major emerging-market
economies.
The exchange rate of the South African rand continues to be subject to changes in risk aversion
in global financial markets. Since the previous meeting of the MPC, the rand has fluctuated
between R7,70 and R8,50 to the US dollar, but has generally traded in a more narrow range
of between R7,80 and R8,00. On a trade-weighted basis, the rand has depreciated by around
18,6 per cent since the beginning of the year. Since the last meeting of the MPC the rand has
appreciated by 1,0 per cent on a trade-weighted basis and by 1,4 per cent against the US
dollar. Although the rand tends to be more volatile than most of its emerging-market peers,
the movements of the currency have been in line with other emerging-market and commoditylinked currencies.
The exchange rate has also been influenced to some extent by volatile capital flows. Nonresidents have been persistent net sellers of South African equities for most of 2011, with
cumulative net sales since the beginning of the year amounting to R16,6 billion. Between April
and August, non-residents were net buyers of bonds to the value of R58,4 billion but as the
European crisis intensified, net sales of R17,0 billion were recorded in September. In October
this trend was reversed somewhat with non-resident net purchases of R9,8 billion. Year to date
net purchases of bonds and equities amount to R29,4 billion.
The uncertainty related to the exchange rate imparts an upside risk to the inflation outlook.
However, unless the rand continues on a depreciating trend, the impact is likely to be relatively
limited and should dissipate in the short to medium term. While the rand is not expected to
return to its previous elevated levels, consensus forecasts indicate an expectation of a moderate
appreciation from the current levels in the course of 2012. This is largely dependent on global
developments.
The slower domestic economic growth in the second quarter of 2011 appears to have continued
in the third quarter and the forecast of the Bank has been subject to downward revision. Real
GDP growth in 2011 is now expected to average 3,0 per cent, compared with 3,2 per cent in the
previous forecast. The growth forecasts for 2012 and 2013 have been revised down to 3,2 per
cent and 4,2 per cent from 3,6 per cent and 4,4 per cent respectively. The downward revision
is a result of revised assumptions primarily of international commodity prices and global growth.
The composite leading business cycle indicators of the Bank continued the moderate downward
trend that began in February. It decreased for the second consecutive month in August,
corroborating the expected restrained economic conditions.
There has been some normalisation of manufacturing activity following widespread industrial
action in July. The physical volume of manufacturing output increased at a year-on-year rate of
7,7 per cent in September, following the revised 5,9 per cent increase in August. On a quarteron-quarter basis, a slight contraction of -0,1 per cent was measured in the third quarter. Despite
the recent recovery, the Kagiso/BER PMI remained marginally above the neutral 50 level in
September and October, in line with subdued global PMIs.

Monetary Policy Review November 2011
Mining output has continued its overall downward trend, with the physical volume of mining
output declining by 5,1 per cent in September on a quarter-on-quarter basis and by 5,4 per cent
on a year-on-year basis. The construction sector remains under stress with the FNB/BER civil
construction index declining further in the third quarter.
Despite the disappointing growth outcomes, the Quarterly Labour Force Survey published by
Statistics South Africa indicates that the number of people employed increased by 195 000 in
the third quarter of 2011. The prospects for further employment creation are uncertain, given the
slowing growth of the domestic economy and the fragile global economic environment.
Growth in consumption expenditure by households is expected to have remained relatively
subdued following its moderation in the second quarter of 2011 to 3,8 per cent from 5,2 per
cent in the previous quarter. When comparing the three months to August with the previous
three months, real retail trade sales increased by 0,7 per cent. The BER Retail Survey for the
third quarter of 2011 shows that business confidence among retailers, at a level of 48, remained
below the neutral level of 50. These trends reflect, in part, concern about employment, slower
wage and income growth, and declining levels of consumer confidence. Other factors expected
to constrain consumption expenditure include high levels of household debt, constrained
access to credit and consistently above-average increases in a range of administered prices
which reduce the amount available for household discretionary expenditure.
Growth in credit extension to the private sector remains lacklustre, reflecting both supply-anddemand considerations. After reaching a recent high of 6,1 per cent in July, 12-month growth
in banks’ total loans and advances extended to the private sector moderated to 5,3 per cent in
September. Twelve-month growth in mortgage advances declined to 1,9 per cent, consistent
with the subdued state of the domestic housing market. The main driver of credit extension
was the category of other loans and advances, in particular general loans, which grew at a rate
over 12 months of 12,9 per cent, down from 17,9 per cent in August. General loans account
for 11 per cent of total loans and advances to households. The ratio of impaired advances as a
percentage of gross loans and advances of banks has declined to 5,1 per cent in September
2011, down from 5,9 per cent in September 2010, indicating some improvement in the balance
sheets of the banks.
According to the Medium Term Budget Policy Statement (MTBPS), fiscal policy is set to be more
expansionary than indicated in the main budget in February. Nevertheless the commitment to
medium-term deficit consolidation remains. For the current fiscal year, the deficit is expected
to increase from 5,3 per cent of GDP to 5,5 per cent, compared with the 4,6 per cent deficit
recorded in 2010/11, and is expected to decline to 3,3 per cent of GDP by 2014/15. The wider
deficit for the current year is a result of a 0,7 per cent of GDP increase in expenditure, and lower
tax revenues of 0,3 per cent of GDP which result from the slower economic growth. The primary
deficit is expected to decline from 2,9 per cent of GDP in the current year, to 0,5 per cent in
2014/15. If maintained within the parameters as set out in the MTBPS, the fiscal consolidation
and debt dynamics should be sustainable.
Food prices continue to pose an upside risk to the inflation outlook, and a further acceleration
of food inflation is expected in the near term. This follows the marked food and agricultural price
increases at the PPI level, and the depreciation of the exchange rate which has contributed to
the increase in maize prices in recent weeks. Global food prices have remained relatively stable
over the past months, albeit at high levels, and could signal some relief going forward.
International oil prices have remained relatively stable since the last meeting of the MPC and
are expected to remain constrained by the weak growth outlook in the advanced economies.
At current prices, Brent crude oil is about US$10 per barrel lower than the peak prevailing
earlier in 2011. At present there is a small over-recovery on the domestic petrol price and, if
maintained, could provide some relief to consumers following four consecutive months of price
increases which has resulted in domestic petrol prices being at their highest levels ever. Other
administered prices, particularly electricity, are expected to maintain upside pressure on the
inflation rate.
Monetary Policy Review November 2011

The MPC remains of the view that the underlying inflation pressures are of a cost–push nature
and that the subdued state of domestic demand and output will contribute to core inflation
remaining contained, notwithstanding the continued pressures from some administered prices.
However, the committee is concerned that the change in the profile of the inflation forecasts
and the extended breach of the upper end of the inflation target range may impact adversely on
inflation expectations. At this stage the breach of the upper limit is still expected to be relatively
small and inflation is expected to return to within the target range by the end of 2012.
The committee assesses the risks to the inflation outlook to be on the upside mainly due to
cost–push pressures. The exchange rate is also seen to pose some upside risk to the outlook,
while downside risks are seen to come from possible contagion effects from the European crisis
and associated slow growth. The committee is aware of the dangers of a disorderly resolution
of the crisis and the systemic implications for the global and domestic economy, and remains
ready to act appropriately should the need arise.
Under the prevailing circumstances the MPC has decided to keep the repurchase rate
unchanged at 5,5 per cent per annum.

Monetary Policy Review November 2011
Abbreviations
Alsi
All-Share Index
API
administered price index
ARIMA Autoregressive Integrated Moving Average
BCI
Business Confidence Index
BER
Bureau for Economic Research [of Stellenbosch University]
BoJ
Bank of Japan
CBOE
Chicago Board Options Exchange
CCI
Consumer Confidence Index
CDS
credit-default swap
CPI
consumer price index for all urban areas
ECB
European Central Bank
FNB
First National Bank
fob
free on board
G7
Group of Seven
GDP
gross domestic product
IEA
International Energy Agency
IMF
International Monetary Fund
JSE
JSE Limited
LIBOR
London Interbank Offered Rate
MENA
Middle East and North Africa
MPC
Monetary Policy Committee
MPR
Monetary Policy Review [of the South African Reserve Bank]
MTBPS Medium Term Budget Policy Statement
NAB
non-alcoholic beverage
NEER
nominal effective exchange rate
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
S&P
Standard and Poor’s
UK
United Kingdom
US
United States
VIX®
Chicago Board Options Exchange Volatility Index
WEO
World Economic Outlook
Glossary
the Bank South African Reserve Bank
the Fed
United States Federal Reserve
Monetary Policy Review November 2011

Monetary Policy Review November 2011