Monetary Policy
Review
May 2011
Monetary Policy
Review
May 2011
Monetary Policy Review May 2011
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ISSN: 1609-3194
Monetary Policy Review May 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

Statement of the Monetary Policy Committee


Boxes


Figures


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


Monetary Policy Review May 2011
B3.1 Gross government debt to GDP and net government debt to


Tables


Real value of building plans passed and buildings completed in


Monetary Policy Review May 2011
Monetary Policy Review
Introduction
The global recovery has remained on track in the period since the previous Monetary Policy
Review was published in October 2010, but a number of vulnerabilities continue to characterise
the global economy. The unresolved European sovereign debt crisis, rising international
commodity prices and the tragic events in Japan may moderate the pace of recovery in the near
term. Global inflation risks have also increased, particularly in emerging-market economies, a
number of which have tightened their monetary policy stance in recent months. Pressures from
developments in international commodity markets are likely to pose an increasing risk to both
the global and domestic inflation outlook. The acceleration in international oil prices that was
evident in the latter part of 2010 in response to strong global demand has been reinforced by
the geo-political events in the Middle East and North Africa (MENA), which have raised concerns
about the security of oil supplies. In a number of mature economies the process of withdrawing
fiscal stimulus continued, and the first step in raising interest rates from exceptional lows was
taken when the European Central Bank (ECB) increased its key policy rate in April 2011.
The domestic growth prognosis has improved, although growth remains below potential.
The recovery in household consumption expenditure has been sustained and has been the
main driver of growth, but growth in fixed capital formation has remained weak. At this stage
there are no discernible inflationary pressures coming from the demand side of the economy,
although the high, but moderating, level of real wage settlements and developments in food and
commodity prices have been significant upside risks to the domestic inflation outlook. The main
risks to the inflation outlook in this regard remain food and administered prices, and oil prices in
particular. In addition, the potential exists for there to be adjustments in the exchange rate that
would impact on the inflation outlook.
This Monetary Policy Review analyses the latest developments in inflation and the factors that
impact on it. It reviews recent monetary policy developments, and presents the outlook for
inflation and the South African Reserve Bank’s (the Bank) inflation and growth forecasts. In
addition, a number of topical issues are addressed in boxes. The first box considers what micro
price data say about pricing conduct and how findings on pricing conduct from South Africa’s
consumer price microdata compare to international stylised facts. The second box reports
on research undertaken on the rand as a carry trade target, and the third on sovereign debt
developments in the peripheral euro area.
Monetary Policy Review May 2011

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 a low of 3,2 per cent in
September 2010 to 4,2 per cent in April 2011 (Figure 1). Headline inflation has remained within
the inflation target range of 3 to 6 per cent for 15 months since moving back to within the range
in February 2010.
The main drivers of the trend in headline inflation since September 2010 were the food and nonalcoholic beverages, and transport categories (Table 1). The contribution from the food and nonalcoholic beverages category increased from 0,2 percentage points between September and
December 2010 to 0,7 percentage points in April 2011.
Table 1
Contributions to CPI inflation
Percentage change over 12 months* and percentage points

Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr

Of which:

Source: Statistics South Africa
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

Monetary Policy Review May 2011
The contribution from the transport category increased from 0 percentage points in September
2010 to 0,6 percentage points in April 2011, largely as a result of higher petrol prices. The
contributions from the housing and utilities, alcoholic beverages and tobacco, health and
education categories remained broadly unchanged during the review period, although the
housing and utilities category remained the single largest contributor to overall headline
inflation. The contribution of the miscellaneous category declined from 0,7 percentage points
during September–December 2010 to 0,5 percentage points in January–April 2011.
Inflationary pressure from food items has increased in the period under review (Figure 2).
The year-on-year inflation rate for all food items rose from 1,2 per cent in September 2010 to
5,1 per cent in March 2011, before declining slightly to 4,8 per cent in April. Most categories
included in the CPI food basket recorded positive year-on-year inflation rates in April, with
the most notable increases in this month being for oils and fats (22,7 per cent), and meat
(8,3 per cent).
Maize prices in South Africa have increased markedly since they bottomed out in June 2010
(Figure 3). Although domestic maize harvests have been good in recent years, international
maize prices have risen due to increased demand globally for meat and dairy products,
and more recently in line with increasing oil and commodity prices. The spot price of yellow
maize averaged R1 361 per ton in October 2010 and had increased by approximately
23 per cent to average R1 676 so far in May 2011. Futures prices have also increased, with the
futures price for July 2011 delivery rising from an average of R1 438 per ton in October 2010 to
R1 702 in May 2011. Similarly, the July 2011 delivery price of wheat increased from an average
of R2 791 per ton in November 2010 to an average of R3 129 per ton in May 2011.
Percentage change over 12 months
Figure 2
Targeted inflation* and food inflation
All food items
Oils and fats
Bread and cereals
Targeted inflation measure
Meat
Sugar, sweets and
desserts
-20
-10

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

Monetary Policy Review May 2011

Transport prices in the CPI have been impacted by rising petrol prices since the beginning
of the fourth quarter of 2010. The price for 95 octane unleaded petrol in Gauteng Province
increased from 807 cents per litre in September 2010 to 1 025 cents per litre in May 2011
(Figure 4). Increasing international oil prices have been the main driver of petrol price increases
since September 2010. These increases more than offset the impact of appreciations in
the rand exchange rate, which occurred for six of the eight months since September 2010.
Regulatory changes also impacted adversely on domestic petrol prices. In October 2010 the
retail margin included in the petrol price increased by 8,5 cents per litre. In April 2011 the fuel
tax increased by 10 cents per litre and the Road Accident Fund levy increased by 8 cents per
litre as announced in the National Budget speech on 23 February 2011.

Figure 3
Yellow maize prices

Rand per ton

Yellow maize spot price

Yellow maize futures prices (13 May 2011)
Sources: Grain South Africa and SAFEX


Cents per litre

Figure 4
South African petrol price

Petrol price (Gauteng 95 octane)

Margin


Source: Department of Energy

1 000
1 200

Fuel tax

Basic fuel price

Road Accident Fund

Other levies

Monetary Policy Review May 2011
Table 2 shows the inflation rates for goods and services prices in the CPI. Goods inflation
remained below the lower bound of the inflation target range for most of the period under
review, before rising to 3,0 per cent in February 2011 and further to 3,7 per cent in April. Durable
goods prices declined throughout the period, recording a year-on-year rate of change of
-2,3 per cent in April 2011. Inflation rates for the non-durable goods and services categories
have remained positive, with non-durable goods inflation increasing from 3,7 per cent in
September 2010 to 6,8 per cent in April 2011 and services inflation declining from 5,2 per
cent to 4,7 per cent over the same period.
Table 2
CPI: Goods and services inflation
Percentage change over 12 months

Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr

Source: Statistics South Africa
Table 3 considers developments in a number of measures of core inflation, calculated by excluding
food, petrol and electricity prices from headline inflation. If petrol prices alone were excluded,
inflation for the remaining items in the CPI changed moderately over the period, rising from 3,4 per
cent in September 2010 to 3,8 per cent in April 2011. The inflation rate for the CPI excluding petrol
prices has been less than, or equal to, that of the headline CPI since October 2010, indicating the
upward pressure that petrol prices have exerted on inflation.
Table 3
The effect of food, petrol and energy prices on headline inflation
Percentage change over 12 months

Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr

CPI excluding food, NAB and petrol

CPI excluding food, NAB, petrol and

* NAB: Non-alcoholic beverages
Source: Statistics South Africa
Food prices continued to put downward pressure on CPI inflation for the first part of the period,
resulting in the inflation rate for the CPI excluding food and non-alcoholic beverage prices being
higher than the headline CPI rate until January 2011. This situation has reversed since March
2011. If both petrol prices, and food and non-alcoholic beverage prices are excluded, inflation
for the remaining items in the CPI was higher than headline inflation until December 2010 and
lower thereafter, reflecting the upward pressure that petrol and food prices have exerted on
inflation in recent months. Finally, if the prices of petrol, food and non-alcoholic beverages, and
energy (predominantly electricity) are excluded from headline CPI, the resulting inflation rate was
lower throughout the period under review than the rate for CPI excluding petrol, and food and
non-alcoholic beverage prices, reflecting the upward pressure energy prices placed on inflation.
Monetary Policy Review May 2011

The year-on-year inflation rate for the administered price index (API) has risen since September
2010, mainly due to the increased contribution from petrol prices, which rose from 0,1 percentage
points in September 2010 to 3,7 percentage points in March and April 2011 (Table 4). The API
inflation rate for April 2011 was 10,7 per cent, marking the seventeenth consecutive month that
the inflation rate for administered prices has been above the upper level of the inflation target
range. There has been little change in the contributions made by the items in the unregulated
component of the API since September 2010, and the contributions of most items in the regulated
component besides petrol have also remained constant. Over half of the API inflation rate in
April 2011 is accounted for by contributions from electricity and petrol, although these items
account for only a little over a third of the weight of the API.
Table 4
Contributions to administered prices
Percentage change over 12 months* and percentage points
Weights

CPI
API
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
Regulated component

Unregulated component

Motor vehicle registration fees.

Primary and secondary

CPI for administered prices*........ 14,66 100,00

Due to rounding, individual contributions may not add up to totals
Source: Statistics South Africa
The year-on-year inflation rate measured in terms of the producer price index (PPI) for domestic
output has remained fairly stable since September 2010 (Figure 5). Over the year to March 2011
the PPI for domestic output increased by 7,3 per cent, with the highest rates recorded for
products of petroleum and coal (17,1 per cent), mining and quarrying (8,1 per cent), basic metals
(10,2 per cent), and electricity (21,2 per cent). The inflation rate for imported commodities
increased from 0,7 per cent in September 2010 to 7,5 per cent in March 2011, boosted by the
rising prices of crude oil.

Monetary Policy Review May 2011
Figure 6 plots the year-on-year percentage changes in food prices in the domestic output PPI
and the CPI. Food price pressures in the PPI for domestic output remain contained with the
12-month change in the downstream prices of food at the agricultural level at -0,9 per cent in
March 2011. This is the twenty-fifth consecutive month that this change has been negative.
The price of food at the manufacturing level has been accelerating since November 2010, but
remained low at 2,9 per cent in March 2011.
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
-30
-20
-10

Domestic output
Domestic output: Electricity
Domestic output: Manufacturing
Imported commodities
Percentage change over 12 months
Figure 6
Food prices in the PPI and CPI


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

Monetary Policy Review May 2011

Box 1
What price-level data can tell us about pricing conduct
The study of pricing microdata is emerging in the literature as an important method for understanding
actual pricing conduct, and refining the modelling of pricing behaviour in macroeconomic models.
Studies of the large price datasets used to compile consumer price index (CPI) and producer price index
(PPI) measures have been undertaken in a number of countries. Klenow and Malin (2009, 2011) provide
a recent synopsis of a wide range of international results on micro price data research in which they
reviewed ten stylised facts on price-setting conduct. This box discusses how findings on pricing conduct
from South Africa’s pricing microdata, summarised in Creamer et al. (2011),1 compare to Klenow and
Malin’s stylised facts.
Klenow and Malin (2009) suggest the following “ten facts modellers may want to know about pricing”:2
1.
Prices change at least once a year (p. 45)
2.
[There is] substantial heterogeneity in the frequency of price changes across goods (p. 49)
3.
On average, price changes are big (p. 50)
4.
Many small price changes occur (p. 51)
5.
Price changes are typically not synchronised over the business cycle (p. 52)
6.
Neither frequency nor size is increasing in the age of the price (p. 53)
7.
Sales and product turnover are often important for micro price flexibility (p. 46)
8.
Reference prices are [often] stickier and more persistent than regular prices (p. 48)
9.
More cyclical goods change prices more frequently (p. 50)
10. Relative price changes are transitory (p. 51).
Creamer et al. (2011, 6) report that individual South African prices change, on average, more frequently
than once per annum (Fact 1). For the CPI microdata, the average price duration is 5,0 months
(median 3,7 months).3 The CPI data set offers evidence of a varying frequency of price changes and
related price durations, over time, with a weighted average monthly price change frequency of
17,1 per cent over the period. The CPI data also offer evidence of asymmetry in pricing as price
increases (11,1 per cent) occur more frequently than price decreases (6 per cent).
A summary of selected comparative findings for CPI data is presented in Table B1.1.4 With regard
to the frequency of price changes at the aggregate level, the finding for South Africa (17,1 per cent)
using CPI-weighted data would appear to be broadly similar to findings for Spain (15 per cent), the
euro area (15,1 per cent) and France (18,9 per cent). The United States (US) economy would appear
to have a significantly greater frequency of price changes (24,8 per cent), including higher
frequencies both of price increases and price decreases.5 Similarly, Brazil has experienced a
significantly higher frequency of price changes (37 per cent) than South Africa, and a higher
frequency of both price increases and price decreases.
There is evidence for South Africa of substantial heterogeneity in pricing conduct across types of
goods and industries (Fact 2). Services prices in the CPI data change less frequently (14,9 per cent
of the time) than goods prices (17,0 per cent). Services prices increase more frequently than goods
prices, but decrease less frequently than goods prices. The findings on the frequency of price
changes by product category show that there is also considerable heterogeneity in pricing conduct
for different product categories.
South Africa’s pricing microdata reveal relatively large price changes (Fact 3). For the CPI, the weighted
average magnitude of price increases is 10,7 per cent, compared to an average monthly CPI inflation
rate of 5,4 per cent over the period. Table B1.1 shows that the average magnitude of price increases
in South Africa is larger than for the euro area (8,2 per cent) and Spain (8,2 per cent), but smaller than
1 For the South African CPI microdata set used in Creamer et al. (2011), a total of around 5 million individual price
records were available over the period from December 2001 to December 2007. Based on the criteria that only data
collected at a monthly frequency and only data with an acceptable capture status were to be included in the study, the
dataset ultimately used comprised 3 930 977 price records. Each individual price record corresponds to a precisely
defined item sold in a particular outlet at a given point in time.
2 The list of ten facts has been drawn from Klenow and Malin (2009), but the order in which the ten facts are presented
has been altered to facilitate their comparison to the findings on the South African pricing microdata. More recently, in
their chapter 6 in the Handbook of Monetary Economics, Klenow and Malin (2011) adjust their ten stylised facts by
combining facts 3 and 4 into a single statement that “price changes are big on average, but many small changes occur”.
This enables the authors to introduce a new tenth stylised fact, which is that “price changes are linked to wage changes”.
3 Such price durations are based on the direct measurement of the duration of uncensored spells during which prices are
unchanged.
4 Sources for the country studies are provided in Creamer et al. (2011). Owing to the adoption of differing methodologies
in the various studies, not all results are strictly equivalent, yet the results allow for general comparisons of pricing conduct
in a number of economies.
5 An important technical reason for higher price change frequencies in the US data, as compared to the euro area and
South Africa, is that the US data include a relatively large proportion of temporary sales prices, compared to other
jurisdictions. In the period under study, in South Africa, the statistical authorities initially gave no indication in the data as
to whether or not prices were related to temporary sales, but from March 2006 it is recorded for the CPI data whether
or not a particular price record constitutes a sales price.

Monetary Policy Review May 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 outlook for these variables and their likely
impact on inflation are discussed in a later section.
those of Brazil (16 per cent), the US (12,7 per cent) and France (12,5 per cent). The average size of price
decreases in South Africa (-12,3 per cent) is similar to the average size of price decreases in Brazil
(-12,6 per cent), is larger than for the euro area (-10 per cent), France (-10 per cent) and Spain
(-10,3 per cent), but smaller than for the US (-14,1 per cent).
Table B1.1: Comparison of findings of CPI microdata analyses
Per cent
Frequency
of price
changes
Frequency
of price
increases
Frequency
of price
decreases
Average
size of price
increases
Average size
of price
decreases


Source: Creamer, et al. (2011)
Creamer et al. (2011, 13) report evidence in the South African data of many small price changes (Fact 4).
They find that 10,56 per cent of all price changes in the CPI microdata can be described as inflationindexed price changes, which they define as having a magnitude of less than, or equal to, 25 per cent of
the prevailing CPI inflation rate.
The stylised facts that price changes are not synchronised over the business cycle and that neither
frequency nor size is increasing in the age of the price (Facts 5 and 6) may be contradicted by evidence
from the South African price microdata. Regression analysis in Creamer (2010) reveals some evidence that
the frequency of price increases rises with the prevailing rate of inflation. The finding for the South African
microdata is that at the level of specific products in specific stores, hazard functions tend to be upward
sloping, indicating an increasing likelihood of price changes as time passes. With regard to the relationship
between the magnitude of price changes and the age of the price, the South African microdata reveal that
the magnitude of CPI price changes is increasing in the age of the price. This suggests time-dependence
in pricing conduct in the South African context, as opposed to state-dependent pricing, where price
duration is endogenous to the accumulation of shocks, rather than dependent on the passing of time.
In summary, there is clear confirmation that pricing conduct in South Africa is consistent with the first
four stylised facts (1–4) of Klenow and Malin (2009), but there is some evidence from the South African
data that appears to contradict stylised facts 5 and 6. The questions raised by stylised facts 7 to 10
have not as yet been addressed in the South African literature. Answers to these questions would
undoubtedly contribute further to the understanding of pricing conduct in the South African economy
and, armed with such knowledge, further refinements could be made in the areas of macroeconomic
modelling and policy implementation.
References
Creamer, K. 2010. “Price Setting Conduct in South Africa 2002–2007: Implications of Microdata for
Monetary Policy”. PhD dissertation, Faculty of Commerce, Law and Management, University of the
Witwatersrand.
Creamer, K, G N Farrell and N Rankin. 2011. “What Price-Level Data Can Tell Us About Pricing Conduct
in South Africa”. Discussion Paper DP/11/04, April. Pretoria: South African Reserve Bank.
Klenow, P and B Malin. 2009. “Microeconomic Evidence on Price-Setting”. Manuscript prepared for the
Handbook of Monetary Economics, last modified September. Microsoft Word file.
. “Microeconomic Evidence on Price-Setting”. 2011. In Handbook of Monetary Economics, edited by
B Friedman and M Woodford. Vol. 3A, Chapter 6, 231–283. Amsterdam: North-Holland.
Monetary Policy Review May 2011

International economic developments
The global growth outcome for 2010 reflected the strong recovery in emerging and developing
countries, and a less impressive but improved growth performance by the advanced countries.
The possibility of a double-dip recession has not materialised, but the global recovery remains
unbalanced. Advanced economies are still recovering too slowly, with output below potential
and employment remaining weak. Housing markets continue to be depressed and banks are
still struggling with non-performing loans. Emerging-market and developing countries have
experienced better underlying growth and sounder fiscal positions, but rapid growth and strong
capital inflows pose inflation and overheating risks to a number of these countries.
In the advanced economies the recovery has become more self-sustained but growth has remained
too low to close output gaps and reduce unemployment much. The International Monetary Fund
(IMF) in its April 2011 World Economic Outlook (WEO) estimates real gross domestic product
(GDP) growth in the United States (US) of 2,8 per cent in 2010, compared with a contraction of
2,6 per cent in 2009 (Table 5). The recovery was supported by an easing in financial conditions,
strengthening in private demand and an increased contribution from net exports. In Japan, although
the recovery lost momentum in the second half of the year, positive economic growth of 3,9 per
cent was recorded in 2010 compared to a contraction of 6,3 per cent in 2009. In the euro area
economic growth strengthened to 1,7 per cent in 2010 and became increasingly driven by private
demand and net exports. Growth in key economies such as Germany was robust compared to the
stagnation experienced in the periphery. In the United Kingdom (UK) economic growth of 1,3 per
cent was recorded in 2010, compared with a contraction of 4,9 per cent in 2009. Front-loaded fiscal
consolidation in the UK has dampened domestic demand and muted the recovery.
Table 5
Annual percentage change in real GDP and consumer prices
Share of
global
GDP*
Real
GDP
Consumer
prices


Emerging-market and developing economies...

* GDP shares based on the IMF's purchasing power parity valuation of country GDPs for 2010
Source: IMF World Economic Outlook, April 2011
Average growth in emerging and developing economies rose sharply from 2,7 per cent in 2009
to 7,3 per cent in 2010 as a result of stronger external demand, higher commodity prices and
the relatively limited damage suffered from the financial crisis. This broad-based recovery has
continued in emerging Asian economies, with the IMF reporting growth of 9,5 per cent in 2010.

Monetary Policy Review May 2011
Many emerging and developing economies have also had to cope with the policy challenge of
managing high commodity prices. Headline inflation in emerging and developing economies
rose from 5,2 per cent in 2009 to 6,2 per cent in 2010, and in a number of the larger economies
is close to or above central bank targets. Core inflation also rose significantly over the period,
suggesting the inflation pressures are broad and indicative of tightening capacity constraints.
Economies in sub-Saharan Africa resumed faster growth in 2010, recording real growth of
5 per cent compared with 2,8 per cent in 2009. The region’s inflation rate slowed notably from
10,5 per cent in 2009 to 7,5 per cent in 2010.
Oil prices
International oil prices have displayed considerable volatility in the period under review (Figure 7).
The price of Brent crude oil remained relatively stable within a band of between US$80 and
US$89 per barrel in October and November 2010, but rose to US$94 per barrel by the end of
December and to US$100 per barrel by the end of January 2011 in response to higher-thanexpected demand arising from relatively severe northern hemisphere weather conditions. Oil
prices then levelled off slightly in the early part of February after reports that crude oil supplies
in the US and production in the Organization of the Petroleum Exporting Countries (OPEC) had
increased significantly. OPEC crude oil production in January had averaged 29,6 million barrels
per day; the highest level in two years. According to data released by the International Energy
Agency (IEA), oil stocks in the advanced countries had also increased sufficiently to cover
about 61 days of demand, which was near the highest level in ten years and well above the
less than 52 days’ cover in early 2008. Oil traders nevertheless started becoming concerned
about potential oil supply disruptions because of rising tensions in Egypt and other Middle East
countries towards the end of January and the first weeks of February.
After six weeks of region-wide protests ignited by the ouster of Tunisia’s president in January and
the fall of Egypt’s president in February, the turmoil in the Middle East then spread to Libya, a
major oil producer, causing the price of Brent crude oil to reach US$112 per barrel in late February
2011; a level not seen since August 2008. Demonstrations and violent protests later also spread
to other parts of the MENA region. There was also growing concern that continued unrest in
Egypt could halt crude oil shipments through the Suez Canal waterway. Major oil producers,
including Saudi Arabia, increased production to make up for lost Libyan oil production. Spare
production capacity, which was thought to be around 5 million barrels per day earlier in 2011, has
since dropped to about 3 million barrels per day. The Brent crude oil price rose further to above
US$126 per barrel at the end of April (its highest level since the onset of the financial crisis), before
Figure 7
Price of Brent crude oil

2011 2012
US dollar per barrel

Brent crude spot price

Futures prices (22 March 2011)

Futures prices (10 May 2011)

Futures prices (Latest: 13 May 2011)
Source: Bloomberg

Monetary Policy Review May 2011

experiencing a sharp correction in the first week of May, when it dropped by almost US$17 per
barrel, as profit-taking triggered a technical sell-off. Since then, prices have rebounded, with the
price per barrel standing at US$113,80 on 13 May.
International monetary policy developments
Monetary policies have remained accommodative in most of the advanced economies since
the previous Monetary Policy Review was published in October 2010 (Table 6). Official interest
rates were left unchanged in the US and the UK. The Bank of England (BoE) has held off raising
borrowing costs even after inflation had risen to more than twice its target, maintaining that
price increases would moderate as government budget cuts restrained the recovery. The BoE’s
Monetary Policy Committee voted in April and May to maintain the official Bank Rate paid on
commercial bank reserves at 0,5 per cent. The committee also voted to maintain the stock of
asset purchases financed by the issuance of central bank reserves at £200 billion. Minutes
of the BoE’s Monetary Policy Committee’s May 2011 meeting showed the majority of the
committee members favoured keeping the policy rate and asset purchase programme stable
due to concerns about protracted weakness in consumer demand and how tightening at this
point could negatively affect consumer confidence. The committee was mindful of the potential
effect of high inflation on inflation expectations, but felt that this effect was not materialising in
the economy as shown by the low growth in wages.
Table 6
Selected central bank interest rates
Per cent
Countries
6 Oct 2010
17 May 2011
Latest decision
(Change in percentage points)

0,00–0,25
0,00–0,25
27 Apr 2011
(0,00)

0,00–0,10
0,00–0,10
28 Apr 2011
(0,00)

1,00
1,25
5 May 2011
(0,00)

0,50
0,50
5 May 2011
(0,00)

1,00
1,00
12 Apr 2011
(0,00)

1,05
1,30
7 Apr 2011
(0,25)

0,75
1,75
20 Apr 2011
(0,25)

2,00
2,25
12 May 2011
(0,25)

0,00–0,75
0,00–0,75
17 Mar 2011
(0,00)

4,50
4,75
3 May 2011
(0,00)

3,00
2,50
28 Apr 2011
(0,00)

2,00
3,00
24 Apr 2011
(0,00)

5,31
6,31
5 Apr 2011
(0,25)

6,50
6,75
12 May 2011
(0,00)

2,75
3,00
5 May 2011
(0,25)

2,25
3,00
13 May 2011
(0,00)

1,50
1,75
31 Mar 2011
(0,125)

1,75
2,75
20 Apr 2011
(0,25)

6,00
7,25
3 May 2011
(0,50)

10,75
12,00
20 Apr 2011
(0,25)

2,50
5,00
12 May 2011
(0,50)

4,50
4,50
15 Apr 2011
(0,00)

0,75
0,75
5 May 2011
(0,00)

5,25
6,00
16 May 2011
(0,00)

3,50
4,25
11 May 2011
(0,25)

7,75
8,25
3 May 2011
(0,25)

7,00
6,25
21 Apr 2011
(0,00)

6,25
4,25
20 Apr 2011
(0,00)
Source: National central banks

Monetary Policy Review May 2011
The United States Federal Reserve System (the Fed) announced a renewed commitment to
quantitative easing in November 2010 and has continued to state that it expected interest
rates to remain low over an extended period. During December the Fed announced that it had
authorised an extension of dollar liquidity swap agreements with the central banks of Canada,
England, the euro area, Japan and Switzerland to 1 August 2011. This facility was previously
scheduled to end in January 2011. At the end of April 2011 the Chairman of the Fed, Ben
Bernanke, held the first of four press conferences to be held after selected Federal Open Market
Committee (FOMC) meetings in 2011. It was announced during this conference that the FOMC
aimed to complete the purchase of longer-term assets by the end of the second quarter of
2011, as announced in November 2010. The FOMC does not expect to conduct a third round
of quantitative easing, given the current economic conditions in the US.
Although the ECB continued with its Security Market Programme, it raised its main policy rate
by 0,25 percentage points on 7 April 2011 due to concerns about broad-based inflationary
pressures. However, the stance of monetary policy in the euro area remains accommodative at
1,25 per cent per annum. On 5 May 2011 the ECB kept interest rates stable at 1,25 per cent and
mentioned that the HICP inflation rate was expected to stay above 2 per cent for an extended
period due to commodity and energy prices.
Sweden’s central bank raised its benchmark repurchase (repo) rate in April 2011 for the sixth
time since July 2010. The Riksbank increased its benchmark interest rate in order to stabilise
inflation close to the target of 2 per cent as economic activity strengthens and has indicated that
it expects the repo rate to increase more rapidly than had been assessed at the end of 2010.
The Bank of Japan (BoJ) doubled its asset-purchase programme to ¥10 000 billion on 14 March
2011 and widened the range of collateral that is accepted to ensure that there was sufficient
liquidity in the financial system in the aftermath of the March earthquake and tsunami. On
28 April the BoJ announced that it would offer temporary loans to financial institutions and central
organisations of financial co-operatives with branches in the disaster areas totalling no more
than ¥1 000 billion to encourage lending to companies with cash-flow shortages in the wake of
the earthquake.
Australia’s central bank left its benchmark interest rate unchanged, albeit at the highest level
among the advanced economies, as floods disrupted coal mining in the nation’s northeast and an
appreciating currency tempered inflation. The Reserve Bank of Australia held the overnight cash rate
target at 4,75 per cent for a fifth consecutive meeting, after having raised rates seven times between
October 2009 and November 2010. The Reserve Bank of New Zealand reduced the official cash rate
by half a percentage point to 2,5 per cent in March after the earthquake that struck Christchurch on
22 February had killed at least 172 people and impacted negatively on growth.
The Bank of Israel raised its policy interest rate by 50 basis points to 3 per cent in March
2011 as part of a move towards returning the policy rate to more normal levels. Effective
27 January, Bank of Israel Governor, Stanley Fischer, ordered Israeli banks to meet a 10 per cent
reserve requirement for foreign-exchange derivative transactions by non-residents. Residents
and non-residents are required to report foreign-exchange swaps and forwards of more than
US$10 million a day. Non-residents trading beyond certain daily amounts in so-called Makam
bills and other short-term government bonds are also required to report their transactions.
In Asia policy rates were raised in March–May 2011 by India, China, Vietnam, Taiwan, the
Philippines, South Korea and Thailand. The Reserve Bank of India increased its key repo
rate in May 2011 for the ninth time since March 2010, boosting the measure by a half of
a percentage point to 7,25 per cent to rein in inflation. The People’s Bank of China raised
benchmark lending and deposit rates by one-quarter of a percentage point with effect from
6 April and on 12 May announced a 50 basis point increase in the reserve requirements ratio
for banks for the fifth time in 2011, in its latest tightening move to limit inflationary pressures.
China has implemented a variety of policies to curb inflation, including successive increases in
banks’ reserve requirement ratios and multiple increases in interest rates since October. The
central bank boosted its benchmark one-year lending rate by a quarter point to 6,31 per cent
from 6,06 per cent, while the one-year deposit rate will rise to 3,25 per cent from 3 per cent.
This was the fourth interest rate increase in less than six months, signalling the government’s
determination to defuse overheating risks.
Monetary Policy Review May 2011

The Philippine central bank raised its benchmark interest rate in March 2011, for the first time
since August 2008, and again in May, signalling that it was ready to raise policy rates further
if required. Thailand’s central bank increased interest rates by 25 basis points in March and
April 2011, following the Thai MPC’s assessment that the economic recovery, both locally and
globally, was improving and that there was a need to return to more normal levels of the policy
rate, in part to help anchor inflation expectations.
Although Turkey’s economy grew by 8,9 per cent in 2010, with year-on-year credit growth
surging to 35 per cent, the central bank has kept interest rates at historic lows in an attempt
to curb capital inflows. It has in the meantime also almost trebled banks’ required reserves
ratios to 16 per cent since November 2010 in an effort to slow loan growth and stop the
economy from overheating. Turkey’s MPC again increased reserve requirements in April 2011
for macroprudential purposes.
The Monetary Policy Committee (Copom) in Brazil has continued to tighten interest rates, most
recently raising the target for the Selic rate by 25 basis points in April 2011 to 12,00 per cent due
to inflationary pressures and uncertainty stemming from commodity prices. Similar concerns
about inflationary pressures have led the Central Bank of Chile to increase rates from 2,5 per
cent in October 2010 to 5,0 per cent in May 2011.
Exchange rate developments
The nominal effective exchange rate (NEER) of the South African rand, which measures the value of
the rand against a basket of 15 currencies, appreciated to above 81 index points at the end of 2010
despite portfolio capital outflows in the final quarter of the year, before declining to 73 index points
in early February 2011 (Figure 8). More recently, it has averaged around 76 index points since March
2011. Measured on a bilateral basis, the rand has fluctuated between R8,76 and R9,93 against the
euro since October 2010, and between R6,60 and R7,31 against the US dollar.
Index: 2000 = 100 (foreign currency per rand)
Rand per dollar
Rand per euro
Figure 8
Exchange rates of the rand

Nominal effective exchange rate of the rand
(NEER)

Rand per US dollar
Rand per euro (right-hand scale)

Monetary Policy Review May 2011
During the period October 2010—May 2011 foreign investors disposed of their South African bond
holdings as a high degree of uncertainty prevailed in the global financial markets. Cumulative nonresident net sales in the bond market amounted to R11,1 billion by the week ending 13 May 2011,
compared with the total 2010 net purchases of R52,0 billion. Concerns of global investors included,
among other factors, the potential impact of rising oil and other commodity prices on the inflation
outcomes of emerging markets and the likelihood of subsequent monetary tightening by central
banks. However, foreign investor net sales of domestically issued bonds were countered by net
purchases in the share market. Between October 2010 and May 2011 cumulative non-resident share
purchases amounted to R21,5 billion, compared with 2010 net purchases totalling R36,4 billion.
South Africa’s real effective exchange rate, measured by the Bank for International Settlements
(BIS), appreciated from October 2010, increasing from around 98,7 index points to 102 index
points in December 2010, before declining to 98,7 index points in March (Figure 9). Compared on
a consistent basis from the beginning of 2009, there has been generalised appreciation among
commodity-exporting countries such as Australia, Canada, Brazil and South Africa.
Indices: 2005 = 100

Figure 9
Real effective exchange rates

Australia

Canada


Source: Bank for International Settlements

Brazil

South Africa
Box 2
The rand as a carry trade target
The ‘carry trade’ refers to currency speculation strategies designed to profit from a favourable interest
rate differential, when the high-interest currency does not depreciate substantially relative to the lowinterest currency – and the evidence is that in the short term and on average it does not. The simplest
way to implement the trade unhedged is to borrow in the low-interest currency (the ‘funding currency’),
buy the high-interest currency (the ‘target currency’) in the spot market, deposit the proceeds or buy
fixed-income securities denominated in the target currency and, finally, convert the terminal payoff back
into the funding currency, facing the exchange rate risk. Alternatively, the speculator can use the lowinterest currency to buy the target currency forward when the latter is trading at a discount in the
forward market, that is, the forward value of the target currency is lower than its value in the spot market
and, conversely, to sell the target currency forward when it is trading at a forward premium. Other
variations can be designed and implemented through the derivatives markets.
Currency speculators targeting the rand through the carry trade were exposed to periodic, very large
losses between 2007 and 2008. The appeal of the rand as a carry target, as well as that of other
emerging-market currencies, was firmly restored from 2009.6 Current research at the South African
Reserve Bank (Hassan and Smith, 2011) shows that the rand is historically and on average an
6 The annualised average return from targeting the rand through Japanese yen-funded speculation, using the forward
currency market and trading at the weekly frequency, between January and December 2010, was approximately 32 per
cent, with a ratio of mean return to volatility of 1,89. This large return-to-volatility figure is close to the historic average
performance of the rand as a (yen-funded) carry trade target over the past decade; and it is evidenced in the data despite
the Bank decreasing its policy rate to a 30-year low, as speculators gained from appreciation in the rand, and a relative
reduction in short-term volatility.
Monetary Policy Review May 2011

attractive carry target, despite its high volatility, producing a return-to-volatility ratio substantially
above the Australian and New Zealand dollars, which are the two most common carry trade targets.
Table B2.1 compares the historic average weekly return and volatility of the three widely traded
commodity currencies, used as yen-funded carry trade targets, where the trade is implemented with
forward contracts.
Table B2.1 Returns to the carry trade (weekly trading)
Target
Before transaction costs
After transaction costs
Mean
(per cent)
SD*
(per cent)
SR**
Mean
(per cent)
SD*
(per cent)
SR**

* SD is the standard deviation of weekly returns
** SR is the return-to-volatility ratio
Sample period: 3 November 1997 – 21 February 2011
Source: Hassan and Smith (2011)
Hassan and Smith (2011) indicate that the most profitable periods to carry trade speculators are
accompanied by a gradually appreciating rand and low exchange rate volatility. Conversely, randtargeting carry traders typically incur the largest losses in periods of very high volatility in the currency
market. Lower rand volatility reduces the size of exchange rate losses in unhedged carry positions, and
reduces the cost of using options to hedge against the same losses. Figure B2.1 plots the weekly returns
from a yen-funded rand-targeting strategy (Carry) against a measure of the conditional volatility of the
rand–yen exchange rate (Vol).
The carry trade affects foreign exchange market turnover and portfolio debt capital flows. It leads to
portfolio flows when funded conventionally through borrowing, and/or when the speculator’s counterparty
hedges its exposure through the spot market. But the trade can also be implemented through the
derivatives market, with no speculator-initiated flows at inception. The relationship between capital flows
and rand-targeting carry positions is therefore only partial.
The sudden reversal of rand carry positions, usually built up gradually, can cause abrupt and potentially
destabilisingly large depreciations. The rand’s allure as a carry target depends on a host of factors,
including changes in global risk appetite and volatility; monetary conditions in the eurozone, United
States, Switzerland and Japan (the issuers of the main carry funding currencies); the growth and inflation
outlooks, domestically and abroad; rand volatility; and the interest differential offered by South Africa.
Reference
Hassan, S and S Smith. 2011. “The Rand as a Carry Trade Target”. Discussion Paper DP/11/03, April.
Pretoria: South African Reserve Bank.
Rate
Figure B2.1 Rand carry returns and exchange rate volatility

Carry: rand target
Vol: rand–yen rate volatility
(right-hand scale)

Source: Hassan and Smith (2011)

Monetary Policy Review May 2011
Labour markets
Figure 10 shows that the year-on-year change in nominal unit labour cost declined from 11,5 per
cent in the fourth quarter of 2009 to 7,7 per cent in the fourth quarter of 2010. Higher employment
levels in successive quarters of 2010 were accompanied by a decline in the rate of increase in
measured labour productivity from 5 per cent in the first quarter to 2,2 per cent in the fourth
quarter. This was more than offset by the change in remuneration per worker, which declined
from 15,9 per cent in the first quarter to 10,1 per cent in the fourth quarter of 2010.
According to the outcome of the Andrew Levy Wage Settlement Survey, the average level of
wage settlements declined to 8,2 per cent in 2010 from 9,3 per cent in 2009, influenced in part
by the decline in the CPI inflation rate in 2010 (Figure 11). The average level of wage settlements
in the first quarter of 2011 remained at 8,2 per cent.
Percentage change over four quarters

Figure 10
Remuneration per worker, labour productivity and

unit labour cost in the formal non-agricultural sector

Nominal unit labour cost

Remuneration per worker

Labour productivity


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

Per cent

2011*
Figure 11
Average annual inflation and wage settlements

CPI

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

Monetary Policy Review May 2011

Table 7 shows the average wage settlements in major sectors in 2010 reported by Andrew
Levy Employment Publications. The highest average settlement was 9,3 per cent, reached in
the transport and freight sector, and the lowest was 7,3 per cent in the communication sector.
Settlements reached at the centralised level tend to act as benchmarks for the sectoral settlements,
and these moderated in 2010. In 2010 the settlement for the public sector was 7,5 per cent, below
the double-digit increases received by parastatals in the latter part of 2009.
Table 7
Average percentages of wage settlement by major sector in 2010
Sector
Per cent


Source: Andrew Levy Employment Publications
Total employment in the formal non-agricultural sector increased marginally from 8,2 million
in the fourth quarter of 2009 to 8,3 million in the final quarter of 2010 but was still below the
8,5 million recorded in the corresponding quarter of 2008 (Table 8). In 2010 employment levels
increased in mining and quarrying; wholesale and retail trade; electricity, gas and water supply;
and finance, insurance, real-estate and business services. Only in the community, social and
personal services sector was employment created over both periods. By contrast, sectors such
as the manufacturing; construction; transport, storage and communication sectors all shed
jobs in each of the periods.
Table 8
Employment in formal non-agricultural industries
Thousands
Total employment

4th qr
4th qr
4th qr

1 275
1 185
1 166


1 747
1 665
1 683


Source: Statistics South Africa Quarterly Employment Survey

Monetary Policy Review May 2011
Demand and output
Real GDP increased by 4,4 per cent on a quarter-on-quarter annualised basis in the final
quarter of 2010, following increases of 2,8 per cent in the second quarter and 2,7 per cent
in the third quarter of the year (Table 9). The improved performance in the fourth quarter
mainly reflected stronger growth in the real value added by the secondary and tertiary sectors,
which was partly offset by slower growth in the real value added by the primary sector. The
real value added by the manufacturing sector recovered in the fourth quarter of 2010, with
manufacturing output increasing at an annualised rate of 4,1 per cent following a decline of
4,9 per cent in the third quarter of the year. For 2010 as a whole, real GDP grew by 2,8 per cent,
following a contraction of 1,7 per cent in 2009.
Table 9
Growth in real GDP and expenditure components
Per cent*

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

* Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data
** Constant 2005 prices
Aggregate real gross domestic expenditure decelerated from 6,2 per cent in the third quarter of
2010 to 1,2 per cent in the fourth quarter, although growth of 4,2 per cent for the 2010 calendar
year outstripped the contraction of 1,7 per cent recorded in 2009.
Growth in real final consumption expenditure by households slowed to 5,1 per cent in the fourth
quarter of 2010 from 5,7 per cent in the third quarter, following slower increases in expenditure
on durable and non-durable goods. By contrast, growth in real final consumption expenditure
by general government was 3,9 per cent in the fourth quarter of 2010, following a contraction of
0,6 per cent in the third quarter. This was largely the result of increased spending on compensation
of employees, the biggest subcomponent of general government expenditure.
Real gross fixed capital formation grew by 1,0 per cent in the third quarter of 2010 and 1,5 per
cent in the fourth quarter. Real capital spending by public corporations increased further over the
period, but there were lower capital outlays by private business enterprises and a continuation of
the contraction in investment by general government. After having declined for ten consecutive
quarters, the aggregate level of real inventory holdings increased by R1,1 billion in the fourth quarter
of 2010, mainly from an accumulation of inventories in the mining and construction sectors. As a
percentage of annualised non-agricultural GDP, industrial and commercial inventories declined to
11,3 per cent in the fourth quarter of 2010; its lowest quarterly level ever registered.
Real exports of goods and services grew by 14,0 per cent in the third quarter of 2010 and by 8,2 per
cent in the fourth quarter, despite a strengthening in the exchange rate of the rand. It was aided by
firm international commodity prices and an improvement in the country’s terms of trade. By contrast,
the volume of imports of goods and services declined by 4,1 per cent in the fourth quarter. The
deficit on the current account of the balance of payments narrowed to 0,6 per cent of GDP in the
fourth quarter of 2010; the smallest ratio since the third quarter of 2003.
Monetary Policy Review May 2011

South Africa’s gross international reserve position strengthened from US$44,1 billion at the
end of September 2010 to US$50,6 billion at the end of April 2011. Over the same period
the international liquidity position improved from US$40,1 billion to US$46,0 billion, and the
overbought forward position expanded from US$1,1billion to US$3,9 billion.
Real-estate and equity prices
Prices of shares on the JSE Limited (JSE) continued the upward trend established early in 2009.
After recording a low for 2010 of 25 793 index points on 5 February, the FTSE/JSE All-Share
Index (Alsi) improved to 31 951 index points on 16 May 2011. The Alsi has increased less than
the Kuala Lumpur Composite, Bovespa, and Bombay Sensitive indices, but performed better
than the Dow Jones Euro Stoxx 50, Standard & Poor’s (S&P) 500, Nikkei 225 and Shanghai A
share indices (Figure 12).
House price inflation has generally trended downwards since the middle of 2010 (Figure 13),
reflecting the base effects of the turning point in house price inflation in mid-2009, higher
household debt ratios and the absence of further stimulus from interest rate cuts. The year-onyear percentage change in the Standard Bank median house price index slowed from 8,3 per
cent in September 2010 to 3,4 per cent in April 2011, while that of the First National Bank (FNB)
national average house price index declined from a peak of 10,9 per cent in May 2010 to 2,2 per
cent in April 2011. The rate of change in the Absa House Price Index declined from 13,4 per cent
in April 2010 to a negative 1,5 per cent in April 2011, and that of the extended repeat sales house
price index of Lightstone slowed from a peak of 6,8 per cent in June 2010 to 1,0 per cent in
April 2011.7 According to the FNB home-buying estate agent survey, the time taken for a house
to be sold rose to 19 weeks and one day in the first quarter of 2011, up from 15 weeks and
6 days in the previous quarter. Moreover, 85 per cent of sellers dropped their asking price in the
first quarter of 2011 compared to 80 per cent in the previous quarter and asking prices declined
by 12 per cent compared with 11 per cent in the previous quarter.
Indices: 1 January 2007 = 100

FTSE/JSE All-Share Index
Euro area (Dow Jones Euro Stoxx 50)
Malaysia (Kuala Lumpur Composite)
Brazil (Bovespa)
Figure 12
Share price indices

United States (S&P 500)
Japan (Nikkei 225)
India (Bombay Sensitive)
China (Shanghai A Share)
Sources: JSE Limited and I-Net Bridge

The First National Bank
(FNB) House Price Index is
constructed using the
average value of housing
transactions financed by FNB.
In order to eliminate outliers
from the data sample,
transaction values must be
above 70 per cent of the FNB
Valuations Division’s valuation
of the property but below 130
per cent, while the purchase
prices recorded as above
R10 million are excluded. A
statistical smoothing function
is then applied to the data.
The Absa House Price indices
are based on the total
purchase price of houses in
the 80 m2–400 m2 size
category, priced at
R3,5 million or less in 2011
(including improvements) in
respect of which the mortgage
loan applications were
approved by Absa. Prices are
smoothed in an attempt to
exclude the distorting effect of
seasonal factors and outliers
in the data.
Standard Bank’s House Price
Index is based on the median
house price of the full
spectrum of houses where
mortgage finance was
provided by Standard Bank.
The Lightstone Repeat Sales
House Price Index provides a
measure of the actual price
inflation of houses that have
been transacted twice within
a particular period of time, in
order to reduce the influence
of the mix of properties
transacting during the period.
Data are obtained from the
Deeds Office, the Surveyor
General and other sources.

Monetary Policy Review May 2011
Table 10 shows the real value of building plans passed and buildings completed in larger
municipalities as published by Statistics South Africa. So far in 2011, the total real values of
buildings completed and the residential and non-residential subcomponents of buildings
completed have contracted at a slower pace than in the preceding year. The real value of the
non-residential component of building plans passed has improved in 2011 when compared with
the corresponding period in 2010.
Table 10
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 three months of 2011 compared with the same period of the previous year
Source: Statistics South Africa
Fiscal policy
The 2011 National Budget was tabled before Parliament by the Minister of Finance on 23 February.
Government indicated that job creation would be a key focus area over the medium term and
allocated funds required for the implementation of the New Growth Path Strategy for economic
development. The fiscal stance remains countercyclical while being mindful of the need to pursue
fiscal consolidation and debt sustainability within a long-term framework. Government spending
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 13
House prices

Standard Bank House Price Index

Lightstone House Price Index
Monetary Policy Review May 2011

is projected to rise over the forecast period at a slightly lower rate than in recent years and as
economic growth strengthens and tax revenue recovers, the deficit is expected to narrow to a level of
3,8 per cent of estimated GDP by the fiscal year 2013/14 (Table 11). This represents a slightly slower
pace of deficit narrowing and a somewhat higher government debt trajectory than earlier official
projections. However, the Budget also indicates that the economy is recovering at a faster-thanexpected pace. Personal income tax collections climbed 11 per cent to R228 billion in the 2010/11
fiscal year while value-added taxes surged 24 per cent to R184 billion and customs duties rose
36 per cent to R27 billion. Company tax collections have been much slower to recover following
the 2009 recession, and dropped 0,5 per cent to R152 billion. Government expects revenue
growth to pick up as economic growth accelerates and forecasts that the South African economy
will expand by 3,4 per cent in 2011.
Table 11
Public finance data
2009/10
2010/11
2011/12 2012/13 2013/14
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 Budget Review 2011
The revised consolidated budget balance for 2010/11 is a deficit of R142,4 billion. Government
collected more tax revenue than expected in the 2010/11 fiscal year, while consolidated
government capital expenditure continued to underperform budgeted amounts, resulting in an
expected budget deficit of 5,3 per cent of GDP. Consolidated government revenue was expected
to amount to R755,0 billion in 2010/11, significantly higher than the estimate of R738,4 billion
made in February 2010. Consolidated government expenditure in 2010/11 was slightly lower than
was projected in February 2010, falling marginally from R907,0 billion to R897,4 billion.
Government plans to narrow the deficit more slowly than originally planned over the next
three years because of subdued growth in revenue and as it intends maintaining significant
spending on roads, schools and hospitals. The deficit is projected to be 5,3 per cent of GDP
in the fiscal year through March 2012, 4,8 per cent in fiscal 2012/13 and 3,8 per cent in the
year thereafter.
The estimated public-sector borrowing requirement (PSBR), reflecting the higher financing
requirements of government and the non-financial public enterprises, is expected to have
widened to 10,5 per cent of GDP in 2010/11 but is projected to decline to 9,5 per cent of GDP in
2011/12, to 8,1 per cent of GDP in 2012/13 and to 6,3 per cent of GDP in 2013/14. Net loan debt
as a share of GDP in 2010/11 has been revised to 30,8 per cent and is projected to increase to
39,3 per cent of GDP by 2013/14.
Monetary conditions
On a year-on-year basis the narrow M1 monetary aggregate grew at a faster pace from early
2009, while the wider M2 and M3 aggregates took longer to recover due to a strong preference
among investors to hold their deposits at the short end of the maturity spectrum (Figure 14).
Growth in broad money (M3) declined from 6,9 per cent in December 2010 to 6,5 per cent in

Monetary Policy Review May 2011
March 2011. The growth rate of M2 has been uneven and amounted to 4,6 per cent in March
2011. The growth rate of M1 has continued to rise since December 2010, increasing modestly
from 6,9 per cent in December 2010 to 8,3 per cent in March 2011.
Figure 15 shows that as 2010 progressed total loans and advances to the private sector recovered
from negative growth rates, driven by the rebound in the growth rates in instalment sale and leasing
finance, and other loans and advances (in particular, general advances and credit card advances).
Overdrafts have rebounded from the low levels recorded in 2009, although growth remains in negative
territory. Growth in mortgage advances has fluctuated around 4 per cent. On a sectoral basis, the
rebound in total loans and advances was underpinned by the household sector.
Monetary policy
The monetary policy environment has changed somewhat since the publication of the previous
Monetary Policy Review in October 2010. At that stage, inflation was still on its downward
trajectory and the domestic economic recovery appeared to be fragile. The exchange rate of
the rand was also appreciating despite portfolio capital outflows in the final quarter of 2010.
Percentage change over 12 months

Figure 14
Growth in monetary aggregates
-10
-5

M3
M1
M2
Percentage change over 12 months
-20
-10

Figure 15
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 May 2011

Given this scenario, the MPC reduced the repo rate by a further 50 basis points to 5,5 per cent
in November (Figure 16). This kept nominal and real policy rates at their lowest levels in over
30 years, and should be seen in the context of the weak economic conditions and low real
interest rates in advanced economies. However, in the following months, the inflation outlook
deteriorated significantly and although the monetary policy stance was left unchanged, the risks
to the outlook moved to the upside.
At the time of the MPC’s November meeting, the latest CPI inflation reading (for September)
had declined to 3,2 per cent, which turned out to be the low point of the current inflation cycle.
At that stage, the Bank’s forecast was adjusted down further, and the expectation was that
inflation would average 4,3 per cent in 2011 and 4,8 per cent in 2012. Inflation expectations
had also declined further, although they were, on average, still outside the target range. The
global recovery was regarded as fragile and the further quantitative easing in the US was
expected to sustain or increase capital flows to emerging markets, including South Africa.
These developments were expected to underpin the strength of the rand exchange rate with a
favourable impact on the inflation outcomes.
At the same time, the domestic economic outlook remained subdued: growth in gross fixed capital
formation was minimal and the weak performance of the manufacturing sector was a source
of concern. Overall business confidence remained low, although it had improved somewhat.
Consumer confidence, however, was relatively high, and there were indications that consumption
expenditure was recovering, and would be supported by positive wealth effects from higher asset
prices and lower interest rates, but constrained by high unemployment and high household debt
levels. Credit extension remained relatively subdued, but there were tentative signs of recovery.
At that time, the main risks to the inflation outlook were from cost–push factors, mainly
administered prices and wage trends, which were, however, showing some tentative signs of
moderation. Food and petrol prices were not viewed as immediate problems, but were identified
as potential longer-term risks. Although international oil prices had risen to above US$80 per
barrel, there was an expectation that the fragile state of the global economy would constrain
further price increases. The domestic bumper maize crop and the strong exchange rate were
expected to moderate pressures on domestic food prices.
Against this backdrop, the MPC expected the risks to the outlook to remain fairly evenly balanced.
Given the fragile nature of the domestic recovery, the MPC decided that there was room for
further stimulus, which would be consistent with the continued attainment of the inflation target.
Per cent

Prime overdraft rate
Repurchase rate
Three-month negotiable certificates of deposit rate
Figure 16
The repurchase rate and other short-term interest rates

Monetary Policy Review May 2011
The MPC noted, however, that the scope for further downward movement was limited, given the
signs of recovery in household consumption expenditure and credit extension. The MPC also
emphasised the limited nature of the impact of such actions on output: while monetary policy
could impact on cyclical deviations of output from potential output, it could not determine the
long-run growth path of the economy.
At the following three MPC meetings (in January, March and May 2011) a progressive deterioration
in the inflation outlook was evident, mainly as a result of continued price pressures coming from
international oil and food prices. By the time of the January meeting, inflation was already on an
upward path, when the most recent measure (for December 2010) was 3,5 per cent. By the May
meeting it had increased to 4,1 per cent (for March). Of greater significance was the sustained
deterioration of the inflation forecast. In January the inflation forecast for 2011 was 4,6 per cent
and for 2012, 5,3 per cent. By March the forecast was revised upwards to 4,7 per cent for 2011
and 5,7 per cent for 2012, still within the target range for the entire forecast period.
In May there was a further upward revision of the forecast, which was now expected to reach the
upper end of the target in the fourth quarter of 2011 and to breach the upper end of the target
range in the first quarter of 2012, when it was expected to average 6,3 per cent. Inflation was then
expected to return to within the target range and to remain close to the upper end until the end
of 2012. Inflation was expected to average 5,1 per cent in 2011 and 6,0 per cent in 2012. At both
the March and the May meetings the risks to the outlook were also assessed to be on the upside.
The forecasts of private-sector analysts were also revised upwards over this period, and the
consensus forecasts of analysts in the Reuters survey were similar to those of the Bank. The
results of the survey conducted by the Bureau for Economic Research (BER) at Stellenbosch
University continued to reflect a moderation in inflation expectations, particularly among business
and trade union respondents. In the first quarter of 2011 the expectations of all categories of
respondents for 2011 and 2012 had declined to within the target range.
In each instance, the upward revision of the Bank’s expected inflation path was mainly as a
result of changes in the assumptions regarding administered prices, particularly oil prices. As
discussed earlier in this review, the international oil price has been impacted by shocks on
both the supply and demand side, and has been relatively volatile on an upward trend. Over
this period, there was a progressive upward revision of the oil price assumption which, in turn,
raised the inflation forecast. In formulating its assumptions about international oil prices, the
MPC relies on internal Bank analysis of the oil market, but also looks at other indicators such
as oil futures prices, and the forecasts of a number of international agencies and analysts.
Nevertheless, the volatile nature of this market meant that during the past few months, most
forecasts have generally underestimated the actual outcomes.
The MPC consistently viewed the risks to the inflation outlook to have emanated mainly from cost–
push factors. Apart from the oil price, these factors included food prices and wage costs. Food
prices had been increasing significantly in international markets for some time, but it took a while
for these developments to start impacting on domestic prices. In May the MPC noted that there
were signs that food prices may have peaked in international markets. Nevertheless, there was an
expectation that domestic food prices were likely to increase further in the short to medium term.
Wage cost developments have been identified as a persistent risk to the inflation outlook. For
some time, nominal wage increases have been significantly above inflation and productivity
increases. However, in March the MPC noted that there was evidence that the risk to inflation
from wage increases was moderating. This was a result of the observed decline in nominal
wage and unit labour cost growth. The MPC also expressed its concern that high nominal wage
increases would also constrain employment growth in the economy.
While there were definite and rising pressures on inflation coming from the cost–push side, the
MPC assessed the pressures coming from the demand side as being benign. Growth in GDP was
regarded as still being below potential, with a persistent negative output gap. The MPC viewed
the growth recovery to be sustained but fragile, and insufficient to make a significant impact on
the unemployment rate, which decreased marginally to 25,0 per cent between the first quarter of
2010 and the first quarter of 2011. In January the Bank’s forecast of GDP growth was 3,4 per cent
for 2011 and 3,6 per cent for 2012. This forecast was revised marginally upwards in subsequent
meetings, and in May the respective forecasts were 3,6 per cent and 3,9 per cent.
Monetary Policy Review May 2011

The fragile nature of the recovery was, in part, a result of the low growth in gross fixed capital
formation, having increased by 1,0 per cent in the third quarter of 2010 and by 1,5 per cent in
the subsequent quarter. The manufacturing sector showed some improvement over the period,
but the sector continued to be characterised by underutilised capacity and output levels well
below those achieved prior to the financial crisis. The MPC also expressed concern about the
continued weak state of the construction sector. However, the composite leading business
cycle indicator of the Bank suggested that the recovery was expected to be sustained, and
business confidence surveys suggested that sentiment was improving.
The main impetus to growth in 2010 came from consumption expenditure. The MPC highlighted
the recovery in household consumption expenditure in particular, which grew at an annualised
rate of 5,1 per cent in the final quarter of 2010, and by 4,4 per cent for the year as a whole. At
the May 2011 meeting, however, the MPC noted that growth in retail sales and in new vehicle
sales was showing signs of moderation. During the review period, the committee’s view was
that while the growth in household consumption expenditure was likely to be sustained, it
was unlikely to accelerate to excessive levels. The MPC pointed to a number of factors that
were likely to constrain consumption growth going forward despite relatively high real wage
settlements and low levels of interest rates. These constraining factors included continued high
levels of unemployment and high levels of consumer debt.
The ratio of household debt to disposable income declined only marginally to 77,6 per cent in the
fourth quarter of 2010, and there had been a persistent increase in the number of consumers
with impaired credit records since the implementation of the National Credit Act. In May the
committee also expressed concern about the fact that commercial banks’ ratio of impaired
advances to gross loans and advances had remained more or less unchanged at around
5,8 per cent for some time. This high level of impairments was mainly attributable to retail loans.
These developments were reflected in banks’ credit extension to the private sector, which
continued to grow at very subdued rates. While this slow growth was seen to reflect both
supply and demand weakness, in the May 2011 statement the committee suggested that there
were some tentative signs that banks may have relaxed their lending criteria somewhat. Over
the period there was a moderation in the growth in mortgage advances from a recent high of
4,8 per cent in November 2010 to 2,9 per cent in March 2011, consistent with the weak state
of the housing market. The resulting negative wealth effects from the real-estate market were
viewed as a further constraint on consumption expenditure growth.
The hesitant nature of the domestic recovery was also regarded as being a function of continued
uncertainties in the global economy. During the period under review, the MPC noted the uneven
global recovery, but in the most recent statement it observed that the recovery had become
more hesitant in recent weeks in the wake of renewed concerns about peripheral Europe,
the aftermath of the disaster in Japan and higher commodity prices. Global developments
are not only important because of their impact on commodity prices, but also because of
their possible impact on domestic growth and the exchange rate through demands for South
African exports and the impact on capital flows. Although the rand was volatile during the
period, having fluctuated against the US dollar in a range of R6,55 and R7,33, the MPC’s view
throughout this period was that the rand was unlikely to pose a significant upside risk to the
inflation outlook. Interest rates in advanced economies, particularly the US, the euro area
and Japan, are expected to remain low for an extended period. In the absence of significant
global financial market risk aversion the rand exchange rate was, therefore, expected to remain
relatively strong, despite the Bank’s continued purchases of foreign exchange.
Against the backdrop of rising inflation, the repo rate has remained unchanged since November
2010. However, as outlined above, the MPC’s view was that the observed pressures and risks
to the inflation outlook emanated from supply-side shocks rather than from excess demand
pressures. The MPC accepts that there is little it can do to prevent these price increases
from impacting on headline inflation. The challenge facing policy-makers is that it is difficult
to determine whether these shocks are of a temporary or permanent nature. The appropriate
response under such circumstances is to remain vigilant to the emergence of possible
generalised price increases, or so-called second-round effects. The MPC cannot ignore these
upside risks and pressures because they have the potential to impact negatively on inflationary

Monetary Policy Review May 2011
expectations and, in so doing, affect general wage and price-setting behaviour. At the end of
its most recent meeting, the MPC warned that it would not hesitate to respond to signs that
threatened to move inflation out of the target on a sustained basis.
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 recovery has been gaining strength since the previous Monetary Policy
Review was published in October 2010. Although broader prospects for the global growth outlook
in 2011 and 2012 have continued to improve, the outlook for global growth is clouded by a number
of developments that have occurred during this period. In Japan, a severe earthquake (Japan’s
strongest on record) and tsunami have devastated parts of northeastern Japan and crippled one of
the country’s major nuclear power plants, thereby threatening many global manufacturers’ supply
chains. Queensland in Australia suffered an enormous flood and an earlier powerful earthquake
had crippled large parts of Christchurch in New Zealand. Political turmoil in the MENA region has
resulted in higher world oil prices that, together with a broader upturn in most commodity prices,
have contributed to surging inflationary pressures that present new policy challenges.
These developments will undoubtedly slow the pace of the global economic recovery somewhat
during the first half of 2011 and have also increased somewhat the downside risks to growth
in the medium term. In its April 2011 WEO, the IMF’s forecasts are therefore slightly lower than
earlier forecasts for certain developed countries but, on balance, it projects that global output
will expand by a robust 4,4 per cent in 2011 and 4,5 per cent in 2012 (Table 12). The IMF deems
risks to its growth projections to be mainly to the downside given disruptions brought about by
the natural disasters in some of the advanced countries and continued concerns about sovereign
debt in the euro area (Box 3 discusses sovereign debt developments in the peripheral euro area).
Table 12
IMF projections of world growth and inflation for 2011 and 2012*
Per cent
Real GDP
Consumer prices


Emerging-market and developing economies...

* IMF projections for 2011 as at October 2010 in parenthesis
Source: IMF World Economic Outlook, April 2011
Monetary Policy Review May 2011

Real GDP in advanced economies is projected to expand by 2,4 per cent in 2011 and
2,6 per cent in 2012, and although financial conditions continue to improve, they remain fragile.
The recovery in the US economy began gaining momentum in the fourth quarter of 2010 and
high-frequency economic indicators show more consistent improvement in the early months of
2011. The IMF projects GDP growth in the US to increase slightly from 2,8 per cent in 2011 to
2,9 per cent in 2012 but with risks to the outlook remaining elevated. In April 2011 S&P
announced that it was altering its outlook on the long-term rating for the US from stable to
negative. This was due to the large budget deficits and increasing government debt in the US,
relative to other AAA-rated countries. S&P also emphasised that it was its view that the lack of
a clear US government plan for addressing these two issues, and the risk that such a plan may
not be formulated and implemented by 2013, would put the US in a weaker fiscal position than
other AAA-rated countries.
The recovery in Japan has been hampered by the recent tragic earthquake and it is very
difficult to determine the full economic impact at this stage. The devastating earthquake
on 11 March 2011 has tilted the balance of risks to growth in the country firmly to the
downside in the short run and there are concerns about spillovers through Japan’s role in
the global supply chain. The Organisation for Economic Co-operation and Development
(OECD) estimated in April that Japan’s GDP growth may be reduced by as much as
0,6 percentage points in the first quarter of 2011 and up to 1,4 percentage points in the second
in the aftermath of the quake. The IMF estimates damage from the earthquake and tsunami
to amount to between 3 per cent and 5 per cent of the country’s GDP but that the global
macroeconomic impact would be limited. Data reflecting the state of the economy since the
earthquake point to a significant impact on production as manufacturing shrank at the fastest
pace in nine years, according to the purchasing managers’ index. The IMF projects GDP growth
in Japan to increase from 1,4 per cent in 2011 to 2,1 per cent in 2012.
In the euro area the underlying momentum of economic activity continues to be positive but
uncertainty regarding the growth outlook remains elevated. Following the 1,2 per cent increase
in euro area real GDP in the fourth quarter of 2010, recent statistical releases and high-frequency
indicators point towards a continued positive underlying momentum of economic activity in early
2011. Euro area exports are expected to be supported by the ongoing recovery in the world
economy and, given an accommodative monetary policy stance and the relatively high level of
business confidence, private-sector domestic demand is projected to contribute increasingly to
economic growth. However, balance-sheet adjustment in various sectors is expected to dampen
the recovery somewhat and downside risks to the growth outlook therefore continue to prevail.
More specifically, threats to financial stability and growth are derived from continued strains in the
most vulnerable euro area sovereigns and banks. The IMF projects that the euro area’s GDP will
grow by 1,6 per cent in 2011 and by 1,8 per cent in 2012. Risks to the medium-term outlook for
price developments also remain elevated and on the upside, and relate to possible higher-thanassumed increases in energy prices. Risks also relate to the possibility of stronger-than-expected
domestic price pressures in the context of a stronger-than-expected recovery in activity.
UK output growth was weaker than expected in the final quarter of 2010 but rebalancing of the
economy is underway and demand has begun to shift from consumption to exports. Domestic
consumption is being restrained by the effects of both fiscal consolidation and slow real income
growth, while exports are beginning to show the effects of a more competitive exchange rate
and improved growth in world demand. Following the 2,3 per cent decrease in UK real GDP
in the fourth quarter of 2010, recent statistical releases and high-frequency indicators provide
evidence of a significant margin of spare capacity in the economy but point towards a sustained
improvement in the underlying momentum of economic activity. The IMF projects that GDP
growth in the UK would increase to 1,7 per cent in 2011 and to 2,3 per cent in 2012. The Office
for Budget Responsibility, formed by the UK government in May 2010 to make an independent
assessment of public finances and the economy, in March cut its forecast for 2011 economic
growth to 1,7 per cent from 2,1 per cent.
Growth in emerging-market and developing countries is projected to amount to 6,5 per cent in
both 2011 and 2012. The IMF revised its 2011 and 2012 economic growth forecasts slightly for
some emerging and developing countries, and now expects developing Asia to grow by 8,4 per
cent in both 2011 and 2012. Rising food and oil prices, and Japan’s earthquake disaster present

Monetary Policy Review May 2011
a risk to sustained growth but the impact of the latter on the broader Asian region is expected
to be temporary and limited.
Growth in Brazil, Russia, India, China and South Africa (the BRICS countries) is projected to
outpace growth in the developed world. The IMF expects China’s economy to expand by 9,6 per
cent in 2011 and by 9,5 per cent in 2012, but the People’s Bank of China has been increasing
interest rates and raising bank capital requirements to keep inflation in check, which may serve
to slow down China’s economy somewhat. India’s projected growth was lowered slightly to
8,2 per cent in 2011 and 7,8 per cent in 2012. Russia’s growth forecast was boosted to 4,8 per
cent in 2011 and 4,5 per cent in 2012, while Brazil’s projected growth remained unchanged at
4,5 per cent in 2011 and 4,1 per cent in 2012. The IMF revised its MENA region growth forecasts
for 2011 and 2012 downwards by almost 1 percentage point due to widespread political tensions
in the region. A noticeable impact on GDP in the MENA region is likely to be felt over the next
several months, and the IMF now expects the region’s economy to expand by 4,1 per cent in 2011
and by 4,2 per cent in 2012. Faster and more sustainable growth has resumed in sub-Saharan
Africa and the IMF projects growth of 5,5 per cent in 2011 and 5,9 per cent in 2012.
Commodity prices have increased more than had been expected following a number of supply
shocks and strong economic growth in emerging markets, although currency appreciation in
emerging and developing countries has helped fend off inflation pressures by keeping the local
currency price of these goods down. The IMF projects that consumer-price growth in emerging
and developing countries will increase to 6,9 per cent in 2011, before slowing somewhat to
5,3 per cent in 2012. The IMF cautions that boom-like conditions in some emerging and
developing countries could develop into overheating as inflation pressure could build up
significantly once production begins to face capacity constraints, and large food and energy
price increases unleash demands for higher wages. Macroeconomic prospects for commodity
prices are expected to remain supportive as growth projections suggest that emerging-market
economies will continue leading the expansion.
Box 3
Sovereign debt in the peripheral euro area
Introduction
Various political groupings in the euro area have been calling for an end to the sovereign bailouts provided to
peripheral euro area countries and for more rapid debt restructuring to be pursued. The main concern is that
Greece, Ireland and Portugal in particular are facing crises of solvency rather than liquidity, and that the only way
these countries can solve their current cash-flow problems is by writing off some of their debt. The groups suggest
that the sooner these countries’ fiscal positions are put on a sustainable footing, the sooner households and
companies can start spending and investing again, thereby enabling sustainable economic growth. There is also
concern that the longer this decision is delayed, the more the peripheral country debt burden is shifted onto wider
eurozone taxpayers, either directly via bailout packages or indirectly via liquidity programmes.
In recent months policy-makers in the euro area have taken further steps to strengthen crisis management,
policies and governance. The effective lending capacity of the European Financial Stability Facility (EFSF)
has been increased to €440 billion and the European Stability Mechanism (ESM) to €500 billion. This has
been accomplished through a range of funding mechanisms that include IMF pricing principles for ESM
loans. Despite these developments and an improved euro area economic outlook, sovereign credit rating
downgrades have been issued for Greece, Ireland and Portugal in recent weeks and market concerns have
continued focusing on political developments that could get in the way of a smooth resolution of the euro
area’s sovereign debt difficulties. Bank lending conditions in the periphery economies have at the same
time remained tight amid tighter supervision and regulation and capital rebuilding. Many banks that hold
periphery sovereign debt are still rebuilding their balance sheets and are facing significant challenges in
implementing new capital requirements.
Key fiscal ratios in the peripheral euro area
The euro periphery sovereign crisis countries’ incurred budget deficits of between 8 and 12 per cent of gross
domestic product (GDP) in 2010 compared with the euro area average of about 6,5 per cent. Their gross
public debt to GDP is projected to reach between 64 and 152 per cent of GDP in 2011 and only Spain and
Portugal will be below 100 per cent. One of the most relevant measures to determine the sustainability of
state leverage is the net sovereign debt to government revenue ratio. For some of the countries of peripheral
Europe this specific measure has been raising concerns in markets. The ratio for these countries (Figure
B3.1) implies that taxes will have to rise significantly and therefore that the higher taxes could constrain
Monetary Policy Review May 2011

the economic growth that is being assumed will raise tax revenue sufficiently in the years ahead to service
sovereign debt.
The process of normalising fiscal policy in the post-financial crisis period has been difficult for most euro
peripheral countries as they have crossed the 90 per cent debt-to-income threshold which, according
to Reinhart and Rogoff 2010, historically begins to be associated with lower growth on average (see Box
1: “Risks for the global growth outlook on the road to fiscal consolidation in advanced countries” in the
October 2010 Monetary Policy Review). Substantial interest expenditure makes public finances more
vulnerable to rising interest rates and in effect ensures further borrowing or fiscal tightening. Although a
record-low interest rate environment has kept the carrying cost of debt relatively modest thus far, markets
have expressed concern that a higher interest rate environment for an extended period would place an
overly severe strain on national budgets of the euro peripheral countries.
Figure B3.2 shows that sovereign peripheral and bank credit-default swap (CDS) spreads remained wide in
early 2011 and in some cases widened further in recent weeks, thereby signalling a 64,5 per cent chance of
default in the case of Greece within five years. Market expectations regarding debt restructuring in the euro
periphery drove yield spreads of Greek government bonds over German Bunds to record highs. The cost
of protecting against a default for five years on Greek government debt also increased sharply after media
speculation on 14 April of plans by the Greek government to introduce new and deeper austerity measures
as it enacts budget cuts demanded as a condition for the €110 billion lifeline from the European Union (EU)
and the IMF. Over the past weeks, spreads have not only widened for Greece (spread over Germany up to
1 656 basis points) but also for Portugal (spread over Germany up to 759 basis points); and, significantly,
for Spain (spread over Germany up to 166 basis points). By contrast, Irish spreads are slightly lower, albeit
still very high (spread over Germany down 27 basis points, to 700 basis points).
The international financial institutions, the European Central Bank (ECB) and other sovereign peripheral
country policy-makers’ concerns about debt restructuring revolve around the following:
1. Restructuring any eurozone member’s debts while the country is still running a primary deficit, excluding
debt interest, would effectively defeat the purpose of the restructuring.
2. Given their substantial holdings of peripheral euro area sovereign debt, some European banks are not
yet strong enough to absorb the losses from a haircut on government bonds, and the turmoil in bond
markets associated with haircuts could lead to another financial crisis.
3. The outstanding stock of debt would not be reduced significantly with a voluntary restructuring via
extending maturities or cutting interest payments and premature debt restructuring would ease the
pressure on peripheral countries to push ahead with required structural reforms.
Any country that defaults would be shut out of debt markets and the government concerned would still
require continued support to meet its commitments (the country would either need to restructure its debt with
bondholders or ask European counterparts for further financial assistance either directly or through the EFSF).
Spain
Portugal
Ireland
Italy
Greece


Government net debt to government revenue
Source: IMF World Economic Outlook, April 2011 database
Ratio
Government gross debt to GDP
Figure B3.1
Gross government debt to GDP and net government debt

to government revenues, 2011

Monetary Policy Review May 2011
Risks for the global growth outlook
Although financial conditions eased in most parts of the euro area during late 2010 and into early 2011, the
progress in financial system repair has lagged behind the economic recovery and total leverage (public plus
private) has continued to rise in euro area periphery countries. Banks in Europe hold a large percentage of
euro peripheral sovereign debt (according to the Bank for International Settlements, French and German
banks accounted for almost two-thirds of lending to both public and private debtors in Greece as at end
September 2010 with French banks accounting for US$59,4 billion and German banks US$40,3 billion,
followed by UK and Portuguese lenders to Greece). If sovereign entities were to default on their loans or
come close, this could have disruptive implications for the euro area given that balance-sheet repair is
still a work in progress for many banks. A credit crunch could ensue if banks have to take a haircut, suffer
reserves depletion and are unable to raise new capital.
The euro crisis revolves around how best to deal with deleveraging that will have to take place in the years
ahead. Sovereign and bank risks in the euro area are intertwined, and this has heightened concern regarding
the systemic consequences of any debt restructurings and the inevitable impact this would have on the
euro area growth performance. Contagion risks are therefore significant in the euro area and the current
crisis of peripheral Europe could quickly evolve into a problem of systemic proportions. However, media
concerns about a Greek sovereign debt default in the very near term still appear somewhat premature,
given that Greece is currently adequately funded by the EU and the IMF, and that there is little incentive to
restructure while still working through an adjustment programme.
Risks to the euro area growth outlook are elevated as countries such as Germany have very strong
prospects but peripheral Europe is clearly quite weak. Default by a euro area member would also, at best,
only provide a temporary solution before problems re-emerged relating to productivity and even-weaker
growth outcomes. Periphery countries need more time than certain political groups appear willing to allow
for them to turn around their fiscal positions and politics may yet force policy-makers’ hands, particularly if
economically stronger countries refuse to keep supporting bailouts. However, there appears to be no better
alternative than the measured approach that policy-makers in Europe have thus far been pursuing in the
concerted hope of paving the way for orderly economic recovery.
References:
Reinhart, C M and K S Rogoff. 2010. “Growth in a Time of Debt”. NBER Working Paper No. 15639, January.
Bank for International Settlements. 2011. “What the BIS Banking Statistics Say (and what they do not) about
Banking Systems’ Exposures to Particular Countries and Sectors”. BIS Quarterly Review, pp. 15–17, March.
Basel: Bank for International Settlements.

1 200
1 500
Greece
Portugal
Source: Bloomberg
Italy
Spain

Basis points
Ireland
Figure B3.2
Sovereign 5-year CDS spreads

Monetary Policy Review May 2011

The composite leading indicator compiled by the OECD projects continued economic
expansion in OECD economies. It increased by 1,5 per cent in March 2011, compared with the
corresponding month of the previous year (Figure 17). The JPMorgan global manufacturing PMI
has remained comfortably above the neutral level of 50 for more than a year, and increased to a
level of 57,4 in February 2011 before declining to 55,0 in April. The year-on-year rate of change
in the OECD industrial production index slowed down slightly from 7,2 per cent in December
2010 to 6,0 per cent in February 2011.
Outlook for domestic demand and supply
According to the Bank’s latest quarterly projection, annual average growth in real output is
expected to be 3,6 in 2011 and 3,9 per cent in 2012 (Figure 18). Annualised real GDP growth is
expected to exceed 3,5 per cent in all four quarters of 2011.
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 17
Selected indicators of global economic activity


Percentage change at seasonally adjusted annualised rates

Figure 18
Real GDP growth forecast


Monetary Policy Review May 2011
National Treasury’s February 2011 Budget Review projects growth in year-on-year real GDP of
3,4 per cent in 2011, followed by 4,1 per cent in 2012 and 4,4 per cent in 2013. By comparison,
the April 2011 Reuters survey of long-term forecasts for the South African economy reveals
that analysts expect year-on-year GDP growth to register 3,6 per cent in 2011, followed by
3,9 per cent in 2012 and 4,1 per cent in 2013. On the demand side, the main influences on
growth during this forecast period are expected to be net exports and gross fixed capital
formation, the latter projected to rise by 3,9 per cent in 2011, 5,5 per cent in 2012 and 6,8 per
in 2013. On the supply side, the secondary and tertiary sectors are expected to be the main
contributors to domestic growth.
The Bank’s composite leading business cycle indicator increased by 1,0 per cent in February 2011
compared with the preceding month (Figure 19). Nine of the eleven component time series that
were assessed for February 2011 increased, while two decreased. The largest positive contribution
to the leading indicator came from the BER Business Confidence Index, followed by the BER
average hours worked per factory worker in manufacturing. The two negative contributors in
February were the number of building plans passed for flats, townhouses and houses larger than
80 m2, as well as the six-month smoothed growth rate in the real M1 money supply.
The seasonally adjusted Kagiso PMI stabilised at a level of 56,4 index points in April 2011,
after having increased from 51,6 index points in February to 59,7 index points in March. While
the business activity and new sales indices showed small declines, the forward-looking index
measuring expected business conditions in six months’ time remained unchanged at a level of
58,1 index points.
For the first time in three years, the Rand Merchant Bank (RMB)/Bureau for Economic Research
at Stellenbosch University (BER) Business Confidence Index (BCI) broke the neutral level of
50 index points by rising from 44 points in the fourth quarter of 2010 to 55 in the first quarter
of 2011. This indicates that there are more firms that are optimistic than pessimistic about
prevailing business conditions. With the exception of the building sector, there has been a
generalised improvement in business confidence in most sectors surveyed. The motor trade
sector rose sharply to 84 index points in the first quarter of 2011; the highest level in five years.
Wholesale sector confidence rose to 65 index points in the first quarter.
According to the first quarter 2011 BER Manufacturing Survey, manufacturing business
confidence has improved by 10 points to reach 51 index points in the first quarter of 2011.
Owing to improving business conditions, rising domestic sales volumes and capacity utilisation,
manufacturers are planning to increase fixed investment in the second quarter of 2011. The
outlook for fixed investment has improved as the net majority expecting total fixed investment to
rise in 12 months’ time increased from 11 to 19 per cent.
Index: 2000 = 100

Figure 19
Composite leading business cycle indicator

Monetary Policy Review May 2011

According to the BER’s Retail Survey, a net majority of retailers and wholesalers reported
an improvement in business conditions in the first quarter of 2011. Retailers in non-durable
goods reported that their first quarter 2011 sales growth exceeded their earlier expectations.
New vehicle dealers and retailers in durable goods reported that sales growth strengthened
in the first quarter of 2011. Wholesalers in both consumer goods and non-consumer goods
also reported a substantial improvement in sales volumes, suggesting that the trade sector
recovery is on track. In general, both the retailers and wholesalers are optimistic about their
sales prospects during the second quarter of 2011.
Indicators of inflation expectations
Inflation expectations surveyed by the BER in the first quarter of 2011 continued to trend
downwards (Figure 20). Average expectations for 2011 declined from 5,5 per cent in the
survey undertaken in the fourth quarter of 2010 to 5,3 per cent in the first quarter of 2011
survey. Inflation is expected to be 5,7 per cent in 2012 and 6,0 per cent in 2013.

Financial analysts surveyed by the BER expect inflation to reach 4,7 per cent in 2011, 5,5 per
cent in 2012, and 5,6 per cent in 2013. For 2011, business people revised their fourth quarter
2010 expectations from 6,0 to 5,6 per cent in the first quarter of 2011. For 2011 and 2012
trade unions have revised their inflation expectations to 5,6 and 5,8 per cent respectively. Trade
unions and business expect inflation to breach the target band in 2013.
The latest estimates of inflation expectations for the period from 2011 to 2013 obtained from
the Reuters survey conducted in April 2011 show that average annual CPI inflation is expected
to remain below the upper level of 6 per cent of the CPI inflation target range, although
estimates have been revised upwards since March. As depicted in Table 13, average CPI
inflation expectations for 2011 are 5,0 per cent, followed by 5,8 per cent for 2012 and 5,7 per
cent for 2013.
Annual averages, per cent


Figure 20
BER surveys of headline CPI inflation expectations

Survey conducted during:

3rd qr 2010
Source: Bureau for Economic Research, Stellenbosch University

4th qr 2010

1st qr 2011

Monetary Policy Review May 2011
Table 13
Reuters survey of CPI inflation forecasts: April 2011*


(19)

(13)

* March 2011 survey results in parentheses
Source: Reuters
Inflation expectations derived from break-even inflation rates, measured as the difference
between the the yields on conventional South African nominal government bonds and CPI
inflation-linked government bonds of similar maturity, have been trending higher from October
2010 (Figure 21). In May 2011 the 12- to 15-year maturity break-even rates were higher than the
2- to 3-year maturity break-even rates, suggesting that investors expect long-term inflation to be
higher, although both long- and short-maturity break-even rates were within the inflation target
range. On 13 May 2011 break-even inflation in the 2- to 3-year maturity range stood at 5,6 per
cent, while that over 12 to 15 years was at 5,8 per cent.
The South African Reserve Bank inflation forecast
The most recent projections of the Bank’s quarterly inflation forecasting model, presented to the
MPC meeting on 10–12 May 2011, are reproduced in the form of a fan chart in Figure 22. These
projections show that there has been a further upward revision to the CPI inflation forecast of
the Bank since the previous meeting of the MPC in March 2011, mainly as a result of revised
assumptions regarding administered price increases over the forecast period.
The central projection, conditional on an unchanged repurchase rate, is for the average quarterly
CPI inflation rate to reach the upper limit of the inflation target range at 6,0 per cent during the
final quarter of 2011, and to peak at 6,3 per cent in the first quarter of 2012. Inflation is then
projected to return to within the target range by the second quarter of 2012 and remain close to
the upper limit of the range for the rest of the year. Inflation is expected to average 5,1 per cent
in 2011 and 6,0 per cent in 2012, compared with the averages of 4,7 per cent and 5,7 per cent
that were forecast at the time of the previous meeting.
Percentage points

Figure 21
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 May 2011

The main risks to the inflation outlook continue to emanate from cost–push pressures, including
administered prices. The acceleration in food prices is expected to persist for some time,
despite indications that global food price inflation may have peaked, and international oil prices
have displayed considerable volatility recently. Underlying demand conditions in the economy
remain relatively restrained and are not seen to pose a significant risk to the inflation outlook
at this stage, although a depreciation of the exchange rate of the rand would generate a more
pessimistic outcome for targeted inflation. On balance, there is deemed to be a slight upside
risk to the forecast of targeted inflation displayed in the fan chart in Figure 22.
Assessment and conclusion
The global economic recovery has continued to be uneven, characterised by generally high growth
in emerging economies and low growth in many of the advanced economies. While there is a
general view that the recovery is sustainable, there are a number of risks to the growth outlook.
These include the impact of rising commodity prices, the sovereign debt crisis in peripheral
Europe and the implications of the disaster in Japan. There are also still some concerns about the
relatively weak private-sector expenditure in some of the advanced economies, and their ability to
weather any withdrawal of government fiscal and monetary policy stimuli. As debt sustainability
and the need for fiscal consolidation are receiving more focused attention in many countries, the
burden of supporting growth has fallen increasingly on monetary policy. This implies that interest
rates in a number of the advanced economies, particularly the US and Japan, are likely to remain
low for a protracted period. This would seem to imply continued capital flows to emerging-market
economies with implications for their exchange rates.
Emerging markets in general have been experiencing strong growth, and there has been a
general trend of monetary policy tightening in response to emerging inflationary pressures.
More recently, attempts made by some emerging-market economies, particularly China, to
moderate the growth in their economies have also had an impact on the pattern of capital flows
and commodity prices.
Per cent

Figure 22
Targeted inflation* forecast

* CPIX for metropolitan and other urban areas until the end of 2008; CPI for all urban areas thereafter
Note:
The fan chart uses confidence bands to depict varying degrees of certainty. The darkest
band of the fan chart covers the most likely 10 per cent of probable outcomes foreseen
for inflation, including the central projection. Each successive band, shaded slightly
lighter and added on either side of the central band, adds a further 10 per cent to the
probability, until the whole shaded area depicts a 90 per cent confidence interval (see
Box 4 “Understanding the fan chart” on p. 27 of the March 2001 Monetary Policy Review).

Monetary Policy Review May 2011
South Africa remains an outlier compared with its emerging-market peers. Domestic growth
remains below potential, and although growth is expected to be sustained, it is expected to be
below that of emerging-market economies in general. This is due, in part, to the persistently
low growth in fixed capital formation, the uncertain growth prospects in some of South Africa’s
traditional trading partners and to possible constraints on consumption expenditure growth.
Since the publication of the October 2010 Monetary Policy Review, the global and domestic
inflation environment has deteriorated markedly, mainly as a result of oil and food price increases.
The challenge facing monetary policy-makers is to determine whether these developments are
of a temporary or permanent nature. This is not always easy. The appropriate monetary policy
response will differ, depending on the nature and persistence of the shock and the extent to
which inflation expectations are well entrenched. If expectations are not well anchored, even
temporary shocks could cause the first-round effects to translate into more generalised inflation.
For this reason, it is important that monetary policy is seen to be focused on its inflation objective
over the appropriate time horizon. This then becomes a fine balancing act for the MPC, as a
flexible inflation-targeting framework requires that monetary policy actions be mindful of the
impact on the real economy as well. This is particularly the case when the domestic economy
is relatively fragile and there is underutilised capacity.
At its most recent meeting (May 2011), the MPC noted the adverse inflation outlook and the fact
that inflation was expected to exceed the upper limit of the target range temporarily during the first
quarter of 2012. At the same time, the MPC noted that the factors behind this deterioration were
mainly of a cost–push nature, and not a result of excess demand conditions, given the continued
existence of a negative output gap. This does not mean that these inflation developments can
be ignored. While it is clear that the first-round effects cannot be avoided, the MPC will remain
vigilant with respect to indications of second-round effects or generalised inflation, and will not
hesitate to take timeous appropriate action, particularly if inflation is expected to move out of the
target range on a sustained basis. The Bank will continue to give primacy to its objective of price
stability, and implement monetary policy within a flexible inflation-targeting framework.
Monetary Policy Review May 2011

Statement of the Monetary Policy Committee
18 November 2010
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 MPC, the outlook for domestic inflation has improved further
against the backdrop of a continued negative domestic output gap and sustained strength in
the exchange rate of the rand. Persistently low growth in the United States (US) and renewed
quantitative easing, combined with renewed concerns about the solvency of some euro area
countries, are expected to prolong the current environment of low global interest rates and
continued capital flows to emerging market economies. While a number of cost–push factors
are beginning to pose some upside risk to domestic inflation, the overall risks to the inflation
outlook are assessed to be fairly evenly balanced.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas declined to 3,2 per cent in September 2010, compared with 3,5 per cent in August.
Goods price inflation measured 1,5 per cent in September, while services inflation amounted to
5,2 per cent. The categories of housing and utilities (mainly electricity) and miscellaneous goods
and services (predominantly insurance costs) together contributed 2,2 percentage points of the
3,2 per cent inflation outcome. CPI excluding administered prices measured 2,6 per cent, while
administered prices excluding petrol measured 9 per cent.
Of the twelve broad CPI categories, only one category had an inflation rate that was within the
target range of 3 to 6 per cent, while the inflation rates of six categories were below the lower
end of the target range. Five categories, with a combined weighting of 34,6 per cent, had
inflation rates above the 6 per cent level.
Having peaked at 9,4 per cent in June 2010, producer price inflation has since moderated
somewhat and measured 6,8 per cent in September. Despite higher global food price trends,
agricultural prices and manufactured food prices continued to decline on a year-on-year basis.
This indicates subdued pressure on food prices in the coming months at the consumer level,
where food prices increased at a year-on-year rate of 1,2 per cent.
The lower-than-expected inflation outcomes contributed to a further downward adjustment in
the inflation forecast of the Bank throughout the forecast period to the end of 2012. Targeted
CPI inflation averaged 3,5 per cent in the third quarter of 2010. A similar average outcome is
expected during the fourth quarter, resulting in an expected average inflation rate of 4,3 per
cent for 2010. Inflation is then expected to remain at an average of 4,3 per cent in 2011 and
to increase to 4,8 per cent in 2012. In the final quarter of 2012 inflation is expected to average
4,8 per cent, compared with the previous forecast of 5,1 per cent.
The more favourable forecast is a result of an expected moderation in administered price
inflation, a more appreciated nominal effective exchange rate of the rand, as well as lower-thanexpected actual inflation outcomes, which lowered the starting point of the forecast.
Inflation expectations as reflected in the survey conducted by the Bureau for Economic Research
(BER) at Stellenbosch University during the third quarter have been revised downwards for all
categories of respondents. Expectations have been on a consistent downward trend since
reaching a peak in the second quarter of 2009. Nevertheless, in contrast to expectations of
the financial analysts, who expect inflation to remain within the target range over the forecast
period, the expectations of trade unions and business executives remain outside the target
range. According to this survey, inflation is expected to average 5,7 per cent in 2010, and
6,1 per cent and 6,4 per cent in 2011 and 2012 respectively.
The Reuters consensus survey of financial analysts, conducted in October, also shows a more
favourable outlook with inflation expected to average 5,5 per cent in 2012. Break-even inflation
rates as derived from the inflation-linked bonds have also declined significantly across all
maturities, to levels of around 5 per cent.

Monetary Policy Review May 2011
The global economic recovery has continued in an uneven manner, with downside risks to
the growth outlook in a number of the advanced economies including the US, Japan and
the euro area. Further fiscal stimulus in the United States (US) appears unlikely, suggesting
that the burden of supporting the flagging growth and persistent unemployment will fall
disproportionately on monetary policy. The recent resumption of quantitative easing, against
a backdrop of deflation fears, indicates that monetary policy in the US is likely to remain
highly expansionary for some time. There is heightened uncertainty in the euro area with the
focus, once again, shifting to the peripheral countries, as concerns relating to the solvency
of the Irish banking system and the sustainability of Irish public-sector deficits have raised
fears of possible contagion within Europe and possibly to the global financial sector. Spreads
on sovereign debt have widened again in some of the Southern European countries after a
relatively steady period, and in some instances have exceeded the levels reached in April
2010, when sovereign debt concerns reached their peak.
Apart from the risks to the fragile global recovery, there are also significant risks to financial
stability emanating from these developments in the advanced economies. Should the problems
in the euro area not be resolved in an orderly manner, there are risks of a sudden reversal of
capital flows to emerging markets.
By contrast, growth in the emerging markets has remained buoyant and in some instances
monetary policy has been tightened in response to increased demand pressures. Furthermore,
the strong growth in Asia, and China in particular, has underpinned commodity prices, which
have contributed to the stronger trend in inflation in these countries. It the extent to which growth
in the emerging markets can be sustained independently of a recovery in the industrialised
economies is still unclear. Despite the higher commodity prices, global inflationary pressures
remain relatively benign.
The quantitative easing has continued to have spillover effects on emerging-market economies.
The search for yield resulting from this increase in liquidity has implications for the exchange rates
of the recipient countries. South Africa has been no exception in this respect and appreciation
pressures are expected to persist for some time, in the absence of renewed bouts of global risk
aversion. The exchange rate therefore remains a downside risk to the inflation outlook.
Since the previous meeting of the MPC, the rand has appreciated by over 3 per cent against
the US dollar and is more or less unchanged on a trade-weighted basis. This has been despite
lower domestic interest rates and the higher pace of reserve accumulation in the past two
months. In October the Bank acquired the proceeds of the foreign purchase of Didata, which
were in excess of US$2 billion. The recent observed volatility in the bilateral rand exchange
rates has been mainly as a result of the volatility in the euro/dollar exchange rate. From a policy
perspective, focus is maintained on the trade-weighted exchange rate.
The domestic growth outlook remains subdued and below-trend growth is expected to persist.
The forecast of the Bank is relatively unchanged since the previous meeting of the MPC, with
GDP growth remaining at 2,8 per cent for 2010 and expected to average 3,3 per cent and
3,6 per cent in 2011 and 2012 respectively. The composite leading business cycle indicator of
the Bank has been trending sideways since April, suggesting a possible moderation in the pace
of recovery in the months ahead. Private sector gross fixed capital formation is expected to have
remained weak in the third quarter of 2010.
The manufacturing sector, in particular the motor vehicle and components sector, was hit
particularly hard by industrial action, which contributed to the contraction of manufacturing
output in the sector in the third quarter. Year-on-year growth in manufacturing sector output
in September measured 1,4 per cent, much lower than market expectations, while output
contracted by 1,5 per cent on a quarter-on-quarter basis in the third quarter. This was
consistent with the declining manufacturing capacity utilisation in the third quarter, as well as
the weakening Kagiso Purchasing Managers Index, which has returned to below the neutral
level of 50. The construction and civil engineering sectors are also facing a challenging outlook.
By contrast, output growth in the mining sector improved markedly in the third quarter and
contributed positively to third-quarter GDP growth. The Rand Merchant Bank (RMB)/BER
Monetary Policy Review May 2011

business confidence index has been increasing, but still reflects negative sentiment overall. As
a result of these trends, unemployment in the economy has shown little sign of reversing.
There are indications of recovery in household consumption expenditure in the economy. Retail
trade sales decreased by 1,4 per cent on a month-on-month basis in August, but increased by
0,4 per cent in September. On a year-on-year basis, the increase was 6,1 per cent. Although
vehicle sales have grown significantly on a year-on-year basis, the short-term trends have
moderated somewhat but were likely to have been impacted by the industrial action in this sector.
Consumer confidence, as reflected in the FNB/BER consumer confidence index remains relatively
high, but was largely unchanged during 2010. Household consumption expenditure is expected
to be supported by positive wealth effects as is reflected in higher asset prices and lower interest
rates, but constrained by high unemployment and significant household debt levels.
Growth in total loans and advances to the private sector by banks has continued to an increase
at a moderate pace, having increased by 4,1 per cent in September. This figure was somewhat
inflated by technical factors such as the acquisition of mortgage loan books and a general
loan book by banks from non-banks in the past three months. Mortgage advances were again
the main contributors to the positive trend, increasing by 4,8 per cent on a year-on-year basis
in both August and September. Growth in instalment sale credit and leasing finance turned
marginally positive after 17 consecutive months of contraction, while other loans and advances
accelerated to a year-on-year growth of 4,5 per cent in September, from 0,4 per cent in August.
Credit card advances and bank overdrafts, however, continued to contract.
In the banking sector, impaired advances to gross loans and advances declined marginally to
5,7 per cent in September 2010, having reached a peak of slightly over 6 per cent in November
2009. There is, however, some evidence that the banks are still charging higher spreads above
the repurchase rate than was the case before the crisis, which indicates that the recent monetary
policy easing has not been fully passed through to new borrowers.
The fiscal policy stance has tightened moderately with the narrowing of the expected deficit
before borrowing from the original estimate of 6,5 per cent to a revised estimate of 5,3 per
cent for the current fiscal year, representing an estimated structural deficit of 4,1 per cent. The
deficits for the coming fiscal years have also been adjusted downwards, and a 3,2 per cent
deficit is expected in 2013/14. Most of the adjustment has been due to higher-than-expected
revenue collections.
The main risks to the inflation outlook continue to emanate from cost–push factors. These
include wage trends and administered prices. Food and petrol prices are also identified as
potential longer-term risks.
There are some tentative indications of moderation in wage growth. According to Andrew
Levy Employment Publications, the average wage settlement rate amounted to 8,3 per cent
in the first nine months of 2010, compared with 9,3 per cent in 2009 as a whole. However the
Quarterly Employment Survey of Statistics South Africa indicates that in the second quarter of
2010 the year-on-year average nominal remuneration per worker increased by 15,8 per cent.
The unit labour cost increase, which adjusts for productivity increases, amounted to 10,8 per
cent, up from 10,3 per cent in the previous quarter.
Global food prices have been affected by adverse weather conditions in a number of regions,
but the impact on domestic prices has been counteracted in part by the rand exchange rate
trends and the bumper maize crop. The exchange rate has also moderated domestic petrol
price increases. Having remained relatively stable in a narrow range for the past few months, the
price of Brent crude oil has increased over the past weeks to above the US$80 per barrel level,
resulting in a cumulative increase in domestic petrol prices of 25 cents per litre in October and
November, and a further increase is likely in December. Global oil prices are, however, expected
to be constrained somewhat by slow growth in the advanced economies.
In considering the prevailing conditions and data, it is important to emphasise that the focus,
notwithstanding any immediate impact or influence, is on the situation that might exist 12 to 18

Monetary Policy Review May 2011
months hence. There are significant voices and varied opinions aired in the public domain, all
expressing a view on what needs to be done. While it is important to listen and hear what is
being said, it is the responsibility of the MPC to determine the path of interest rates without fear
or favour. And this is what we will continue to do.
The MPC has taken cognisance of the improved longer-term inflation outlook and assesses
the risks to this outlook to be fairly evenly balanced. The domestic economic recovery remains
fragile and the adverse global developments make the growth outlook more uncertain. The MPC
believes that while monetary policy cannot determine the long-term growth path of the economy,
it can impact on cyclical deviations of output from potential output. The view of the MPC is that
there is room for further stimulus, given the weakness in the supply side of the economy.
The MPC has accordingly decided to reduce the repurchase rate by 50 basis points to 5,5 per
cent per annum with effect from 19 November 2010. This action is viewed to be consistent with
the continued attainment of the inflation target. The scope for further downward movement,
however, is seen to be limited, given the signs of recovery in household consumption expenditure
and credit extension. This will be assessed on an ongoing basis.
Monetary Policy Review May 2011

Statement of the Monetary Policy Committee
20 January 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 MPC, there have been more convincing signs that the
recovery in the global economy will be sustained. However, growth in the advanced economies
is expected to be slow and is subject to a number of downside risks, including the sovereign
debt crisis that continues to beset the eurozone. The more promising global growth outlook, as
well as the unfavourable weather conditions, has implications for commodity prices, particularly
those of food and energy. These pressures are likely to pose an increasing risk to both the
global and domestic inflation outlook. Nevertheless, domestic inflation is expected to remain
within the target range for the forecast period.
Domestically, the output gap remains negative and gross domestic product (GDP) growth is
expected to remain below potential over the next two years. However, there are indications
that the outlook for output growth, while hesitant, is somewhat more positive. The recovery in
household consumption expenditure appears to be sustained.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas moderated to 3,5 per cent in December from 3,6 per cent in November 2010. The
average inflation rate for 2010 was 4,3 per cent compared with 7,1 per cent in 2009. Food price
inflation in December measured 1,4 per cent, unchanged on a month-on-month basis. The
main contributor to the inflation outcome remained housing and utilities, primarily electricity,
which contributed 1,5 percentage points to the 3,5 per cent outcome. Administered prices
excluding petrol increased at a rate of 9,1 per cent in both November and December.
Year-on-year producer price inflation reached a recent peak of 9,4 per cent in June 2010, and
has declined moderately since then. In November, the producer price index (PPI) increased by
6,2 per cent, compared with 6,4 per cent the previous month. The impact of the exchange rate
on producer prices is still clearly evident, with the prices of imported commodities increasing at
a year-on-year rate of 0,5 per cent. Manufactured food prices increased by 0,6 per cent, while
agricultural prices declined by 0,3 per cent.
The CPI forecast of the Bank has been revised upwards since the MPC’s previous meeting.
Nevertheless, the domestic inflation trajectory is still expected to remain within the target
range over the entire forecast period to the end of 2012. Inflation is now expected to average
4,6 per cent in 2011 and 5,3 per cent in 2012. The upward adjustment is mainly due to revised
assumptions of the international oil price over the forecast period, and we will continue to
monitor global inflation trends closely.
The Bank’s forecast is similar to the Reuters consensus forecast. In the December survey, the
mean forecast of CPI inflation was 4,5 per cent for 2011, 5,4 per cent for 2012 and 5,6 per cent
for 2013. These forecasts were slightly higher than those in the November survey. The breakeven inflation rates across all maturities also continue to reflect inflation expectations within the
target range.
Inflation expectations as reflected in the survey conducted by the Bureau for Economic Research
(BER) at Stellenbosch University in the fourth quarter of 2010 continued to trend downwards.
For the first time, average expectations for 2011 are within the inflation target band at 5,5 per
cent. The expectations of all categories of respondents declined, with both business executives
and trade union officials expecting inflation to average 6,0 per cent, while those of the financial
analysts declined to 4,5 per cent.
All categories of respondents expect inflation to increase again in 2012 when it is expected to
average 6,2 per cent.

Monetary Policy Review May 2011
The global economic outlook remains uncertain but there appears to be increasing optimism
that the recovery, albeit relatively weak, will be sustained. Most forecasts have been revised
upwards in recent months but indicate that global growth is expected to be slower in 2011 than
in 2010. However, the prospects remain uneven across countries and regions, and a number
of risks remain.
Growth in the United States (US) continues to be supported by strong monetary and fiscal
intervention, while growth in Japan remains subdued. In the euro area, the recovery is being
driven by strong growth in Germany but this is expected to moderate in 2011. In the rest of the
euro area, confidence has declined in the wake of the worsening sovereign debt crisis, which
remains a major risk to the outlook. Recent co-ordinated measures appear to have stabilised
the sovereign debt markets for now, but significant risks remain and a further escalation of the
crisis could impact negatively on global growth prospects.
The emerging markets continue to outperform the advanced economies, with strong recoveries
in consumption and investment in the major emerging-market economies.
Inflation developments and prospects also appear to reflect the divergent growth trends.
Persistent large negative output gaps in the advanced economies have helped to contain
inflation pressures, despite rising international oil and food prices. There is still some risk of
deflation in the US, although this risk is declining. By contrast, inflation in emerging markets
has been increasing, partly as a result of stronger demand pressures but also as a result of the
higher weights of energy and food in the consumer price baskets. These trends have resulted
in generally tighter monetary policies in emerging markets, but monetary accommodation is
expected to persist in most of the major industrialised countries for some time.
The exchange rate of the rand has been relatively volatile since the previous meeting of the MPC,
when it was around R7,00 against the US dollar. By early January the rand had appreciated to
R6,55, but has since retraced to levels prevailing at the time of the previous meeting. During this
period, non-residents became net sellers of rand-denominated bonds as expectations that there
would be further interest rate reductions were reversed, but were net buyers of domestic equities.
Factors influencing the exchange rate during this period included developments in the euro/
dollar exchange rate, further acceleration in commodity prices and persistent capital flows to
emerging markets.
In the absence of general risk aversion, or a tightening of the monetary policy stances in the
advanced economies, the rand exchange rate is expected to remain relatively strong. Since the
previous meeting of the MPC, the nominal effective exchange rate of the rand depreciated by
0,4 per cent.
During 2010 total direct foreign-exchange reserve accumulation by the Bank and National
Treasury amounted to US$7,4 billion, or a spend of just over R53 billion. Despite this, the rand
continued to appreciate – 12 per cent against the US dollar during 2010 – and remained strong.
Portfolio and foreign direct investment inflows continued, and the net purchases of bonds
and equities by non-residents amounted to R89,5 billion in 2010. The Bank will continue to
accumulate foreign-exchange reserves as and when possible.
Domestic GDP growth remains subdued, with growth of 2,6 per cent in the third quarter of
2010. Although there are mixed signals about the sustainability of the output recovery, highfrequency data indicate a stronger fourth quarter performance, and forecasts for 2011 have
generally been subject to moderate upward revision. The Bank’s forecast was also adjusted
marginally and growth is now expected to average 3,4 per cent in 2011. The forecast for 2012
is unchanged at 3,6 per cent. The composite leading business cycle indicator of the Bank has
been relatively flat in the past few months and declined moderately in October, reflecting the
uneven growth prospects.
Gross domestic fixed capital formation is still subdued, having increased by 0,9 per cent in the
third quarter of 2010. This rate of investment growth remains too low to impact meaningfully
on output growth, and is currently primarily dependent on state-owned enterprises’ pipeline
Monetary Policy Review May 2011

commitment to infrastructure, while investment in the manufacturing sector is being constrained
by low levels of capacity utilisation. The labour market appears to have stabilised in the third
quarter when employment levels were more or less unchanged, although unemployment
remains stubbornly high at 25,3 per cent.
The recovery in the manufacturing sector remains hesitant. Manufacturing output increased
by 4,6 per cent on a year-on-year basis in November, compared with 2,3 per cent in October.
Production of motor vehicles, parts and accessories, in particular, including vehicle exports
which increased by 52,8 per cent quarter-on-quarter in the final quarter of 2010, have exhibited
robust growth.
The Kagiso Purchasing Managers Index (PMI) confirms the uncertain outlook. Following a strong
improvement in the index in November to a level in excess of the neutral level of 50, it declined
again in December, although still indicating an expansion of the sector. The mining sector has
also been improving and grew at a year-on-year rate of 9,6 per cent in November. The Rand
Merchant Bank (RMB)/BER Business Confidence Indicator remained relatively unchanged
throughout 2010, but with a negative outlook.
The recovery in domestic consumption expenditure appears to be sustained. Real final
consumption expenditure by households increased at an annualised rate of 5,9 per cent
in the third quarter of 2010. Strong expenditure growth was observed in all components of
consumption. Real retail trade sales increased at a year-on-year rate of 7,8 per cent in November
2010. New vehicle sales also continued their strong performance, having increased by almost
30 per cent in December. Consumer confidence as reflected in the First National Bank
(FNB)/BER Consumer Confidence Index has been at a relatively high level during the past year.
Credit extension maintained its moderate upward trend during 2010. Total loans and advances
to the private sector increased by 4,4 per cent in November. Growth over 12 months in mortgage
advances has fluctuated around 4,8 per cent since August 2010, reflecting a loss of momentum
in the real-estate market. House prices increased somewhat in the first half of 2010, but since
then the rate of increase has declined, with some house price indexes indicating that prices
have been falling.
Growth in instalment sale and leasing finance, and other loans and advances maintained a positive
trend. Within the latter category, growth in credit card advances was positive for the first time
since the end of 2008. Bank overdrafts were the only major category that continued to contract,
although at a slower rate. Household debt remains high at 78,5 per cent of disposable income.
However, lower interest rates have reduced the ratio of debt-service costs to disposable income
to 7,8 per cent, compared with 12,6 per cent in the third quarter of 2008.
Expenditure has been positively affected by growth in real disposable income, lower interest
rates and some favourable wealth effects. Share prices on the JSE Limited have reached levels
in line with the peaks reached before the onset of the global financial crisis. In 2010 the all-share
index increased by 16,1 per cent.
Risks to the inflation outlook emanating from global commodity price increases have become
more evident. These risks relate mainly to oil and food price developments. Having fluctuated in the
range of US$70–US$80 per barrel for much of 2010, the price of Brent crude oil began to increase
in late November and is currently at around US$98 per barrel. The surge in oil prices is due in
part to stronger global oil demand and the exceptionally cold weather in the northern hemisphere.
These price trends were also affected by US dollar developments, particularly following the
announcement of additional quantitative easing by the US Federal Reserve in November.
The domestic petrol price, which has been cushioned, to some extent, by exchange rate
developments, has increased by 66 cents per litre since September 2010, and by 11 per cent
over the past year.

Monetary Policy Review May 2011
Since September, the rand exchange rate has offset the petrol price increase by a cumulative
45 cents per litre.
Global food prices have also continued to increase, driven by tight food supplies, changing
weather patterns and rising demand in emerging-market economies. To date South Africa has
been shielded, to some degree, from these increases by the exchange rate and the bumper
maize crop. Domestic maize prices have been increasing since the middle of 2010, but in
January 2011 were still about 11 per cent lower than a year ago. By contrast, South Africa is a
net importer of wheat, which has increased in price by almost 40 per cent over the past year.
Although producer price developments suggest that domestic food price inflation will remain
low in the short term, these global developments, unless reversed, will inevitably impact on
consumer food price inflation.
Administered prices and wage settlements remain upside risks to the inflation outlook. Although
wage increases have moderated slightly over the past months, they are still significantly in
excess of the current and expected inflation outcomes. According to Statistics South Africa,
the year-on-year rate of increase in average nominal remuneration per worker in the formal
non-agricultural sector declined from 15,8 per cent in the second quarter of 2010 to 12,6 per
cent in the third quarter. Once labour productivity developments are accounted for, unit labour
cost increases amounted to 10,9 per cent and 9,3 per cent in these two quarters respectively.
According to Andrew Levy Employment Publications, the average wage settlement in the first
nine months of 2010 amounted to 8,3 per cent compared with 9,3 per cent in 2009.
The current level of the repurchase rate is at its lowest level in nominal terms in over 30 years,
while the real interest rate is at a level below 1 per cent. This has helped with the recovery
in consumption expenditure and should also stimulate domestic investment and growth
by reducing the cost of borrowing. However, low interest rates on their own cannot ensure
sustainably higher long-run trend growth and employment creation.
The MPC has taken note of the improving growth outlook for the economy, and is of the view
that the recovery in domestic consumption expenditure will be sustained. While there are
increasing risks to the inflation outlook, they emanate primarily from external cost–push factors,
and inflation is expected to remain within the target range until the end of the forecast period.
The MPC has therefore decided to keep the repurchase rate unchanged at 5,5 per cent per
annum. At this stage there are no signs of incipient excess demand in the economy, and unless
there are significant unexpected changes in the global or domestic outlook, the monetary policy
stance is expected to remain relatively stable for some time. The MPC will continue to monitor
developments closely and stands ready to act should the need arise.
Monetary Policy Review May 2011

Statement of the Monetary Policy Committee
24 March 2011
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
The domestic growth prognosis has improved, and the recovery is expected to be sustained,
although not at rates sufficient to make appreciable inroads into the unemployment situation in
South Africa. Household consumption expenditure has been the main driver of growth, whereas
growth in fixed capital formation has remained weak. At this stage, there are no discernible
inflationary pressures coming from the demand side of the economy.
The global recovery appears to have remained on track, but the unresolved European sovereign
debt crisis, rising international oil prices, partly a result of geo-political events, and the tragic
events in Japan may moderate the pace of recovery in the near term. Global inflation risks have
also increased, particularly in emerging-market economies, a number of which have tightened
their monetary policy stances in recent months.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas measured 3,7 per cent in January and February. Food price inflation, while still low, has
been increasing. In February it measured 3,5 per cent and contributed 0,6 percentage points to
the overall inflation outcome. On a month-on-month basis, food prices declined by 0,1 per cent.
Housing and utilities, primarily electricity, contributed 1,5 percentage points to the outcome.
Petrol prices increased at a year-on-year rate of 12,3 per cent, while administered prices
excluding petrol increased by 9,1 per cent. CPI inflation excluding administered prices was
unchanged at 2,7 per cent, while CPI inflation excluding food and petrol measured 3,4 per cent.
Year-on-year producer price inflation continued its recent downward trend in January
when it measured 5,5 per cent, compared with 5,8 per cent in December 2010. Food price
pressures remained relatively subdued in January despite marked increases in global food
prices. Manufactured food and agricultural prices increased by 1,5 per cent and 0,5 per cent
respectively. This suggests that food price increases at the consumer price level may be
moderated in the near term.
The trajectory of the Bank’s CPI forecast has changed somewhat since the MPC’s previous
meeting. Nevertheless, inflation is still expected to remain within the target range over the entire
forecast period. Inflation is now expected to average 4,7 per cent in 2011 and 5,7 per cent in
2012. This represents an upward adjustment of approximately half a percentage point in 2012.
Inflation is expected to peak at 5,8 per cent in the first quarter of 2012 before declining to
5,6 per cent in the fourth quarter. The upward adjustment is mainly due to revised assumptions
regarding the international oil price over the forecast period.
The survey conducted by Reuters also reflects a moderate upward adjustment in the inflation
forecasts. In the February survey the mean forecast of CPI inflation increased by 0,2 percentage
points to 4,7 for 2011, and by 0,4 percentage points to 6,0 per cent for 2012. Inflation expectations
for 2013 remained more or less unchanged at around 5,7 per cent. Break-even inflation rates
have increased to above the 6 per cent level over the longer-term maturities.
Inflation expectations as reflected in the survey conducted by the Bureau for Economic Research
(BER) at Stellenbosch University in the first quarter of 2011 also indicate a slight deterioration
in financial analysts’ expectations. However, there was some improvement in the expectations
of business executives and trade unionists. Inflation is now expected to average 5,3 per cent
in 2011 and 5,7 per cent in 2012, compared with 5,5 per cent and 6,2 per cent in the previous
survey. Inflation is expected to average 6,0 per cent in 2013. While all categories of respondents
expect inflation to remain within the target range in 2011 and 2012, business and trade union
expectations average 6,2 per cent in 2013, compared with 5,6 per cent for financial analysts.
The global economic recovery, although uneven, is expected to continue, led by a strong
performance in global manufacturing. However, significant downside risks remain, due to the

Monetary Policy Review May 2011
confluence of shocks that have the potential to stall the nascent recovery. These shocks include
higher international oil prices, driven in part by events in the Middle East and North Africa, and
the recent disasters in Japan, which could have a negative impact on the global manufacturing
supply chain. The sovereign debt crisis in the euro area remains a concern, with credit default
swap (CDS) spreads signalling increased risks of sovereign debt defaults. The United States’
(US) outlook appears favourable, but the weak housing market and the ability of the economy to
sustain growth once the fiscal stimuli dissipate during the year are some of the risks that persist.
Growth in emerging markets remains robust, but Asian economies in particular may be negatively
impacted by the recent developments in Japan. The global growth outlook may also be dependent
on the extent to which the authorities in China manage to slow their economy down.
The global inflation outlook has also deteriorated somewhat in the face of higher oil and food
prices, although in some of the advanced economies there is a marked divergence between
core and headline inflation. This reflects the relatively weak underlying demand conditions,
and the generally accommodative monetary policies in these countries. In the faster-growing
emerging markets, inflation pressures are more pronounced and monetary policy tightening has
become more widespread.
The strong capital inflows to emerging markets that were a feature of most of 2010 have slowed
down and in some instances reversed. South Africa has also experienced net sales of bonds
since November, and in the year to date, net sales of bonds and equities by non-residents
have amounted to R19,2 billion. Despite these net sales and the continued purchase of foreign
exchange by the Bank, the rand exchange rate has remained firm but volatile.
The rand exchange rate has remained relatively unchanged since the previous meeting of the
MPC, but has fluctuated between R6,80 and R7,33 per US dollar during this period. Part of
the recent strength of the rand can be ascribed to US dollar weakness. During this period, the
US dollar depreciated by almost 5 per cent against the euro, despite rating downgrades in a
number of euro area countries. Since the previous meeting, the rand has depreciated by over
3,0 per cent against the euro and by about 1,0 per cent on a trade-weighted basis.
Domestic growth prospects appear to have improved moderately. Real gross domestic product
(GDP) grew by 2,8 per cent in 2010, and at an annualised rate of 4,4 per cent in the fourth quarter.
The Bank’s forecast has increased somewhat since the previous MPC meeting, with GDP
growth now expected to average 3,7 per cent and 3,9 per cent in 2011 and 2012 respectively.
These growth rates, while an improvement, are still too low to have a significant impact on the
unemployment rate, which measured 24,0 per cent in the fourth quarter of 2010. According to
Statistics South Africa, formal non-agricultural employment increased by approximately 65 000
jobs in that quarter. The more favourable growth performance was driven mainly by the mining
and manufacturing sectors.
A number of high-frequency indicators suggest that the growth momentum will be sustained.
The composite leading business cycle indicator has maintained its positive trend, and the
Kagiso/BER Purchasing Managers Index has remained above the neutral level since November
2010, suggesting a favourable outlook for the manufacturing sector. The physical volume
of manufacturing production increased at a moderate year-on-year rate of 1,3 per cent in
January, but the three-month-on-three-month rate increased by 2,8 per cent. However, output
levels are still below those achieved before the crisis and the sector remains characterised
by underutilised capacity. The utilisation of production capacity increased from 79,2 per cent
in the third quarter of 2010 to 80,7 per cent in the fourth quarter compared with a pre-crisis
average of around 85 per cent.
Output in the mining sector has maintained its general upward trend, notwithstanding the 1,9 per
cent month-on-month decline in January. Reflecting these developments, the Rand Merchant
Bank/BER business confidence index increased significantly in the first quarter of 2011 to reach
a level above neutral for the first time in three years. The building sector was the only sector in
which negative sentiment was recorded. This is consistent with the quarter-on-quarter decline
in the real value of new building plans passed in the fourth quarter of 2010, and the persistently
low level of the First National Bank (FNB) civil construction index.
Monetary Policy Review May 2011

Domestic growth prospects will also be dependent on developments in gross fixed capital
formation, which declined by 3,7 per cent in 2010 and made a negative contribution to GDP in
that year. In the fourth quarter of 2010 an annualised increase of 1,5 per cent was recorded.
Capital expenditure by public corporations increased by 3,3 per cent in the fourth quarter of
2010, while private-sector investment, which declined by 4,4 per cent over the year, grew at an
annualised rate of 1,6 per cent in the same quarter.
The relatively weak capital expenditure growth contributed to the decline in imports which,
along with improved commodity prices, allowed for a marked decline in the deficit on the
current account of the balance of payments to 0,6 per cent of GDP in the fourth quarter of
2010. However, should capital expenditure pick up, as envisaged by the public corporations,
the current-account deficit is likely to widen.
Real final consumption expenditure by households increased by 5,1 per cent in the final quarter
of 2010, indicative of continued positive consumer sentiment and positive disposable income
growth. This category of expenditure made the largest contribution – 2,8 percentage points – to
growth in GDP during the year. There are indications that although consumption expenditure
growth will remain relatively robust, it is unlikely to accelerate to excessive levels in the short term.
The FNB/BER consumer confidence index declined in the first quarter of 2011, but still remains
at a relatively high level. This was consistent with the decline in confidence, albeit from high
levels, evident among retailers in the business confidence index, and the retail trade sales
growth in January, which was below market expectations. Expenditure on durable goods, in
particular new motor vehicles, has been strong.
Consumption expenditure is expected to be constrained to some extent by the continued high
levels of household indebtedness, which declined marginally to 77,6 per cent of disposable
income in the fourth quarter, and the further increase in the number of consumers with impaired
credit records since the implementation of the National Credit Act. Banks’ ratio of impaired
advances to gross loans and advances has remained relatively unchanged at around 5,8 per
cent for some time.
Bank credit extension to the private sector has remained subdued. Total loans and advances
by banks to the private sector have been growing at an annual rate of around 4 per cent since
September 2010, driven largely by mortgage loans and general loans, mainly to the household
sector. Growth in mortgage advances, however, declined from 4,8 per cent in November 2010,
to 3,8 per cent in January 2011, reflecting the subdued state of the property market.
The various house price indices all indicate that house prices are either falling or increasing at
very low nominal rates. This, combined with the recent decline in equity prices, may contribute
to a moderation of the impact of wealth effects on consumption.
The recent national government budget tabled before parliament indicates a moderately looser
fiscal policy stance through a slower pace of fiscal deficit reduction compared with that in
the October 2010 Medium Term Budget Policy Statement (MTBPS). The fiscal deficit is now
estimated to decline to 3,8 per cent of GDP by the 2013/14 fiscal year compared with 3,2 per
cent in the MTBPS. The government debt-to-GDP ratio is expected to peak at 43,1 per cent in
2013/14, which is much lower than the internationally acceptable norm of around 60 per cent.
High real wage settlements have been a significant upside risk to the inflation outlook. However,
there are indications that nominal wage settlement rates may be moderating. According to
Andrew Levy Employment Publications, the overall average wage settlement rate in collective
bargaining agreements amounted to 8,2 per cent in 2010, compared with a rate of 9,3 per cent
in 2009. Similarly, the downward trend in year-on-year growth in unit labour costs continued
into the fourth quarter of 2010 when it measured 7,7 per cent, compared with 9,3 per cent in the
previous quarter. This positive trend, if continued, may contribute meaningfully to attaining an
environment of low inflation and employment creation.

Monetary Policy Review May 2011
The biggest risks to the inflation outlook remain food and administered prices, in particular oil
prices. International oil prices had already accelerated in the latter part of 2010 in response to
strong global demand and this upward trend has been reinforced by the geopolitical events in
the Middle East and North Africa, which have raised concerns about the security of oil supplies.
Should these political issues be resolved soon, the underlying demand pressures are likely to
still keep oil prices at relatively elevated levels. Since the previous MPC meeting, Brent crude oil
prices have increased by almost US$20 per barrel. Domestic petrol prices have increased by
just under R1 per litre since January 2011, and a further upward adjustment is expected in April,
in addition to the increased fuel levy.
The MPC is of the view that the risks to the inflation outlook are on the upside. However, these
risks and underlying pressures are mainly of a cost–push nature. 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. Given the significant upside risks to the inflation outlook, the MPC will closely monitor any
indications of second-round effects on inflation emanating from these cost pressures.
Monetary Policy Review May 2011

Statement of the Monetary Policy Committee
12 May 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 MPC, the inflation outlook has deteriorated further, mainly
as a result of external cost–push factors. Underlying demand conditions remain relatively
restrained, and are not seen to pose a significant risk to the inflation outlook at this stage.
However, there are elevated risks that these external price shocks could ultimately feed through
to more generalised inflation.
The domestic economic recovery has been sustained, although still at relatively moderate rates,
and there are no signs of a significant increase in employment. Moreover, the international outlook
remains uncertain, and the economic recovery has become more hesitant in the past weeks,
in the wake of renewed concerns about peripheral Europe, the earthquake in Japan and higher
commodity prices.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas
increased to a higher-than-expected level of 4,1 per cent in March 2011, from 3,7 per cent in
February. The main contributions to the inflation outcome came from food, housing and utilities,
and transport which, together, accounted for 2,9 percentage points. Food price inflation increased
markedly to a year-on-year rate of 5,1 per cent from 3,5 per cent in February, while petrol and
electricity prices increased at rates of 16,9 per cent and 19,3 per cent respectively. Administered
price inflation excluding petrol remained unchanged at 9,1 per cent. Underlying inflation pressures
remained relatively stable, and in February and March CPI inflation excluding food and petrol
measured 3,4 per cent; the lowest rate since September 2006.
Year-on-year producer price inflation reversed its recent downward trend and measured 6,7 per
cent and 7,3 per cent in February and March respectively. Electricity, mining and quarrying, and
products of petroleum and coal were the main contributors to this upward trend. In contrast to
developments at the CPI level, food price pressures remained relatively subdued in February and
March. Agricultural and manufactured food prices increased by 2,7 per cent and 2,9 per cent
respectively in March.
Since the previous meeting of the MPC, there has been a further upward revision to the Bank’s
CPI forecast. Inflation is now expected to reach the upper limit of the inflation target range during
the final quarter of 2011 and to peak at 6,3 per cent in the first quarter of 2012, before returning
to within the target range by the second quarter of 2012 and remaining close to the upper limit
of the range for the rest of that year. Inflation is expected to average 5,1 per cent in 2011 and
6,0 per cent in 2012, compared with averages of 4,7 per cent and 5,7 per cent forecast at the time
of the previous meeting. The upward adjustment is mainly due to revised assumptions regarding
administered price increases over the forecast period.
The survey of market analysts conducted by Reuters also reflects a further upward adjustment
in the inflation forecasts. In the April survey the mean forecast of CPI inflation measured 5,0 per
cent for 2011, and 5,8 per cent for 2012; up from 4,8 per cent and 5,7 per cent respectively in the
March survey. Expectations for 2013 were unchanged at 5,7 per cent. The break-even inflation
rates, as reflected in the yield differential between conventional government bonds and inflationlinked bonds have also exhibited an upward trend.
The global economic environment continues to be characterised by uneven recoveries within
and across regions. Growth prospects in a number of the advanced economies, including the
United States (US), the United Kingdom and some European economies remain uncertain in the
face of the need for fiscal consolidation and risks posed by higher commodity prices, which have
the potential to destabilise inflation and growth. Unemployment has also remained persistently
high in a number of industrialised countries, notably in the US and Spain. Spending in Europe,
in particular, has been constrained in part by the undercapitalisation of a significant portion of

Monetary Policy Review May 2011
the banking sector. There are heightened concerns about the ability of some of the peripheral
European countries, particularly Greece, Ireland and Portugal, to meet their debt obligations and
this poses a systemic risk to the region. Lower growth in Japan and the disruption to the global
supply chain caused by the earthquake and its aftermath are also likely to impact negatively on
near-term global growth prospects.
By contrast, growth in emerging markets has generally remained strong, with evidence of
overheating in some countries, particularly in Asia and Latin America.
Global headline inflation has increased, driven primarily by higher food and other commodity prices,
particularly oil. In advanced economies core inflation appears to be generally subdued against
the backdrop of persistent output gaps. However, in a number of emerging market economies,
supply-side pressures have been accompanied by strong aggregate demand pressures and
above-trend growth, resulting in a generally tighter monetary policy environment.
Since the MPC’s previous meeting, the exchange rate of the rand against the US dollar has
been relatively volatile. During this period, the rand fluctuated in a range of R6,95 and
R6,54 against the US dollar, and on a trade-weighted basis the rand depreciated by 0,9 per
cent. These developments were affected to a significant extent by the depreciation of the US
dollar against other currencies, driven in part by the expected continuation of the accommodative
stance of monetary policy in the US. The relatively strong rand exchange rate persisted despite
continued purchases of foreign exchange by the Bank.
Other factors underpinning rand strength during this period included strong commodity prices,
the narrower current-account deficit and a resumption of portfolio flows to South Africa. Since the
beginning of April, non-residents have purchased around R27,1 billion worth of domestic bonds
and equities, and net purchases year to date stand at R14,5 billion. This marked a reversal of the
negative trend in portfolio capital flows experienced by South Africa and some other emerging
markets since the final quarter of 2010.
Domestic economic growth is lower than that of our emerging-market peers. The Bank’s forecast
for economic growth is 3,6 per cent (previously 3,7 per cent) and 3,9 per cent for 2011 and 2012
respectively. The composite leading business cycle indicator of the Bank is suggestive of the
continued recovery in the economy. Manufacturing sector output growth has improved somewhat
against the backdrop of positive business confidence. In March the year-on-year increase in the
physical volume of manufacturing output measured 4,6 per cent, compared with 5,7 per cent in
February. On a three-month on three-month basis, the increase was 4,0 per cent.
Consistent with this recovery, the Kagiso Purchasing Managers Index has remained above the
neutral level since November 2010, although the positive trajectory seen in the past few months
was reversed marginally in April. Despite these positive developments, the level of output remains
below that attained before the global crisis and the sector remains characterised by underutilised
capacity. The utilisation of production capacity measured 79,4 per cent in February 2011,
compared with 81,6 per cent in November 2010 and 78,4 per cent in February 2010.
Mining output has been more subdued in the past months. Mining production declined by
1,4 per cent on a year-on-year basis in March, but when comparing the three months to March
with the preceding three months, an increase of 0,4 per cent was recorded. The construction
sector also remains under pressure, with the real value of building plans passed declining by
18,2 per cent on a month-to-month basis in February, and by 13,1 per cent on a year-on-year
basis. The First National Bank (FNB) Civil Construction Index continued the downward trend that
has been evident since 2008.
The positive momentum observed in the past few quarters in the growth in household consumption
expenditure appears to have been sustained. However, these levels are not giving rise to any
obvious inflationary pressures and there are tentative signs that this momentum may be levelling
off. Year-on-year real retail sales growth moderated from 6,3 per cent in January to 5,6 per cent in
February. On a month-on-month basis, real retail sales declined by 1,0 per cent in February, but
increased by 2,2 per cent when comparing the three months to February 2011 with the previous
three months. Year-on-year growth in new vehicle sales declined to 8,0 per cent in April, from
Monetary Policy Review May 2011

22,8 per cent in March. This slowdown has been ascribed to the high number of public holidays
in that month and to the impact of the disaster in Japan on the sector.
Growth in credit extension to the private sector remains relatively subdued. The twelve-month
growth rate of total loans and advances to the private sector measured 5,3 per cent in March,
but annualised growth in the first quarter of 2011 declined to 4,5 per cent, from 5,4 per cent in
the previous quarter. Growth was driven mainly by other loans and advances, particularly general
loans, and by a recovery in instalment sale and leasing finance, reflecting strong motor vehicle
sales. Twelve-month growth in mortgage advances declined from a recent high of 4,8 per cent
in November 2010 to 2,9 per cent in March 2011, consistent with the continued weakness in the
housing market.
Credit extended to the corporate sector increased at a year-on-year rate of 2,3 per in March 2011,
compared with 1,3 per cent in January, amid tentative indications that banks may have relaxed
their risk premiums somewhat. Demand for credit by the household sector remains constrained
by high debt levels and the high number of consumers with impaired debt records. The ratio
of impaired advances to gross loans and advances has remained at around 5,8 per cent since
December 2010, mainly attributable to retail debt. The fact that this ratio has not declined further
over the past six months is cause for concern.
According to the Quarterly Labour Force Survey published by Statistics South Africa, the
unemployment rate in the first quarter of 2011 stood at 25,0 per cent, marginally lower than the
25,2 per cent measured in the first quarter of 2010. Despite the unfavourable employment
environment, wage settlements and unit labour cost increases remain at levels in excess of inflation.
According to Andrew Levy Employment Publications, the overall average wage settlement rate in
collective bargaining agreements amounted to 8,2 per cent in the first quarter of 2011. Unit labour
costs increased by 7,7 per cent in the fourth quarter of 2010, with labour productivity growth
declining from 3,1 per cent in the third quarter to 2,2 per cent in the fourth quarter.
The main risks to the inflation outlook continue to emanate from cost–push pressures, including
administered prices. The acceleration in food price inflation is expected to persist for some time,
despite indications that global food price inflation may have peaked.
The international oil price has also displayed a marked degree of volatility in the past week, when
prices fell by as much as US$13 in one day. Having risen sharply over recent weeks, the price of oil
reached a peak of around US$126 per barrel. The price of Brent crude oil today, 12 May, has fallen
and is about US$3 per barrel lower than that prevailing at the time of the previous MPC meeting.
While international oil prices are not expected to decline further in the near term, it is unclear if
prices will consolidate at current levels, or if they will continue on their upward path. In the past
two months the domestic petrol price has increased by 8,8 per cent, and by 17,4 per cent since
the beginning of the year.
The MPC continues to be of the view that the underlying inflation pressures are mainly of a cost–
push nature. These developments are expected to result in a temporary breach of the upper limit
of the target band during the first quarter of 2012. It is recognised that these pressures have the
real potential to generate second-round effects, which can result in more generalised inflation.
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. Given the upside risks to the inflation outlook, the MPC will
monitor closely any indications of second-round effects on inflation emanating from these cost
pressures. The MPC will not hesitate to respond in a timely manner to signs that threaten to move
inflation out of the target range on a sustained basis. In addition, the MPC will remain vigilant with
respect to any inflation risks that could emanate from domestic demand developments.

Monetary Policy Review May 2011
Abbreviations
Alsi
All-Share Index
API
administered price index
BCI
Business Confidence Index
BER
Bureau for Economic Research [of Stellenbosch University]
BIS
Bank for International Settlements
BoE
Bank of England
BoJ
Bank of Japan
BRICS Brazil, Russia, India, China and South Africa
CDS
credit-default swap
Copom Monetary Policy Committee [Brazil]
CPI
consumer price index for all urban areas
ECB
European Central Bank
EFSF
European Financial Stability Facility
ESM
European Stability Mechanism
EU
European Union
FNB
First National Bank
FOMC
Federal Open Market Committee
GDP
gross domestic product
HICP
harmonised index of consumer prices
IEA
International Energy Agency
IMF
International Monetary Fund
JSE
JSE Limited
MENA
Middle East and North Africa
MPC
Monetary Policy Committee
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
REER
real effective exchange rate
RMB
Rand Merchant Bank
S&P
Standard & Poor’s
UK
United Kingdom
US
United States
WEO
World Economic Outlook
Glossary
the Bank South African Reserve Bank
the Fed
United States Federal Reserve
repo
repurchase
Monetary Policy Review May 2011