Monetary Policy Review
November 2013
South African Reserve Bank
Monetary Policy Review
November 2013
Monetary Policy Review November 2013
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Monetary Policy Review November 2013
Preface
The primary mandate of the South African Reserve Bank (the Bank) is to achieve and
maintain price stability in the interest of balanced and sustainable economic growth. Low
inflation helps to protect the purchasing power and living standards of all South Africans,
and provides a favourable environment for balanced growth, investment and employment
creation. In addition, the Bank has a complementary mandate to oversee and maintain
financial stability. The Bank’s Monetary Policy Committee (MPC) is responsible for
monetary policy decisions and comprises the Governor as chairperson, the deputy governors
and senior officials of the Bank.
Price stability is quantified by the setting of an inflation target range by Government after
consultation with the Bank. The Bank has instrument independence, with the commitment
to pursue a continuous target of 3 to 6 per cent for headline consumer price index inflation.
The MPC conducts monetary policy within a flexible inflation-targeting framework that
allows inflation to be temporarily outside the target range.
The MPC takes into account a viable medium-term time horizon for inflation and considers
the time lags between policy adjustments and economic effects. This provides for interest
rate smoothing over the cycle, and contributes towards more stable economic growth. The
repurchase (repo) rate decision reflects the MPC’s assessment of the appropriate monetary
policy stance.
The decision of the MPC, together with a comprehensive statement, is announced at a media
conference at the end of each bimonthly meeting. This outlines the MPC’s assessment of
prevailing global and domestic economic conditions, as well as forecasts for inflation and
real economic activity.
The Monetary Policy Review (MPR) is published twice a year and is aimed at broadening
the understanding of the objectives and conduct of monetary policy. The MPR reviews
domestic and international developments that have affected inflation and that impact on the
monetary policy stance. It also provides an assessment of the factors determining inflation
and the Bank’s forecast of the future path of inflation and economic growth. The MPR
is presented by the Governor and senior officials of the Bank at Monetary Policy Forums
(MPFs) in various centres across South Africa, in an effort to develop a better understanding
of monetary policy through direct interaction with stakeholders.
Contents


Frequently asked questions
FAQ 1: At what point does the Monetary Policy Committee become concerned


FAQ 3: Why has the current account of the balance of payments been slow to

Boxes
Box 1

Box 2
The impact of the global financial and economic crisis on South Africa’s

Appendices


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


Monetary Policy Review November 2013
Monetary Policy Review November 2013
Figures
Figure 1

Figure 2

Figure 3

Figure 4

Figure 5
Indicator of the probability that inflation will be above the 6 per cent

Figure 6

Figure 7

Figure 8

Figure 9

Figure 10

Figure 11

Figure 12

Figure 13


Figure 14

Figure 15

Figure 16

Figure 17
Utilisation of production capacity in the manufacturing sector and

Figure 18


Figure 19

Figure 20
Risk premiums of South African government bonds and the exchange rate.

Figure 21

Figure 22

Figure 23

Figure 24

Figure 25

Figure 26

Figure 27

Figure 28

Figure 29

Figure 30
Remuneration per worker and unit labour cost in the formal


Tables
Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8


Table 9

Table 10

Table 11

Table 12

Monetary Policy Review November 2013
Executive summary
Monetary policy stability in an uncertain environment
South Africa’s monetary policy has provided stability through a period of unprecedented
global and domestic uncertainty. Looking beyond the recent temporary breach of the
upper limit of the inflation band, the Bank’s medium-term forecast projects inflationary
pressures to moderate alongside a gradual economic recovery. From 2015, the output gap
– the difference between the potential growth rate of the economy and its realised rate of
growth – should slowly narrow. Subdued but improving global economic growth will lend
some medium-term stability to oil and commodity prices. The value of the rand is expected
to remain range-bound but volatile, consistent with the ongoing high level of uncertainty
in the global economy. The monetary policy stance has remained stable as reflected by the
unchanged low repo rate of 5 per cent per annum. Although inflation is expected to remain
within the target range, the MPC has become increasingly concerned about upside risks to
the forecast.
The primary challenge to price stability lies in the volatility of food and petrol prices, which
is exacerbated by exchange rate movements. Higher inflation outcomes have resulted in
a gradual rise in inflation expectations, which remain uncomfortably close to the upper
band of the target range. However, in line with the Bank’s forecasts, these are expected
to moderate alongside headline inflation over the medium term. A sustained divergence
between the Bank’s forecasts and expectations would raise concerns about the anchoring of
inflation expectations.
Rand depreciation continues to be the main upside risk to the domestic inflation outlook,
although the pass-through from currency movements to headline inflation has proven to
be relatively muted since the onset of sustained depreciation in May 2011. Core inflation,
however, has tracked higher and is the focus of heightened scrutiny. Stronger second-round
effects from depreciation and sharp increases in unit labour costs would have significant and
negative effects on the inflation outlook. These developments reinforce the policy dilemma
amid the weaker growth outlook. A significant deterioration in the risks to the mediumterm inflation outlook may necessitate appropriate action to anchor inflation expectations.
Global economic and financial conditions remain challenging
Since the publication of the previous Monetary Policy Review (MPR) in June 2013, growth
momentum in the global economy has shifted to a few systemically important advanced
economies. In these countries, monetary policies have remained highly accommodative
and certain markets (especially labour and housing) have improved, despite ongoing fiscal
consolidation that weighs on growth. In the United States (US), conflict over how best to
proceed with fiscal consolidation and the need for periodic increases in the government’s
borrowing limit continue to weaken confidence. Global inflation has remained largely
benign, although the spectre of deflation has re-emerged in the euro area, prompting a cut
in the policy rate by the European Central Bank on 7 November.
Despite slower growth, price pressures began to appear in some emerging-market and
developing economies, due in part to currency weakness caused by capital flow reversals.
These reversals arose owing to speculation about the timing and impact of the future
reduction in the US Federal Reserve’s (the Fed) quantitative easing (QE) programme. The
existing tighter financial market conditions (which are expected to persist) amplify the
challenge for policymakers in key vulnerable economies to address higher inflation, slower
growth and, in some cases, large current-account imbalances. The Fed might be able to
mitigate the impact of QE tapering through clear forward guidance and a phased approach,
but this will ultimately depend on financial market interpretation and the credibility of
this guidance.
Monetary Policy Review November 2013

Domestic economy subdued amid uncertainty
Global conditions have had a major impact on South Africa in 2013, affecting key external
variables and domestic economic outcomes. Changes in risk perceptions were apparent in
reduced capital inflows and higher bond yields. Lower commodity prices and weak external
demand interacted with a resurgence in labour market instability and fragile investor
sentiment to constrain exports and aggregate economic growth. Subdued employment
growth and household credit demand have contributed to a loss of momentum in economic
activity and under-utilisation of production capacity. Short-term demand- and supply-side
indicators suggest fragile and below-potential economic growth through to 2015, with the
balance of risks to the downside.
South Africa’s current-account deficit persists, with sustained deficits on both the trade
account and the services, income and current transfer account. The South African Revenue
Service (SARS) announced revisions to its trade statistics, which will now include data on
trade with Botswana, Lesotho, Namibia and Swaziland. The Bank’s revision of the current
account, incorporating SARS’s new trade statistics, will be published in the December 2013
Quarterly Bulletin.
As both a cause of downward pressure on the value of the currency and a contributor to
volatility when international contagion is triggered, the size of the current-account deficit
remains a risk factor. A better balance between investment and saving would help to
reduce risk and volatility. So too would a revival of global growth, which, together with
a competitive exchange rate, should contribute towards some rebalancing of exports and
imports. Risk could be further mitigated if higher global interest rates result in a build-up of
South Africa’s net foreign assets.
New format of the Monetary Policy Review
This MPR is presented in a new format. It includes frequently asked questions (FAQs),
technical appendices to aid the interpretation of the Bank’s forecasts, as well as a
comprehensive glossary. The FAQs convey the views of the MPC on the rand exchange rate
(FAQ 1), on inflation expectations (FAQ 2) and on the current-account deficit (FAQ 3). In
addition, some topical issues are discussed in boxes. These include tracking of South Africa’s
economic recovery (Box 1) and the impact of the global and financial crisis on South Africa’s
potential output (Box 2).

Monetary Policy Review November 2013
Monetary policy stance and evolution
of the forecast
The monetary policy stance has remained stable since July 2012, reflecting
the fragility of South Africa’s recovery amid continued uncertainty and
volatility. Headline consumer price inflation crossed the upper edge of the
inflation target band but is forecast to remain within the band in the near
term. This section reviews the evolution of the monetary policy stance since
the publication of the previous MPR. It also assesses the outlook for the
trajectories of domestic inflation and economic growth over the Bank’s
forecast horizon.
Policy rate and inflation outcomes
The repurchase (repo) rate was left unchanged at 5 per cent at the November
meeting of the MPC. The nominal repo rate remains at a historically low
level set in July 2012, and followed a lengthy period (from November 2010
to July 2012) during which it was fixed at 5,5 per cent. The real repo rate1
has been negative since November 2010, and reflects a sustained period of
accommodative monetary policy. Given a relatively volatile inflation rate
driven primarily by exogenous factors and a negative output gap, the
monetary policy stance strikes an appropriate balance between the risk of
higher inflation and support for the domestic economic recovery.
Consumer price inflation
Headline consumer price index (CPI) inflation2 – the measure targeted by
the Bank – remained within the inflation target range for 14 consecutive
months up to June 2013. In line with other emerging-market economies,
domestic consumer price inflation began to rise gradually from mid-2012,
with food and petrol prices accelerating, and currency depreciation risk
evident. Headline CPI inflation increased from a recent low of 4,9 per cent
in July 2012 to peak at 6,4 per cent in August 2013.
CPI inflation returned to the upper end of the target range at 6,0 per cent in
September and moved to within the target range at 5,5 per cent in October.
Housing and utilities price inflation has remained high, sustaining CPI
inflation. Recent movements in inflation were primarily driven by transport
prices, which were affected by petrol price volatility. Goods inflation
generally increased over 2013, but with considerable volatility. Services
prices, which have risen more strongly during 2013 than goods prices and
average headline CPI inflation, lost some momentum over the year.
Core inflation3 accelerated from 4,5 per cent in July 2012 to 5,3 per cent in
May 2013, and has remained stable since. In the absence of obvious excess
demand pressures, administered price pressures (particularly petrol),
lagged effects of rand depreciation and higher unit labour costs contribute
to upside risk in core inflation.

The real repo rate is negative when the nominal repo rate is below the expected inflation rate (12 months ahead).

This refers to the 12-month change in the headline CPI.

Core inflation in this case refers to headline CPI excluding food, non-alcoholic beverages (NAB), petrol and
energy prices.
Per cent

Figure 1
The repurchase rate and other

short-term interest rates

Prime overdraft rate

Three-month negotiable certificates of deposit rate

Repurchase rate
Source: South African Reserve Bank

Figure 2
Consumer price inflation:

Targeted inflation*
* CPI for all urban areas
Source: Statistics South Africa

Percentage change over 12 months

Monetary Policy Review November 2013

Petrol and food prices
Petrol price inflation has been volatile in 2013, ranging from a year-on-year
change of 1,8 per cent in May to a high of 23,0 per cent in August. This
volatility was largely driven by movements in international product prices
and the rand, both of which affect the basic fuel price. The monthly
contribution of petrol to CPI inflation increased to over 1,25 percentage
points in July and August, more than double the average contribution of
0,56 percentage points for the first six months of 2013. By November
changes in petrol prices moderated to 7,6 per cent, alleviating inflationary
pressures somewhat.
Global oil prices have remained high despite the subdued global growth
outlook. In August oil prices broke through the US$100 to US$105 trading
range to a six-month high of US$117. These then moderated to around
US$110 in response to political developments in the Middle East.
International food prices have stabilised over the year, in part due to
expectations of better harvests. The level of food prices nonetheless remains
high and the cost of food globally is about 75 per cent higher relative to 2005.
South African consumer food price inflation re-emerged in early 2013. It
peaked at 7,4 per cent in August (contributing 1,1 percentage points to CPI
inflation), driven by rising bread and cereals prices and vegetable prices. Food
price inflation surprised on the downside and moderated to 4,2 per cent
in October.
Table 1 Contributions to targeted inflation
Percentage change over 12 months* and percentage points

Weights
Apr
May
Jun
Jul
Aug
Sep
Oct

Targeted inflation*......................... 100,00

Of which:
Food and non-alcoholic beverages

Source: Statistics South Africa and own calculations
Evolution of the inflation outlook
Over the forecast horizon, the trajectory of South Africa’s inflation is
expected to remain within but close to the upper end of the target range.
The Bank’s forecasts for headline CPI inflation for 2013 reflect a moderate
deterioration since the May meeting of the MPC, followed by a marginal
improvement in November. Upside risks to inflation remained elevated over
the review period.
Percentage change
over 12 months
Percentage change
over 12 months


-9
-6
-3

Figure 3
The petrol price and headline

inflation

Estimated contribution to inflation (percentage

points)

Headline inflation

Petrol price change (right-hand scale)
Sources: Statistics South Africa, Department of
Energy and own calculations

Percentage change
over 12 months
Index: 2002–2004 = 100


Figure 4
International food prices

FAO food price index

Change in FAO food price index

(right-hand scale)
Sources: Food and Agriculture Organization and
own calculations

Monetary Policy Review November 2013
Under the assumption of prolonged currency weakness, the trajectories
of administered price inflation and headline CPI inflation were revised
upwards for 2013 and 2014. The forecast for inflation was revised upwards
for the September MPC meeting, mainly due to petrol prices. From January
2013, inflation forecasts showed consumer price inflation breaking above
6 per cent.
Table 2 The Bank’s targeted inflation forecasts
Per cent

MPC
meetings
Targeted inflation

Expected peak
End of forecast period
5,9
3rd quarter 2013 at 6,3 per cent
at 5,2 per cent in the final quarter of 2014
5,8
3rd quarter 2013 at 6,1 per cent
at 4,9 per cent in the final quarter of 2015
5,9
3rd quarter 2013 at 6,3 per cent
at 5,2 per cent in the final quarter of 2015
5,9
3rd quarter 2013 at 6,3 per cent
at 5,3 per cent in the final quarter of 2015
5,8
2nd quarter 2014 at 5,9 per cent
at 5,3 per cent in the final quarter of 2015
Source: South African Reserve Bank
Figure 5 presents an indicator of the cumulative assessed probability that
inflation will exceed the upper band of the inflation target range.4 The
indicator for the May MPC meeting pointed towards the temporary
breach of the upper band of the target range in the third quarter of 2013.
The subsequent notable drop in the probability indicator for May reflected
the expectation of an improved outlook for inflation over the remainder of
the forecast horizon. However, by November, the upside risks to inflation
negatively affected the outlook, as shown by the generally higher level of
this indicator relative to that of May.
The most recent inflation projections of the Bank’s core quarterly forecasting
model, conditional on an unchanged repo rate assumption, are depicted in
the form of a fan chart, Figure 6.5 The headline CPI inflation forecast
reflects a more-or-less unchanged inflation outlook since September 2013.
This forecast was driven by lower petrol prices as well as expectations that
the value of the rand will remain range-bound and that moderate global
growth would keep commodity prices muted. The longer-term inflation
path remains close to 6 per cent with the balance of risks to the central
projection viewed as being to the upside.
The most recent forecast for core inflation continues to show a near-term
rising trend, with a higher peak of 5,6 per cent in the second half of 2014.
Core inflation is projected to average 5,6 per cent in 2014, slightly higher
than was indicated in the September forecast. The forecast for 2015 remained
unchanged at 5,3 per cent.

See Appendix 1 for a detailed discussion of this probability indicator.

See Appendix 2 on how the MPC uses the fan chart to assess the risks inherent in the forecast and communicates
the uncertainties that lie ahead.
Per cent

Figure 5
Indicator of the probability that

inflation will be above the 6 per

cent upper band of the inflation

target

May 2013 MPC
Source: South African Reserve Bank


November 2013 MPC
Q2 Q3 Q4
Q2 Q3
Q2
Q3 Q4
Q4
Q1
Q1

Figure 6 Targeted inflation* forecast
Per cent
3–6 per cent inflation target range
* CPIX for metropolitan and other urban areas until the end
of 2008; CPI for all urban areas thereafter
Source: South African Reserve Bank

Monetary Policy Review November 2013

Table 3 The Bank’s core inflation forecasts
Per cent

MPC
meetings
Core inflation

Expected peak
End of forecast period
4,8
2nd quarter 2014 at 5,1 per cent
at 4,7 per cent in the final quarter of 2014
5,3
4th quarter 2013 at 5,4 per cent
at 4,5 per cent in the final quarter of 2015
5,3
4th quarter 2013 at 5,5 per cent
at 4,9 per cent in the final quarter of 2015
5,2
4th quarter 2014 at 5,5 per cent
at 5,1 per cent in the final quarter of 2015
5,2
4th quarter 2014 at 5,6 per cent
at 5,1 per cent in the final quarter of 2015
Source: South African Reserve Bank
FAQ 1: At what point does the Monetary Policy Committee
become concerned about the rand?
There is no particular level of the exchange rate that would trigger a monetary
policy response by the MPC. The policy stance may be affected by the extent to
which exchange rate developments impact on the medium-term inflation trajectory.
In practice this means that the MPC would have to take a view on the extent
and duration of the exchange rate depreciation, and the extent and duration of its
impact on inflation. The latter depends on the strength of domestic demand and
the pricing power of firms, which have been exceptionally muted in recent times.
A depreciation that is short-lived and expected to reverse quickly is unlikely to
have much impact on the medium-term inflation path. A good example of this is
the petrol price, where exchange rate pass-through to consumer prices is fast and
complete. Unless there are significant second-round effects, the impact on inflation
will dissipate.
If inflation expectations are not anchored, or if the depreciation is significant over
a sustained period (or both), inflation could be expected to rise above the target
band. This could require a monetary policy reaction, depending on the extent and
duration of the deviation of the inflation trajectory from the target range.
When faced with periods of currency uncertainty and volatility, as is currently
the case, the MPC has to make assumptions about the path of the exchange rate
over the forecast horizon. This is a difficult task given the tendency of the rand
to overshoot. The MPC could change the exchange rate path assumption in the
forecast, leave it unchanged and assign an upside risk to the inflation forecast, or a
combination of these two.
Currently, the risk to the exchange rate posed by possible QE tapering poses a
significant challenge. While tapering will happen, the MPC is uncertain as to when
it will happen, how rapid it will be, and how much of this is already priced-in to
the current exchange rate. Different scenarios regarding the timing and nature of
tapering will result in differing inflation trajectories.
Inflation expectations
The median forecast from the Reuters survey suggests that inflation
expectations for 2013 have oscillated around 6 per cent over the past six
months and that a moderation in inflation will occur across 2014 and 2015.
On balance, expectations of near-term inflation have increased in line with
the rise in actual outcomes.
Per cent
Figure 7
Targeted and core inflation

forecasts

Core inflation

3–6 per cent inflation target range
Source: South African Reserve Bank


Targeted inflation

Monetary Policy Review November 2013
Table 4 Reuters survey of CPI forecasts*
Per cent


(21)

(18)

* October 2013, with June forecasts in parenthesis
Source: Reuters
Inflation expectations remain stable near the upper band of the target range
although the longer-term inflation trajectory is uncomfortably close to the
6 per cent level. The latest Bureau for Economic Research (BER) survey of
inflation expectations for headline CPI shows that combined average expected
inflation is stable around the upper end of the inflation target range.
Figure 9 shows market-determined inflation expectations associated with
break-even inflation rates.6 Both short- and long-term break-even inflation
rates have trended upwards and spiked above 7 per cent in June 2013, before
declining to about 6,5 per cent.
Changes in inflation expectations have moved domestic short-term moneymarket rates, although the Johannesburg Interbank Agreed Rate (Jibar)
remained anchored to, and tracked, movements in the repo rate. In the runup to the May 2013 MPC meeting, the rates on forward rate agreements
(FRAs)7 suggested a decline in short-term interest rates. However, the FRA
rates reversed and increased up to August. Subsequently, money-market
interest rate volatility has increased. The October results from the Reuters
survey of interest rate expectations suggest that the median repo rate is
expected to remain unchanged at 5,0 per cent before increasing by 50 basis
points to 5,5 per cent in the first quarter of 2015.
FAQ 2: Inflation expectations and the policy stance
In an inflation-targeting regime, accountability is enhanced by the setting of a clear
and measurable target. This target helps to anchor short- and long-term inflation
expectations of all stakeholders. The MPC applies inflation targeting in a flexible
manner, allowing for temporary deviations from the target band in the case of oneoff shocks. As long as expectations are anchored, risks to inflation from temporary
deviations are low.
Inflation expectations of stakeholders are influenced by the Bank’s mandate and
conduct, as well as by the present level of inflation. In turn, the level and trajectory of
inflation expectations, and duration above the target band, are important factors in
considering any changes to the monetary policy stance.

The break-even inflation rate proxy for expected inflation is measured as the difference between the nominal yields
on conventional South African government bonds and the real yields on CPI inflation-linked government bonds of
similar maturity.

A forward rate is the expected future interest rate that is implied by the current interest rates. As such, it indicates
the markets’ expectations about the future movements of interest rates.
Figure 8
BER surveys of headline CPI

inflation expectations

Annual average, per cent

Surveys conducted during 2013:

1st qr

2nd qr

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

Figure 9
Break-even inflation rates

Percentage points

Spread between R203 and R211 bonds

(4-year maturity)

Spread between R186 and R197 bonds

(10- to 13-year maturity)
Sources: JSE Limited and own calculations
Per cent
Per cent

Figure 10 Money-market and forward rates

Repurchase rate

3x6 Jibar (FRA)

9x12 Jibar (FRA)

Exchange rate (left-hand scale)
Source: Bloomberg

2012 2013
Rand per US dollar

May
Jun
Jul
Aug
Sep
Oct
Nov Dec

3-month Jibar

6x9 Jibar (FRA)

Monetary Policy Review November 2013

The Bank gains an understanding of inflation expectations principally through a
quarterly survey conducted by the BER. In this survey, economists, business people
and trade unionists are asked about their expectations of inflation over a future
horizon ranging from one to five years. In addition, the MPC considers market
expectations of future inflation from the prices of various financial instruments
that contain this information, such as the break-even rate of inflation. There are,
however, challenges in interpreting expectation measures, as the processes by which
various stakeholders form expectations about future inflation differ.
At present, inflation expectations as measured by the BER survey are marginally
above the target band at 6,1 per cent. If these expectations rise further or stay above
the upper band for a prolonged period, the MPC could consider taking steps to
anchor inflation expectations to within the target band. These steps may range
from a different communications strategy to actual increases in the repo rate.
Evolution of the growth outlook
The outlook for South Africa’s growth remains fragile, with modestly
positive economic growth expected over the forecast horizon, Figure 11.8
The Bank lowered its forecast for real gross domestic product (GDP) growth
for 2013 during the May and July 2013 MPC meetings, and again in
November to 1,9 per cent. Downside risks to the domestic growth outlook
persisted over the period.
Global growth
Concerted policy interventions have stimulated the global economy and
supported the recovery in the wake of the contraction in world output in
2009. Global growth continues to be weak, however, and growth forecasts
scaled down. Within the context of lower global growth in 2013, prospects
for some advanced economies have improved this year, while emergingmarket growth trends remain mixed.
Casting back to 2012, the global economy was expected to grow by 3,6 per
cent in 2013. This forecast was revised downwards to 3,1 per cent in July
2013 and to 2,9 per cent by the International Monetary Fund (IMF). Global
real GDP is currently projected to increase by 3,6 per cent in 2014, revised
downwards from the 3,8 per cent projected earlier in 2013. Growth in 2015 is
expected to be somewhat higher at 4,0 per cent.
Table 5
Global growth rates
Per cent


* Figures for 2013 are estimates
Source: International Monetary Fund, World Economic Outlook, October 2013

See Appendix 2 on how the MPC uses the fan chart to assess the risks to the growth forecast.
Figure 11 Real GDP growth forecast
Percentage change*


* At seasonally adjusted annualised rates
Source: South African Reserve Bank

Monetary Policy Review November 2013
Forecasts for all the BRICS countries – Brazil, Russia, India, China and
South Africa – have been revised down by between 0,3 and 1,0 percentage
points. The outlook for many commodity exporters (including those among
the BRICS) has also deteriorated due to subdued commodity prices.
The Organisation for Economic Co-operation and Development (OECD)
lowered its growth forecasts for developed economies, and now expects the
combined GDP of its members to increase by only 1,2 per cent this year
(down from 1,6 per cent in 2012). More muted growth forecasts align with
the subdued rate of increase in the OECD industrial production index. The
JPMorgan global manufacturing Purchasing Managers’ Index remained
slightly above the neutral level of 50 since December 2012, before increasing
to 52,1 in October 2013.
Macroeconomic policy efforts have been supportive of growth in general,
with some exceptions. In the area of fiscal policy, high deficits and debt
levels have severely limited policy space. Overall, macroeconomic policy
efforts have had mixed global effects, with improved economic growth in
the aggregate alongside considerable volatility in capital flows, currencies
and asset prices for emerging markets. The latter outcomes have also
increased uncertainty and depressed confidence.
Although the timing is uncertain, significant monetary accommodation in
the US will abate. This QE tapering is projected alongside a more robust US
economic recovery, with both accounted for in global growth forecasts.
Over the forecast horizon, a stronger global recovery is expected to feed
through to South Africa’s growth outcomes and provide some buoyancy
that is not evident in current conditions.
The pace of growth in commodity prices is expected to remain subdued,
reflecting the expectation of a gradual global economic recovery. While oil
prices have increased in recent months, a reduction in geopolitical tensions
and rising crude-oil output are expected to lead to a moderation in oil prices
over the near term. These considerations suggest that monetary policy in
many advanced economies will remain relatively expansionary for some
time. Despite the high probability of short-term volatility in currencies and
interest rates, improving global growth outcomes may soften the impact of
QE tapering on the level of global interest rates in the long run.
Domestic growth
Since the previous MPR, uncertainty and fragile global growth have weighed
heavily on domestic growth prospects, largely through their dampening
effect on South African commodity export prices and trade volumes.
Domestic factors have dragged economic growth down further. These
factors include rising inflation, protracted labour unrest and electricity
supply bottlenecks, all of which have constrained household consumption
expenditure, investment and exports.
The pace of domestic economic activity picked up notably to 3,0 per cent
in the second quarter of 2013, rebounding somewhat from the low 0,9 per
cent in the first quarter. The most recent central projections, which assume
an unchanged repo rate, forecast annual growth to average 1,9 per cent in
2013. Furthermore, growth is now expected to average 3,0 per cent in 2014
and 3,4 per cent in 2015, compared with the 3,3 per cent and 3,6 per cent
indicated in the September forecast.
Figure 13 Commodity prices

Indices: 4 January 2010 = 100

Oil

Industrial metals
Source: Bloomberg

Grains

Figure 12 Global growth rates
-6
-3

Per cent

Japan

World

Emerging-market

and developing

economies
Source: International Monetary Fund, World Economic
Outlook, October 2013

United States

Euro area

Sub-Saharan Africa

China


Monetary Policy Review November 2013

Table 6 The Bank’s real GDP growth forecasts
Per cent

MPC
meetings
Real GDP growth

Expected peak
End of forecast period
2,7
1st quarter 2014 at 4,1 per cent
at 3,5 per cent in the final quarter of 2014
2,4
4th quarter 2014 at 3,9 per cent
at 3,9 per cent in the final quarter of 2015
2,0
2nd quarter 2015 at 3,7 per cent
at 3,5 per cent in the final quarter of 2015
2,0
2nd quarter 2015 at 3,7 per cent
at 3,6 per cent in the final quarter of 2015
1,9
2nd quarter 2015 at 3,5 per cent
at 3,5 per cent in the final quarter of 2015
Source: South African Reserve Bank
Business and consumer confidence have fluctuated throughout the year,
indicative of often-negative short-term economic news. Low growth in
disposable income and employment, as well as the current high levels of
household debt, continue to strain consumer confidence. Confidence
among businesses has varied across sectors, but has remained low in general.
Table 7 Domestic economic sentiment indicators
Historic range
Most recent
As at MPR:*
Low
High
Low
High
Jun

Nov


Ernst & Young/BER Retail Confidence Index....


-8

-7
-7
* Improved/Worsened since previous MPR
Sources: Kagiso Securities, Rand Merchant Bank, First National Bank, Ernst & Young and the Bureau for Economic
Research, Stellenbosch University
Household consumption and wealth effects
Household consumption expenditure is influenced by disposable income,
asset prices and credit extension. Growth in both household consumption
expenditure and disposable income edged slightly higher in the second
quarter of 2013. However, these growth rates improved at a slower pace
compared to the past three years, reflecting the constraints on real income of
weak employment growth and elevated inflation. Consumption expenditure
remains impeded by the high ratio of household debt to disposable income
that has declined since its peak in 2009 but levelled off during 2013. Going
forward, household consumption expenditure may be supported to some
extent by wage trends.

Monetary Policy Review November 2013
Table 8 Growth in real expenditure components
Per cent*

Year
Year
1st qr
2nd qr
Final consumption expenditure

* Quarterly data refer to quarter-on-quarter growth at seasonally adjusted annualised rates
** Constant 2005 prices
Source: South African Reserve Bank
Asset prices
Household income remains strongly supported by developments in domestic
share prices, which in rand terms continued along a strong upward trend in
2013. The FTSE/JSE All-Share Price Index (Alsi) continued to scale new
all-time highs to 46 193 index points on 6 November 2013. At these levels,
share prices may incentivise listed companies to raise more capital, which
may in turn support fixed capital formation.
Box 1
Tracking South Africa’s economic recovery
In 2005 South Africa achieved real economic growth above 5 per cent for the year, for the
first time since 1984. This robust economic performance continued until 2007, when the
financial crisis erupted.
As global demand fell in 2008 and 2009, South Africa saw a significant reduction in its real
exports of goods and services. While household expenditure and gross fixed capital
formation declined, the rate of growth of GDP turned negative in the final quarter of 2008
and remained negative during the first half of 2009. Subsequently, South Africa’s economic
growth has been positive, although it took a further year (until the second quarter of 2010)
to reach its pre-crisis level. Since 2008 the average rate of growth has been about
2,0 per cent.
After the creation of about two million jobs in the period 2004 to 2008, the financial crisis
and the ensuing global recession led to one million jobs being lost and a worsening rate of
unemployment. The mining sector’s employment levels remained fairly stable since the
beginning of the crisis, with a brief dip in 2008–2009 but reaching peak levels during 2012.
Although the volume of manufacturing production experienced a slow and steady recovery,
employment in the manufacturing sector fell after the crisis and has remained low ever
since. A range of factors contributed to this, including increasing mechanisation in the face
of tense labour relations and uncertainty about the expected path of the global recovery
(and hence demand for manufactured goods). Consistently positive annual output growth
in the tertiary sector throughout the financial crisis was accompanied by a stable level of
employment in this sector, supported by continued job growth in the public sector.
The global financial crisis did not have a direct and lasting impact on South African financial
markets. The rate of credit extension to households and the private sector did ebb for a
while after the crisis struck, as banks and policymakers adapted to global developments.
Growth in mortgage advances remains muted. This may indicate the reluctance of banks
and borrowers to take on large and longer-term debt contracts. However, most other types
of credit have recovered.
Indices: 2005 = 100
Figure B1.2 Imports and investment

Real gross fixed capital formation

Real imports of goods and services

Source: South African Reserve Bank

Indices: 2005 = 100
Figure B1.3 Exports and production

Real exports of goods and services

Volume of manufacturing production

Volume of mining production
Sources: Statistics South Africa and South African
Reserve Bank

Indices: 2005 = 100
Per cent

-10

Figure B1.1 Employment and

economic growth

Formal non-agricultural employment

Manufacturing employment

Mining employment

Real GDP excluding agriculture

Real GDP growth rate

(right-hand scale)
Sources: Statistics South Africa and South African
Reserve Bank

Monetary Policy Review November 2013

A comparison of the Alsi, in rand and US dollar terms since the beginning
of 2012, shows the impact of the rand’s depreciation on domestic share
prices (mainly through repatriated earnings, rand-hedges, and pricing of
dual-listed shares). In US dollar terms, South Africa’s share prices closely
followed those of commodity-producing Canada and Australia.
The moderate pace of growth in the residential real-estate market seen earlier
in the year lost some momentum. This can be seen in growth in Absa’s
nominal house price index, which decelerated somewhat from a high 11,9 per
cent in April 2013 to 8,1 per cent in October. Growth in real house prices
remained positive from December 2012, but decelerated from 5,7 per cent in
April 2013 to 2,4 per cent in October. Although a marginal expansion in real
house prices is expected, the real-estate market remains constrained by muted
growth in mortgage finance.
Credit conditions
Since November 2010, the low and stable interest rate environment has
supported real growth in overall credit extension. Credit extension by banks
remained broadly in line with money-supply and nominal GDP growth.
More recently, growth in banks’ total loans and advances to the private
sector moderated since the recent peak of 10,0 per cent in December 2012 to
8,4 per cent in September 2013. Mortgage lending, which prior to the crisis
comprised the largest component of credit extended, has remained quite low.
In contrast, instalment sale credit and leasing finance for the acquisition of
vehicles has grown relatively strongly. Support from another main driver,
other loans and advances,9 moderated mainly due to a slowdown in general
loans to 14,7 per cent in September. Slower growth in general loans reflected
weaker household credit demand and increased caution on the part of lenders
who were faced with increased regulatory scrutiny regarding unsecured
loans.10 Credit extension to households is likely to constrain consumption
expenditure in the short- to medium term.
Government expenditure
In real terms, government consumption expenditure grew by 3,3 per cent
in the first half of 2013, compared to 4,0 per cent over the same period of
2012. Non-interest expenditure is expected to grow by an annual average
of 2,2 per cent over the medium-term expenditure framework (MTEF).
The Medium Term Budget Policy Statement maintained the countercyclical
fiscal stance, providing support to close the output gap, while setting out a
consolidation path to reduce the budget deficit over time. The public-sector
wage bill is estimated to decline as a share of total expenditure, contributing
towards fiscal consolidation and the rebuilding of fiscal space to fund new
priorities.
As a ratio of GDP, total net loan debt is expected to stabilise at
44 per cent in 2017/18. Interest payments, consisting on average of 9,1 per
cent of total expenditure annually over the MTEF, is the fastest-growing
item of expenditure in the consolidated budget. Over the longer term,
government has set itself the objective of rebuilding fiscal space by stabilising
and then reducing the ratio of public debt to GDP.

The category other loans and advances consists of general loans and advances, credit card advances
and overdrafts.

To manage risk and limit impairments.
Figure 14 Domestic share prices

Indices: 2 January 2012 = 100
FTSE/JSE:

All-Share Price Index

Industrial Index
Sources: JSE Limited and I-Net Bridge

Resources Index

Financial Index

Indices: 2 January 2012 = 100

Figure 15 International share prices*

South Africa (FTSE/JSE All-Share Price Index)

Australia (ASX All Ordinaries)

Canada (Toronto 300 Composite)
* All indices have been converted to US dollar terms
Sources: JSE Limited, I-Net Bridge, Reuters and
own calculations

Figure 16 Banks’ loans and advances to

the private sector

Mortgages

Instalment sale and

leasing

Real total loans and

advances

Credit extended to

households
-10
-5

Percentage change over 12 months

General loans

Total loans and

advances

Other loans and

advances

Monetary Policy Review November 2013
Capacity utilisation
Capacity utilisation – a measure of resource use in the economy – has
trended upwards since its low in 2009, rising from 77 per cent to almost
83 per cent late in 2012. It has since fallen, declining in the first quarter of
2013 but then improved marginally in subsequent quarters.
The main contributor to under-utilisation of production capacity is
insufficient demand. The shortage of resources remained broadly unchanged
with skilled labour and raw material shortages the major contributors,
underscoring the need for policies to bring about structural changes.
The output gap
The sizeable deceleration in the pace of economic activity in the first and
third quarters of 2013 contributed to a wider output gap,11 which is expected
to deteriorate further in 2014. The output gap will narrow slightly at a slow
pace towards the end of the forecast horizon, in line with gradual domestic
economic recovery. The current size of the output gap suggests an absence
of significant demand pressures in the domestic economy and softens upside
pressures on inflation.

Generally, a sustained negative output gap (i.e., where actual output is lower than potential output) is associated
with weak demand conditions and subdued inflationary pressures. In contrast, a positive output gap (i.e., where
actual output is higher than potential output) implies robust demand conditions and is indicative of rising
inflationary pressures. See Appendix 3 on how the Bank derives the output gap.
Per cent
Percentage

Figure 17 Utilisation of production capacity

in the manufacturing sector and

reasons for under-utilisation*

Insufficient demand

Shortage of resources

Other reasons

Utilisation of production capacity in the

manufacturing sector (right-hand scale)

* Data are seasonally adjusted
Sources: Statistics South Africa and own calculations

Figure 18 The output gap


Per cent
Source: South African Reserve Bank
Box 2
The impact of the global financial and economic crisis on South Africa’s
potential output1
Potential output is the highest level of non-inflationary sustainable GDP that the productive
capacity of an economy is able to deliver. This concept remains unobservable and needs
to be estimated. The Bank uses several methodologies to estimate potential output, which
can then be combined into an equally-weighted aggregate measure,2 focusing on the
longer-term average trend growth of potential output. The output gap is defined as the
difference between the actual level of real output and the estimated potential level of real
output. The change in the output gap is an indicator of price and wage pressures in
an economy.
Figure B2.1 shows how the level of real actual output and the aggregate measure of real
potential output have changed in South Africa since the onset of the global crisis. The
impact of the 2008–2009 slowdown in economic activity is clear with actual real output
remaining below the potential output measure since 2009. For the period 1998 to 2011,
annual average real growth in potential output was estimated at 3,5 per cent. The size of
the negative output gap was estimated at between 1,5 per cent and 2,0 per cent from
2009 to 2011. Closing this output gap will require real actual output growth in excess of
real potential output growth.
The IMF2has recently considered why output growth in the BRICS countries has weakened
following the global financial crisis, separating out structural (with significant negative
implications for the global economy) and cyclical (i.e., transitory) factors.3

N Ehlers, L Mboji and M M Smal, “The Pace of Potential Output Growth in the South African Economy”, South
African Reserve Bank Working Paper Series (WP/13/01) (Pretoria: South African Reserve Bank, March 2013).

These methodologies produce outcomes that are not materially different and include de-trending smoothing
techniques (Hodrick–Prescott filter), as well as structural and semi-structural techniques (the Bank’s potential
GDP model, general equilibrium models and multivariate Hodrick–Prescott filter).

See IMF World Economic Outlook (WEO), October 2013, pp.41–44, Box 1.2. “What Explains the Slowdown in
the BRICS?”
Figure B2.1 Actual and potential

output levels

Index 1997 = 100

Actual output

Equally weighted aggregate potential output
Source: South African Reserve Bank
Monetary Policy Review November 2013

Risks to the outlook
The Bank bases its projections on a set of key assumptions about the future
behaviour of the main macroeconomic variables. These assumptions inform
the baseline scenario. However, due to risks associated with macroeconomic
variables, the MPC also considers alternative scenarios. This section
discusses global and domestic risks to the Bank’s baseline scenario.
Global risks
Economic growth and policy risk
A key set of risks concern the trajectory of the global economy. Over the
course of the financial crisis, sharply higher global uncertainty and volatility
resulted in the systematic downward revision of global growth forecasts as
expected growth rates were not realised. These projections depend on a
gradual strengthening of the global economy, driven by better performance
in key advanced economies, stabilisation in the euro area and improving
emerging-market outcomes.
Policy settings in major world economies continue to support the recovery.
In June 2013, the Fed signalled a potential moderation in the pace of asset
purchases and stated that the current low level of the federal funds rate will
remain appropriate even after asset purchases (QE) are concluded. The
October policy meeting concluded with accommodative policy intact and
no clear signal about when this tapering would begin, in part due to
conflicting economic outcomes.
In July, the European Central Bank (ECB) committed to keeping its
monetary policy stance accommodative for as long as necessary to support
growth. This was followed by a 25 basis point cut to its policy rate in
November. The Bank of England (BOE) in August linked changes in the
interest rate and asset sales to an unemployment threshold of 7 per cent,
although a 2 per cent inflation target remains its primary objective.12

In its most recent statement, the BOE indicated that the unemployment rate may fall to 7 per cent sooner than
previously projected, leading to speculation that the benchmark interest rate may be raised earlier than
previously anticipated.
Figure 19 Monetary policy interest rates

of selected countries
J
F
M
A
M
J
J

A
S
O
N
D
Per cent

Australia

Indonesia

Mexico
Sources: National central banks

India

Brazil

Turkey
Despite some fall in potential output, slower growth in South Africa and Russia is mostly
related to cyclical factors. Lower output growth rates are expected to prevail only in China
and Russia over the five-year-ahead forecast period. For Brazil, India and South Africa,
growth is projected to remain almost in line with (or higher than) the respective averages
of the past 15 years.
Table B2.1 Growth and output gap projections for BRICS
Percentage points* and per cent
Output
gap*
Growth
Countries

Average
1998 to 2013
Five-yearahead

* Output gap = (log real actual output – log real potential output) x 100 so that an increase in the output gap will be
associated with inflationary pressures
Source: International Monetary Fund, World Economic Outlook, October 2013

Monetary Policy Review November 2013
The Bank of Japan has indicated the open-ended continuation of its
quantitative and qualitative easing progamme. Inflationary pressures have
prompted monetary policy responses in a number of countries, including
Brazil, Indonesia and India, all of which have raised policy rates.
Fiscal policy uncertainty has proved to be a major challenge to the world
economy. However, in advanced countries, fiscal consolidation is being
calibrated to reduce risks to near-term economic activity while enhancing
long-term growth prospects. In the euro area, government borrowing costs
have returned to more sustainable levels in recent months as intra-euro
area bond spreads narrowed sharply. Furthermore, some emerging-market
economies have started rebuilding fiscal space.
Table 9 Selected central bank interest rates
Per cent
Cumulative
Countries
23 May 2013
21 Nov 2013


* The Bank of Japan announced a change in its monetary target from the uncollateralised overnight call rate to the monetary
base (to increase by ¥60–70 trillion annually) on 4 April 2013, thus the basic loan rate is now used in the table
** The Bank of Russia announced a transition to inflation targeting on 13 September 2013, hence the one-week liquidity
provision interest rate (the key policy rate) is now used in the table
Sources: National central banks
Tapering of quantitative easing and financial risks
An important external risk arises from the unwinding of unconventional
monetary policies in advanced economies, in particular QE tapering in
the US. Tapering could threaten growth prospects through spillover
effects, especially where buoyant global financial asset prices do not reflect
underlying economic fundamentals. QE tapering should reflect a stronger
US economy, which is favourable for both global and domestic growth.
However, tapering also implies less monetary accommodation to financial
markets, potential losses as prices of emerging-market assets fall, and
higher borrowing costs for emerging markets that will increase
macroeconomic risk.

11 Per cent
Rand per US dollar

South African rand bond yields

Rand per US dollar (right-hand side)
Source: Bloomberg

Figure 20 Risk premiums of South African

government bonds and

the exchange rate
Sovereign spread
Currency spread
Monetary Policy Review November 2013

Improved growth prospects in advanced economies have had an effect
on the behaviour of investment in asset markets. Domestic bond yields
rose and became more volatile from May following the announcement
of the possible tapering of QE. In South Africa, non-resident net
sales of shares of R3,4 billion in 2012 changed to net purchases of
R4,8 billion in 2013 year-to-date. Net purchases of bonds fell from
R88,6 billion in 2012 to only R12,6 billion in 2013 year-to-date along with
increased volatility in the demand for bonds. This outcome was driven by a
significant net sell-off of domestic bonds and equities in November.
EMBI13 spreads suggest that despite unique domestic challenges and
heightened financial market volatility in the emerging-market universe,
South Africa has managed to remain favourably positioned relative to other
emerging-market economies. The relatively orderly adjustment in the bond
market suggests continued non-resident portfolio inflows and adequate
funding of the budget deficit.
Currency and balance-of-payments risks
Emerging-market currencies are vulnerable to the longer-term adjustment
in global bond yields. Part of the risk lies in the interaction between global
developments, such as QE tapering, and domestic vulnerabilities. Downward
pressure on currencies has been the result for a range of emerging-market
economies, including South Africa.
The rand has depreciated by 20,3 per cent against the US dollar since the
beginning of the year, of which 6,6 per cent was recorded since the May 2013
MPC. Sharply weaker non-resident portfolio inflows, lower international
commodity prices14 (and therefore lower terms of trade) and perceived
current-account vulnerability have contributed to these movements. On a
bilateral basis the rand weakened to its lowest post-crisis level of R10,44 to
the US dollar on 27 August.
Since the nominal effective exchange rate’s (NEER) post-crisis peak in
December 2010, it has weakened persistently by 33,9 per cent, of which
15,7 per cent was recorded since the beginning of 2013. On a trade-weighted
basis, the rand remained more or less unchanged since June 2013. The close
co-movement between the real effective exchange rate (REER)15 of the rand
and the REERs of developed commodity-exporting countries and emerging
markets has broken down since mid-2011.
Currency depreciation and its pass-through into domestic prices is likely to
remain a key risk to the inflation outlook. Despite a fairly sustained
depreciation since May 2011, the pass-through has nonetheless been
unusually muted, deviating from previous episodes of currency weakness.
This may be due to the weak global recovery and South Africa’s negative
output gap, both of which tend to reduce the pricing power of firms.
Trend movements in the currency can help to reduce macroeconomic
imbalances. The flexibility of the exchange rate acts as a shock absorber and
helps to manage vulnerabilities. Since May 2011, the rand has depreciated
in real terms by 20,5 per cent. Over time, this is expected to lower import
growth and strengthen export growth, and contribute to an improvement

The EMBI+ is a US dollar emerging-market debt benchmark that tracks returns for actively traded external
emerging-market debt.

The TRJ/CRB Total Return Index reflects a long-only, broadly diversified investment in commodities.

The REER in this case is produced by the Bank for International Settlements (BIS).
-20

Index
R billions

Annual cumulative shares

Annual cumulative bonds

VIX® (right-hand scale)
* Data up to 20 November 2013
Sources: JSE Limited and Bloomberg

Figure 21 Non-resident net purchases of

domestic securities and

risk aversion
*
Rand per euro
Rand per US dollar

Figure 22 Bilateral exchange rates of

the rand

Rand per US dollar

Rand per euro (right-hand scale)
Sources: Bloomberg and South African Reserve Bank

Index
Index: 2000 = 100

Figure 23 Exchange rate of the rand and

commodity prices

Nominal effective exchange rate of the rand

(foreign currency per rand)

Thompson Reuters/Jefferies CRB Total

Return Index* (right-hand scale)
* The TRJ/CRB Total Return Index tracks international
commodity prices
Sources: Bloomberg and South African Reserve Bank

Monetary Policy Review November 2013
in the trade balance. Thus far, the response of exports and imports to
depreciation has been weak.
Despite stronger growth in advanced economies and further rand
depreciation, the trade deficit widened in the first half of 2013, owing
to weak second-quarter trade figures. Although export growth by
volume was slightly higher than that of imports in the second quarter of
2013, the terms of trade deteriorated due to falling commodity prices.
Overall, export volumes did not improve sufficiently to offset this fall.
The current-account deficit widened to 6,5 per cent of GDP in the
second quarter of 2013, as both the trade deficit and services, income
and current transfer account deficit increased. Lagged effects from rand
movements may take shape only over the longer run.
FAQ 3: Why has the current account of the balance of
payments been slow to adjust to the exchange
rate depreciation?
Currency depreciation can narrow the current-account deficit as the relative
price of imports to domestically produced goods rises, squeezing imports; and
as domestically produced goods become relatively cheaper in international
markets, raising demand for exports. The rand (NEER) has depreciated by
30,4 per cent since May 2011, but the current-account deficit has not yet
responded significantly to this depreciation. Possible reasons for the slow
adjustment of the current account include the following:
––
Slow adjustment in trade volumes after exchange rate depreciation.
Exchange rate depreciation implies higher domestic prices of imported
goods. If import volumes are slow to adjust, the value (volume multiplied
by price) of imports can rise.
––
Around 80 per cent of merchandise imports in South Africa are
intermediate goods (including fuel) and capital goods that support gross
fixed capital formation. This imparts some rigidity to import volumes,
limiting downward adjustment.
––
Partly because of the weak domestic economy, the pass-through
to inflation from the weaker exchange rate has been more muted
than usual, implying that retailers are reducing their profit margins.
While this is positive for the inflation rate, it reduces the incentive for
consumers either to switch to locally manufactured goods or to reduce
their purchases of imported goods.
––
There are normal lags in the adjustment by local manufacturers
to a depreciated exchange rate. Breaking into new markets takes
time, and producers would want to be sure that the improvement in
competitiveness will be sustained.
––
Labour disputes and strikes in a number of key sectors of the economy
have impacted negatively on exports over this period.
––
Prices for agricultural and mineral commodities have declined in global
markets. Exchange rate depreciation helps to cushion the impact of lower
US dollar prices on domestic producers. However, it does not provide an
impetus to export more in volume terms.
––
Continued slow growth in some of our major trading partners,
particularly in Europe, has constrained demand for our manufactured
exports.
R billions
Per cent


Figure 25 Trade and current accounts*

Balance on current account

Trade balance

Current account as a ratio of GDP

(right-hand scale)
* Data are seasonally adjusted
Source: South African Reserve Bank

2012 2013
Percentage change
over one quarter
Index: 2005 = 100
-6
-4
-2

Figure 24 Terms of trade

Change

Level (right-hand scale)
Source: South African Reserve Bank

Monetary Policy Review November 2013

Domestic risks
The Bank’s forecast is clouded by domestic risks. South Africa’s economic
growth rate is sensitive to changes in household expenditure, which in turn
is affected by administered prices, high consumer debt levels and service
costs, and tighter lending standards. Real household incomes are further
eroded by rising inflation and in particular petrol and electricity prices. As
aggregate growth slows, real incomes also rise more slowly, limiting growth
in consumption expenditure.
Low consumer and business confidence, as well as protracted supply
constraints continue to dampen growth in gross fixed capital formation.
Private fixed capital formation is expected to grow only modestly over the
medium term, and appears to be sensitive to tense labour relations and work
stoppages, as well as to global events.
The increase in electricity supply was delayed and remains inadequate to
date, with costs to firms and households rising. This creates disincentives
for fixed capital formation and growth that could lead to deeper downside
risks to the forecast. Stronger growth in cost-push pressures and unit labour
costs would tend to worsen the trade-off between wage growth and weak
productivity relative to employment outcomes.
The exchange rate of the rand remains an increasingly upside risk to the
inflation outlook against the backdrop of a possible further depreciation
of the currency, notwithstanding relatively slow pass-through to consumer
prices to date. Wage pressures and increases in unit labour costs also
negatively affect the inflation outlook.
Conversely, a stronger global economic recovery implies positive risks for the
economic growth outlook in South Africa. This recovery could result from
better outcomes in advanced economies, a quicker rebound in emerging
markets or a combination of the two. Similarly, a number of domestic risks
could be alleviated through actions that would improve South Africa’s real
GDP forecast. These actions include a more rapid pace of job creation,
improved infrastructure and greater certainty about the cost and supply of
intermediate inputs.
Review of global and domestic inflation
This section reviews recent trends in global and domestic inflation. Whereas
price pressures in advanced economies have softened, emerging-market
economies face somewhat stronger inflationary pressures. In South Africa,
exogenous prices remain the key drivers of headline inflation outcomes,
with core inflation trending upwards.
Global inflation
Global inflation in 2013 remained broadly contained due to modest global
growth and soft commodity prices. Inflation declined in advanced
economies, especially in the euro area. In Japan, deflation eased as inflation
expectations increased. Sustained negative output gaps in major economies
underscore low inflation forecasts for much of the world economy. Consumer
price inflation in emerging-market and developing countries is projected to

Monetary Policy Review November 2013
decelerate from 6,2 per cent in 2013 to 5,7 per cent in 2014 and 5,2 per cent
in 2015. As 2013 progressed, significant currency weakness in a wide range
of emerging-market and developing economies led to increased inflation.
Table 10 IMF projections of world inflation*
Per cent
Consumer prices


* IMF projections as at April 2013 ( ) in parenthesis
Source: International Monetary Fund, World Economic Outlook, October 2013
Domestic inflation
Consumer prices
Both headline and core inflation have gradually accelerated along a similar
trend since the middle of 2012. Food and petrol price pressures were the
main drivers of this acceleration, with currency depreciation risk evident.
Administered prices have had a strong influence on inflation outcomes,
specifically through electricity, education, petrol and water price changes.
The 12-month change in the administered price index (API) remained
significantly above 6,0 per cent and accelerated noticeably through to July
and August before moderating somewhat in September and October. In
terms of their contribution, changes in petrol prices had a major effect
on the API over the period under review. This is evident from the gap
between inflation of the API excluding petrol and paraffin and total API
inflation. By August 2013 the full effect of the new electricity price as set
by municipalities resulted in a decrease of 0,5 percentage points in the
contribution of electricity to administered prices.16

Municipalities change electricity prices once a year, with a majority effecting this change as at July each year;
however, a few do so in August. As a result, the 0,5 percentage point change in the contribution of electricity
to the API has been calculated using the June 2013 and August 2013 contributions.
Percentage points
Percentage change
over 12 months

Figure 26 Contribution to global inflation

Emerging-market and developing economies

Advanced economies

World consumer price index (right-hand scale)
Source: International Monetary Fund, International
Financial Statistics database

Monetary Policy Review November 2013

Table 11 Contributions to administered prices
Percentage change over 12 months* and percentage points
Weights

CPI
API
Apr
May
Jun
Jul
Aug
Sep
Oct

CPI for administered prices

Regulated component

Other regulated administered

Unregulated component

Primary and secondary

Other unregulated

Source: Statistics South Africa
Domestic food prices, with a significant weight of 14,2 per cent in the CPI,
have increased since June 2013. At the same time, international food price
inflation has been negative. The contrasting trends in the measures of
international and domestic food prices are partly the result of the stage of
production at which prices are measured and the different compositions of
the two indices. For example, the Food and Agriculture Organization (FAO)
food price index measures grains and cereals at an earlier stage of production
than they are measured in South Africa’s CPI. During 2013, processed food
inflation, as measured in South Africa’s headline inflation, has averaged
7,2 per cent, higher than unprocessed food inflation at 5,5 per cent. The
weighting also differs substantially as the different components in the FAO
food price index are trade weighted while South Africa’s CPI is consumption
weighted.
Over the review period, petrol prices trended upwards, rising to multiple
highs. Changes in the petrol price are influenced by the changes in the
international oil price and movements of the rand. Figure 28 shows the
relationship between changes in the spot and futures prices of Brent crude
oil in both US dollar and rand terms, together with the lagged changes in
the South African petrol price.
Producer prices
The producer price indices provide an indication about price changes along
the value chain.17 The headline producer price index (PPI) is the PPI for
final manufactured goods, measured at the factory gate. Headline PPI gives
an early indication about price changes in locally produced goods that may,
in the future, be consumed domestically.

These indices are published by Statistics South Africa (Stats SA).
Figure 27 Targeted inflation* and food

inflation
-5

Percentage change over 12 months

All food items

Meat

Vegetables
* CPI for all urban areas
Source: Statistics South Africa

Bread and cereals

Milk, cheese and eggs

Targeted inflation measure
Figure 28 The spot and futures prices of

Brent crude oil and the

petrol price
-60
-40
-20

Percentage change over 12 months

Petrol price (one-month lag)

Brent crude (rand)

Brent crude (US dollar)

Futures (19 November 2013, rand)

Futures (19 November 2013, US dollar)

Sources: Department of Energy, Bloomberg and own
calculations

Monetary Policy Review November 2013
Headline PPI increased to above 6,0 per cent from July 2013, reflecting
high food and fluctuating petrol prices. Recent movements in intermediate
manufactured goods price inflation have been driven by the effect of rand
weakness on import prices. This is evidenced by steep increases in inflation
for rubber products and basic precious and non-ferrous metals.
Table 12 Measures of producer price inflation
Percentage change over 12 months

Apr
May
Jun
Jul
Aug
Sep

Excluding:

Source: Statistics South Africa
Wages and unit labour costs
Rising labour costs and above-inflation wage agreements indicate higher
inflationary pressures going forward, some of which may be offset by job
losses or slower employment growth. These settlements, rising from 7,6 per
cent in 2012 to 7,9 per cent in the first nine months of 2013,18 reflect the
influence of last year’s labour disputes on current wage negotiations and
higher realised inflation. In June 2013, the majority of settlements were
expected to fall within the 7,5 to 8,5 per cent range, but the emergence of
rival unions has introduced an element of unpredictability.
Wage increases in excess of output growth (indicating muted productivity
gains) resulted in nominal unit labour costs rising from 5,2 per cent in the
fourth quarter of 2012 to 6,8 per cent in the second quarter of 2013. Average
real wage settlements levelled off at 1,9 per cent from 2012 despite sluggish
economic growth and weak job creation. Real unit labour costs also
increased as nominal unit labour costs grew by more than inflation.
18 As reported in the September 2013 Andrew Levy Wage Settlement Survey.
Figure 29 Average annual inflation and

wage settlements

-2

Per cent

Headline inflation

Average wage settlements

Average real wage settlements

* Data for 2013 are for the first nine months of the year
Sources: Andrew Levy Employment Publications,
Statistics South Africa and own calculations
*
Figure 30 Remuneration per worker and

unit labour cost in the formal

non-agricultural sector
-2

Percentage change over four quarters

Nominal unit labour cost

Remuneration per worker

Real unit labour cost
Sources: Statistics South Africa and own calculations
Monetary Policy Review November 2013

Appendices
The following appendices are intended to assist in interpreting the indicator
of the probability that inflation will be above the target, the growth and
inflation fan charts, and the output gap.
Appendix 1: Indicator of the probability that inflation will
be above the target
The indicator of the probability that inflation will be above target is derived
from the probability distribution around the inflation fan chart’s median
projection. It indicates the assessed cumulative probability of inflation being
above the 6 per cent upper band of the 3 to 6 per cent inflation target
range in each quarter of the forecast period. The line is purposefully wide to
show the 5 per cent level of uncertainty around the central projection and
more precise probability of the forecast, but should not be interpreted as a
confidence interval.
Appendix 2: The Bank’s fan charts
The MPC uses fan charts to focus the discussion of risks lying ahead and
their impact on the inflation and growth forecasts.
Fan chart projections are based on assumptions and are subject to uncertainty.
These graphical representations reflect the MPC’s collective judgement
(a single view of the probability) of the most likely path of inflation and
growth outcomes in the future. However, there is no mechanical link
between either the central projection or the distribution at the forecast
horizon and the setting of monetary policy.
Fan charts reflect the MPC’s view of uncertainty associated with the
projections at different horizons through a range of confidence intervals.
The mode – darkest band at the centre of the fan chart – represents the
most likely 10 per cent of the probable outcomes, including the central
projection. Moving away from the central projection, the area covered by
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.19 The width of the
coloured confidence bands is an indication of the estimated uncertainty.
The fan becomes progressively wider and flatter as the projection extends
into the future, reflecting increased uncertainty.
The MPC also takes a view on the balance of risks. The probability
distribution will be symmetrical if risks are viewed as evenly spread. If
risks are viewed as not evenly spread then the probability distribution will
be asymmetrical and skewed. A skewed probability distribution reflects a
higher likelihood of outcomes in one direction (above or below the central
projection). An upward bias is reflected by a slightly larger shaded area
covered by the upper bands and a downward bias by a slightly larger shaded
area covered by the lower bands.

Actual inflation and growth outcomes are therefore expected to be somewhere within the fan on 90 out of 100
occasions. For the remaining 10 out of 100 occasions inflation and growth can be anywhere in the area outside
the shaded range.

Monetary Policy Review November 2013
Appendix 3: The Bank’s estimate of the output gap
The output gap (both its size and changes to it) is an important measure of
under- or over-utilisation of resources. It enhances the analysis of demand
pressures in the economy and serves as an indicator of inflationary pressure
in the current period and over the forecast horizon.20
The output gap is the difference between actual output (GDP) and potential
output. Potential output reflects the level of sustainable output that is
consistent with stable inflation and is an unobserved variable.21 As a result,
the output gap is not directly measurable and must therefore be estimated.22
Changes in the output gap over time occur because of variations in the
level of actual GDP and the level of potential output. The variation in the
former is a reflection of the business cycle and shocks, while the variation
in the latter is a function of factors that affect the productive capacity in the
economy. These factors include productivity and labour force developments,
as well as economic shocks.
The estimation of the output gap is a technical exercise that relies on
statistical and structural methodologies to produce an aggregate measure
that satisfies certain criteria. These criteria include economic consistency,
specification robustness, flexibility in incorporating additional judgment,
and the ability to reduce and quantify uncertainty.23 Potential output can be
estimated in several ways. The Bank bases its calculations on the following
methodologies:24
––
Hodrick–Prescott filter. This is a purely statistical method, which
assumes that output can be decomposed into a long-term (trend)
component and a component that captures the short-term deviation of
output from the trend.
––
Production function method. This method incorporates the structural
information from a production function specification to obtain an
estimate of potential output. Information on capital stock, labour trends
and developments in total factor productivity is used for this purpose.
––
Multivariate Hodrick–Prescott filter. This semi-structural method
augments the statistical properties of the Hodrick–Prescott filter with
structural relationships relating to production constraints, goods and
labour markets, as well as capacity utilisation.
––
General equilibrium approach. This approach entails the use of
“gap models” and incorporates actual output, inflation (both actual
and expected), unemployment and capacity utilisation data in order to
estimate potential output. It uses a multivariate Kalman filter for this
purpose.
20 For example, if actual output exceeds potential output then the output gap is positive, resources are over-utilised
and prices tend to rise. Conversely, if actual output is below potential output, the output gap is negative, resources
are under-utilised and prices tend to fall.
21 Stable inflation refers to the absence of inflationary pressures and excessive price fluctuations.
22 In addition to the uncertainty surrounding the unobserved potential output, regular revisions to the GDP figures
present further uncertainty in the estimation of the output gap.
23 N Ehlers, L Mboji and M M Smal, “The Pace of Potential Output Growth in the South African Economy”, South
African Reserve Bank Working Paper Series (WP/13/01) (Pretoria: South African Reserve Bank, March 2013).

Refer to Ehlers et al. (2013) for more detail on these methodologies.
Monetary Policy Review November 2013

The Bank uses equal weights25 to aggregate the estimates of potential
output produced by the methodologies listed above. Figure A3.1 presents
the Bank’s different potential output estimates and shows how they relate
to actual output. The output gap is calculated by subtracting the aggregate
measure of potential output (red line in Figure A3.1) from actual GDP (dark
blue line in Figure A3.1) and expressing the difference as a percentage of
potential output.
Although the output gap is a useful indicator of inflationary pressure, it is
important to recognise that it is an aggregate measure of resource utilisation
and that there are uncertainties involved in its calculation. As such, the Bank
uses the output gap as only one in a range of indicators that it considers in
its policymaking process.
25 Use of equal weights is justified because none of the methods of estimating potential output is superior to the
others.
Figure A3.1 The Bank’s potential output

measures versus actual output

Indices: 1997 = 100

Actual output (GDP)

Multivariate Hodrick–

Prescott filter

General equilibrium

approach
Source: Ehlers et al. (2013)

Hodrick–Prescott filter

Production function

method

Weighted aggregate

measure of potential

output

Monetary Policy Review November 2013
Statement of the Monetary Policy Committee
18 July 2013
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
The period since the previous meeting of the Monetary Policy Committee (MPC) has been
dominated by the reaction of the global financial markets to statements by the United States
(US) Federal Reserve that a slowdown in quantitative easing may begin sooner than previously
anticipated. The news impacted on capital flows to emerging markets, with outflows from
bond markets in particular, but yields on long-term bonds of advanced economies were also
affected. While some of the initial fears have been addressed by further guidance from the
Fed, this episode gives some insight into the difficulties that could be faced in fine-tuning
exit strategies from highly accommodative monetary policies, particularly at a time when
global growth remains weak.
These events had a significant impact on the exchange rate of the rand, creating further upside
risks to the inflation outlook at a time when the domestic economy has shown increased
signs of vulnerability. There has consequently been no let-up in the policy dilemma faced
by monetary policy: that of a widening output gap in a worsening inflation environment.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas surprised on the downside at 5,6 per cent in May 2013, having measured
5,9 per cent for the previous three consecutive months. However, this decline is likely to
have been temporary as it was due in part to a 73 cent per litre decrease in the petrol
price in May, which has since been reversed by an 84 cent per litre increase in July.
Food price inflation increased further from 6,3 per cent in April to 6,7 per cent, and
accounted for 1,0 percentage point of CPI inflation. The other main contributors to the
inflation outcome were housing and utilities, and miscellaneous goods and services which
contributed 1,4 and 1,1 percentage points respectively. Administered price inflation
declined to 6,3 per cent from 8,9 per cent in April due to the petrol price decline. Excluding
petrol, administered price inflation was unchanged at 7,8 per cent. Core inflation,
which excludes food, petrol and electricity, measured 5,3 per cent, marginally up from
5,2 per cent in April. The headline producer price inflation for final manufactured goods
measured 4,9 per cent in May, compared with 5,4 per cent in April.
Despite the lower starting point, the inflation forecast of the Bank has deteriorated since the
previous meeting of the MPC. Inflation is now expected to average 0,1 and 0,3 percentage
points higher in 2013 and 2014 at 5,9 per cent and 5,5 per cent respectively, while the
forecast for 2015 has been raised from 5,0 per cent to 5,2 per cent. A temporary breach of
the upper end of the target range is still expected in the third quarter of 2013, but at a higher
average level of 6,3 per cent (6,1 per cent previously), followed by a return to within the
target range by the final quarter of the year. The deterioration is mainly due to continued
currency weakness and higher-than-expected petrol price increases.
The forecast for core inflation for 2013 is unchanged at an average of
5,3 per cent in 2013 and is now expected to peak at 5,5 per cent in the fourth quarter. This
measure is then expected to moderate and to average 5,2 per cent and 5,0 per cent in the
coming two years, compared with the previous forecasts of 5,0 per cent and 4,6 per cent
respectively. This upward drift in the forecast in the absence of obvious excess demand
pressures suggests that there may be emerging underlying pressures, possibly due to the
lagged effects of the depreciation of the rand exchange rate.
Inflation expectations appear to have remained anchored around the upper end of the
inflation target range. According to the survey conducted by the Bureau for Economic
Research at Stellenbosch University during the second quarter of 2013, inflation expectations
Monetary Policy Review November 2013

of all the categories of respondents remained almost unchanged compared with those of the
previous quarter. Overall, the survey found that inflation is expected to average 6,0 per cent
in 2013 and 6,1 per cent in the next two years, with financial analysts’ expectations below
those of the business executives and trade union officials over the whole forecast period and
within the target range. The former category is consistent with the Reuters survey which
reflects expectations of an average of 5,9 per cent in 2013, and moderating to 5,6 per cent
and 5,4 per cent in the following two years respectively.
The global economic growth outlook has remained fragile due to the continuing deeper
recession in the eurozone and a slowdown in a number of systemically important emergingmarket economies. Several forecasters, including the International Monetary Fund (IMF),
have downgraded eurozone growth forecasts against the backdrop of a slowdown in Germany,
and continued risks emanating from Portugal, Italy and Spain. In its recent World Economic
Outlook update, the IMF reduced its 2013 forecast for eurozone growth by 0,2 percentage
points to -0,6 per cent, with a weaker recovery than previously forecast in 2014. Although
the US economic recovery appears to be gaining some traction, headwinds from the fiscal
contraction remain, and first quarter economic growth, at an annualised 1,8 per cent, was
weaker than the initial estimate of 2,5 per cent. The sustainability of the recovery is also at
risk from rising long-term bond and mortgage interest rates in response to expectations of
a tapering off of asset purchases by the Fed. There are tentative signs of stronger growth in
Japan, but the sustainability of the recovery remains uncertain.
The slowing growth in various emerging-market economies including China, Brazil and Russia
illustrate the difficulties of decoupling from the advanced economies, with the IMF revising
its forecasts for 2013 for China from 7,8 per cent to 7,5 per cent; Russia from 3,4 per cent to
2,5 per cent; and Brazil from 3,0 per cent to 2,5 per cent. The deteriorating outlook for
emerging markets has been compounded by the recent capital flow reversals that impacted
adversely on domestic bond and currency markets in particular. While financial markets
have stabilised somewhat, the risks posed to emerging economies in general, including South
Africa, by normalisation of monetary policy in the US in the future, are evident.
The combination of slower growth in China and the stronger US dollar has also impacted
negatively on commodity prices, although oil prices have been underpinned by risks related
to recent events in Egypt. Global inflation remains benign and monetary policy is expected
to remain accommodative in the advanced economies for some time, as indicated in the
forward guidance provided by the ECB, the Bank of England and the Fed, notwithstanding
a possible slower pace of quantitative easing in the US. By contrast, a general tightening bias
is evident in a number of emerging markets in response to recent capital flow and exchange
rate developments.
Movements in the exchange rate of the rand continue to pose the main upside risk to the inflation
outlook. Since the previous meeting of the MPC exchange rate volatility has increased and the
rand generally traded in a range between R9,60 and R10,36 against the US dollar. Since the
beginning of the year the rand has depreciated by 14,2 per cent against the US dollar and by
11,1 per cent on a trade-weighted basis. Much of the recent volatility and weakness have
been in line with the reaction of a number of other emerging-market currencies to fears
of US monetary policy tightening. The rand has also been negatively impacted by lower
commodity prices.
Domestic bond yields increased significantly in response to capital outflows and higher
bond yields in the advanced economies. The yield on the 10-year government bond, for
example, increased by more than 100 basis points since the financial market turbulence
in late May. Net sales of domestic government bonds by non-residents amounted to
R17,4 billion in May and June. In July non-residents became net buyers again with net
purchases of R3,0 billion, bringing the year-to-date net total to R5,2 billion. Having been
net sellers of South African equities in both 2011 and 2012, non-residents have returned to
the market, with year-to-date net purchases of R23,3 billion.

Monetary Policy Review November 2013
Despite a 15,5 per cent nominal effective depreciation of the rand exchange rate since January
2012, the pass-through to inflation has been relatively muted, particularly when compared
with previous episodes of currency weakness. This is probably a reflection of the weak
pricing power in some sectors of the economy in a low growth environment. Nevertheless,
the risk remains that these pricing pressures may intensify at some stage, particularly if the
exchange rate depreciates further from current levels.
Market expectations are for a moderate appreciation of the rand in the coming months,
although these expectations have been tempered in recent surveys. According to the Reuters
Econometer survey conducted in June, analysts on average expect a rand/dollar exchange
rate of R9,70 at the end of 2013, and R9,40 at the end of 2014. There is, however, a wide
dispersion between the forecasters, reflecting a high degree of uncertainty. Despite a slight
narrowing of the current-account deficit in the first quarter of 2013 to 5,8 per cent of GDP,
the depreciated currency reflects this deficit against a backdrop of declining terms of trade
and more uncertain global capital flows.
The outlook for domestic economic growth has weakened further, following the first quarter
annualised growth rate of 0,9 per cent. While more favourable outcomes can be expected
in the subsequent quarters of this year, overall annual growth is likely to be lower than the
2,5 per cent growth rate recorded in 2012. The Bank’s growth forecast for 2013 has again
been revised down from 2,4 per cent to 2,0 per cent, and from 3,5 per cent to 3,3 per cent
for 2014. Growth is expected to accelerate to 3,6 per cent in 2015, compared with 3,8 per
cent previously. The risks to the outlook are still assessed to be on the downside, particularly
in the face of further delays in overcoming electricity supply constraints. In line with these
subdued growth prospects, the RMB/BER Business Confidence Index declined from 52 in
the first quarter of 2013 to 48 in the second quarter, consistent with the continued sideways
movement of the Bank’s leading indicator of economic activity.
The outlook for the mining sector remains bleak following a 0,7 per cent year-on-year
contraction in May. Although production showed positive month-to-month growth for the
first time in four months, on a three-month-to-three-month basis the sector contracted
by 1,4 per cent. There are indications that the manufacturing sector will make a positive
contribution to growth in the second quarter following the annualised 7,9 per cent
contraction in the first quarter. In May the sector expanded by 2,2 per cent on a year-onyear basis, and by 0,9 per cent on a three-month-to-three-month basis. This more positive
trend is also indicated in the Kagiso PMI which increased by 1,2 index points to 52,6 in July.
The real value of building plans passed remains on a moderately upward trend despite a
decline in May. The FNB construction confidence index reflects some improvement, having
increased by 4 points to 41 in the second quarter of 2013, although the civil construction
index declined somewhat over the same period.
Underlying the sluggish economic growth outlook is the low growth in real gross fixed
capital formation, which moderated from an annualised 4,3 per cent in the fourth quarter
of 2012 to 2,5 per cent in the first quarter of 2013. Private-sector fixed investment growth
slowed from 3,8 per cent to 2,8 per cent over this period, and reflected lower outlays in all
sectors apart from agriculture, construction and finance. Work stoppages at Eskom’s Medupi
plant also impacted negatively on investment by state-owned enterprises in the quarter.
Fixed investment expenditure is likely to remain affected by low business confidence and
prolonged electricity supply constraints.
Employment growth remains subdued, particularly in the private sector. In the year from
March 2012 to March 2013, employment grew by 1,0 per cent, or 80 000 workers, of
which 65 000 were in the public sector, although this number was inflated by temporary
appointments relating to municipal by-elections in the first quarter of the year. Employment
contracted in the mining and manufacturing sectors during this period. The official
Monetary Policy Review November 2013

unemployment rate increased from 24,9 per cent in the fourth quarter of 2012 to
25,2 per cent in the first quarter of 2013. Of particular concern is the increase in the youth
unemployment rate to 52,9 per cent in the first quarter.
Slower growth in real consumption expenditure by households is indicative of declining
consumer confidence and the relative lack of excessive demand pressures in the economy.
Household consumption expenditure growth moderated to 2,3 per cent in the first quarter
of 2013, driven mainly by more subdued demand for durable goods, particularly motor
vehicles. Real retail trade sales surprised on the upside in May with year-on-year growth of
6,2 per cent. Nevertheless, retail trade sales increased by 0,5 per cent in the three months
ending May compared with the previous three months, suggesting a continuation of the
moderate growth in sales.
Consumption expenditure is expected to be constrained by high petrol and electricity costs,
high consumer debt levels and declining growth in credit extension to households. Despite
a moderation in the growth of household debt in the first quarter of 2013, the ratio of
household debt to disposable income was unchanged at 75,4 per cent, as growth in real
disposable income also slowed.
Twelve-month growth in total loans and advances extended to the private sector increased
by 9,3 per cent in May, but excluding mortgage advances the increase was 16,8 per cent.
In the first five months of 2013, general loans (mainly unsecured lending) continued to
account for the bulk of the increase in credit extension, but at a slower pace, particularly to
households. Twelve-month growth in general loans to households declined from a recent
peak of 35,4 per cent in September 2012 to 24,4 per cent in May 2013. The slowdown is
more pronounced when measured over three months. In the three months to the end of
May 2013, annualised growth was 11,3 per cent, compared with rates of increase in excess of
30 per cent during 2012.
One of the upside risks to inflation remains wage and salary increases. In the first quarter
of 2013, a stronger upward trend was observed with growth in nominal remuneration per
worker increasing from 6,6 per cent in the fourth quarter of 2012 to 7,5 per cent. With slower
productivity growth, this implied an increase in unit labour cost growth from 5,2 per cent
to 6,7 per cent. These increases are consistent with the overall average wage settlement rate
in collective bargaining agreements published by Andrew Levy Employment Publications,
which increased from 7,6 per cent in 2012 to 7,9 per cent in the first quarter of 2013.
Other upside risks to the inflation outlook emanate from food prices, which have been
accelerating over the past few months following a low of 4,6 per cent in September 2012.
Food price pressures are intensifying at the producer price level, with manufactured food
product prices increasing by 6,9 per cent in May. Although agricultural product inflation
remained subdued at 2,6 per cent, this was mainly due to the 13,0 per cent decline in live
animal prices which offset the 10,4 per cent increase in cereal and other crop prices. More
favourably, global food prices have declined as a result of expectations of bumper crops in
some of the main grain producing countries. The FAO international cereals price index
decreased by 10,1 per cent since September 2012.
Global oil prices have broken out of their recent trading range of between US$100 and
US$105, mainly due to political developments in the Middle East.
However, the relatively subdued global growth outlook, particularly in China, is likely to
restrain these price increases. The current under-recovery of around 36 cents per litre on the
domestic petrol price is mainly due to international price developments, and indicates that a
further petrol price increase can be expected in August.

Monetary Policy Review November 2013
The MPC continues to face conflicting policy choices relating to rising inflation and slowing
growth. Inflation is expected to resume its upward trajectory following the brief respite in
May. However, despite the upward trend in core inflation, there are no strong signs of excess
demand pressures and the forecast for headline inflation suggests that the breach of the
target may be short-lived. The main upside risk to the inflation outlook is the exchange rate
and much will depend on the strength of the pass-through to inflation, which to date has
been relatively muted. However, the risk remains that these pressures could be mounting,
particularly if further currency weakness occurs and affects inflation expectations, which
are currently anchored at the upper end of the target range. In addition, the outcome of the
present round of wage bargaining will be critical in determining the extent of wage pressure
on the inflation outlook.
The output gap has widened, and is only anticipated to begin to narrow during 2015, when
growth is expected to be more or less in line with potential. The downside risk to growth has
already resulted in the Bank being more tolerant of inflation at the upper end of the target
range than would normally have been the case, an approach that is consistent with a flexible
inflation-targeting framework.
While the upside risks to the inflation outlook reduce the scope for further accommodation,
a tightening of the monetary policy stance does not automatically follow. This will be
highly dependent on how we see the inflation trajectory unfolding in this very uncertain
environment. In other words, it has become even more data dependent. At this stage a
sustained breach of the inflation target is not our central forecast. However, we are concerned
about the revised higher trajectory of core inflation and macroeconomic vulnerabilities
that are increasingly evident. The MPC is mindful of these conflicting pressures and the
challenging domestic and global environment, and will continue to monitor developments
closely and act appropriately to achieve its mandate. The MPC has decided to keep the
repurchase rate unchanged at 5,0 per cent per annum.
Monetary Policy Review November 2013

Statement of the Monetary Policy Committee
19 September 2013
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC), domestic inflation
has breached the upper end of the target range. This development was in line with our forecast
and we continue to expect inflation to moderate somewhat in the final quarter of this year.
While the outlook for the domestic economic growth environment remains unchanged, it
has been overshadowed by protracted work stoppages. Where wage agreements have been
reached, these have generally been above the headline inflation rate, contributing to the
upside risk to the inflation outlook.
During this period, global financial markets have been dominated by continued speculation
about the speed and timing of tapering of quantitative easing by the United States (US) Fed.
The uncertainty related to this event resulted in a high degree of volatility and weakening
in a number of emerging-market economies’ foreign-exchange and bond markets since
May. The decision by the Fed to delay tapering surprised the markets and emerging-market
currencies in particular responded strongly, with many seeing significant overnight currency
appreciation. The Fed emphasised the data-dependent nature of its decision, indicating
that this respite could prove to be temporary, as speculation regarding the timing of future
tapering is likely to continue whenever positive data emerges from the US.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban
areas increased to 6,3 per cent in July and 6,4 per cent in August. Food and non-alcoholic
beverages inflation measured 7,1 per cent in August, up from 6,8 per cent in July, while
petrol prices increased at a year-on-year rate of 23 per cent. Core inflation, which excludes
food, petrol and electricity, measured 5,1 per cent, down from 5,2 per cent in July, while
administered prices excluding petrol moderated to 7,0 per cent. The headline producer price
inflation for final manufactured goods accelerated to 6,6 per cent in July, up from 5,9 per
cent in June.
The inflation forecast of the Bank has deteriorated further since the previous meeting of the
MPC. The forecast for 2013 is unchanged at an average of 5,9 per cent, but inflation is now
expected to average 5,8 per cent in 2014 compared with 5,5 per cent in the previous forecast.
The forecast for 2015 has been raised from 5,2 per cent to 5,4 per cent, and inflation is
expected to average 5,3 per cent in the final two quarters of that year. The current breach of
the inflation target is still expected to be temporary, and the peak was possibly reached in
August. The deterioration in the forecast is mainly due to changes in assumptions related to
the exchange rate of the rand and petrol prices, but given the overnight developments these
assumptions will be revisited on an ongoing basis.
The forecast for core inflation for 2013 is 0,1 percentage point lower, at an average of 5,2 per
cent. This measure is then expected to average 5,4 per cent and 5,3 per cent in the coming
two years, compared with the previous forecasts of 5,2 per cent and 5,0 per cent respectively,
and to measure 5,1 per cent in the final quarter of 2015. This upward drift of underlying
inflation is due to the lagged effects of the depreciation of the rand exchange rate and the
impact of higher unit labour costs.
Inflation expectations, as measured in the survey conducted in the third quarter of 2013
by the Bureau for Economic Research, have remained stable around the upper end of the
target range. It is of concern to the MPC that inflation is expected to average 6,0 per cent
in 2013 and 6,2 per cent and 6,1 per cent in the subsequent two years respectively. Business
respondents expect inflation to average 6,4 per cent in both 2014 and 2015, slightly lower

Monetary Policy Review November 2013
than in the previous forecast, while expectations of trade unionists are unchanged from the
previous survey, at 6,2 per cent and 6,3 per cent for these respective years. The expectations
of economic analysts have deteriorated slightly since the previous survey but still expect
inflation to average below 6,0 per cent over the period, and to average 5,8 per cent and
5,5 per cent in 2014 and 2015 respectively.
Global economic prospects have improved in a number of the advanced economies, but
downside risks remain. Growth in the US appears to be gradually improving, despite fiscal
headwinds, and most forecasts are for growth in excess of 2,5 per cent in 2014. There are,
however, a number of downside risks to the outlook which were also highlighted by the Fed.
Financial conditions have tightened since the initial tapering announcement, and there are
fears that the significantly higher mortgage rates and the observed downturn in mortgage
applications could derail the nascent recovery in the housing market, posing a risk to
household consumption expenditure. Fiscal policy is also seen as a source of downside risk,
with the debt ceiling issue expected to resurface in mid-October. Failure to find a resolution
could result in further unplanned fiscal expenditure cuts.
The eurozone emerged from its protracted recession in the second quarter of 2013 led by
Germany, but economic growth is expected to remain weak and below trend for some time.
This negative outlook is compounded by fragile political environments in a number of
countries, including uncertainty regarding the ability of some of the peripheral countries
to meet the conditions of their bail-out clauses amid stringent fiscal consolidation measures
and deteriorating debt dynamics, and slow progress towards a banking union. The Japanese
economy appears to be responding to the stimulus packages and the weaker yen, but it is still
too early to assess the sustainability of the recovery.
Fears of a marked slowdown in China have abated somewhat following strong growth in
industrial production in August, amid easing liquidity and bank lending conditions. While
there are some concerns that the recent improvement is based on an unsustainable credit
boom, growth in excess of 7 per cent in 2014 is generally expected.
The expectation of an end to US quantitative easing prompted a sell-off of emerging-market
assets, which has the risk of further undermining the weaker growth outlook that has been
apparent for some time. While financial markets in these countries have reacted positively to
the Fed’s decision not to begin tapering at this stage, the underlying weaknesses are expected
to persist.
Monetary policy in the advanced economies remains highly accommodative, and forward
guidance suggests that low policy rates will be maintained for some time. Inflation in the
advanced economies remains very low but there is speculation that a faster-than-expected
decline in the US unemployment rate could prompt an earlier start to normalisation of
monetary policy in the US. Some emerging markets, notably Brazil, Indonesia, Turkey
and India have either tightened monetary policy in response to currency depreciation,
implemented a range of direct controls on capital flows or engaged in direct intervention in
the foreign-exchange markets.
The exchange rate of the rand has been highly volatile since the previous meeting of the MPC,
against the backdrop of a widening current-account deficit, domestic labour disputes, and
the reversal of capital flows to emerging-market economies. The rand’s strong co-movement
with other emerging-market currencies suggests that external factors predominated over this
period. Since the previous MPC meeting, the rand has fluctuated in a range between around
R9,55 and R10,50 against the US dollar and appreciated by 2,3 per cent against the dollar,
but is more or less unchanged on a trade-weighted basis.
The uncertainties related to possible changes in US monetary policy have been reflected in
the volatile non-resident activity in the domestic bond and equity markets. Following net
sales of domestic bonds to the value of R17,9 billion between May and August in reaction
Monetary Policy Review November 2013

to the Fed tapering announcement, non-residents have been net purchasers of bonds in
September to the value of R9,3 billion, bringing the cumulative total since the beginning of
the year to R14,9 billion. Non-resident appetite for domestic equities has remained strong
following net sales in 2011 and 2012, with year-to-date net purchases of R28,3 billion.
The risks to the inflation outlook from the exchange rate remain elevated and dependent on
its future trend. A sustained depreciation trend could pose a significant risk to the inflation
outcome. While there are some signs of generalised price pressures evident in the producer
price index, to date the pass-through to consumer price inflation has been relatively muted,
given the weak pricing power in the current low growth environment.
The rand is expected to remain sensitive to global sentiment as well as to the current-account
deficit, which widened to 6,5 per cent of gross domestic product (GDP) in the second quarter
of 2013. The deficit is expected to narrow in the coming months in response to the depreciated
currency. However, this response is expected to be slow, given the import-intensive nature
of capital expenditure by the state-owned enterprises in particular. Furthermore, export
revenues are hampered by weak external demand, strike activity in the mining and motor
vehicles sectors in particular, and declining terms of trade. The stepping up of exports is
critical to address the current account deficit. While the rand has appreciated significantly
in the last few days, the experience of the past few months is indicative of its vulnerability to
future changes in US monetary policy.
The domestic growth outlook is unchanged since the previous MPC meeting. The real
GDP growth rate of 3,0 per cent recorded in the second quarter of 2013 was driven mainly
by a recovery in the manufacturing sector, following the marked contraction in the first
quarter. Despite the rebound, growth was below the estimated potential of around 3,5 per
cent and the negative output gap widened further. The Bank’s forecast of GDP growth is
unchanged: we still expect growth to average 2,0 per cent in 2013, and 3,3 per cent and
3,6 per cent in the next two years respectively. The composite leading business cycle
indicator of the Bank declined slightly in June, continuing its broadly sideways movement,
confirming the subdued growth outlook. Business sentiment remains weak: the RMB/BER
Business Confidence Index declined from 48 index points in the second quarter to 42 index
points in the third quarter.
There are, however, tentative signs of improvement in the manufacturing sector. The Kagiso
PMI increased to its highest level in 6 years, and in July the physical volume of manufacturing
production increased by 3,5 per cent on a month-to-month basis, and 5,4 per cent year
on year. Capacity utilisation also increased marginally in the second quarter of 2013 to
81,3 per cent. Despite these positive trends, manufacturing output is expected to be adversely
affected by protracted strikes, particularly in the motor vehicle sector. Mining output, which
contracted in the second quarter, is expected to contribute positively to growth in the third
quarter, following strong increases in production in July and a relatively quick resolution of
the strikes in the gold-mining sector.
Growth in real gross fixed capital formation remains relatively weak, at an annualised rate of
2,7 per cent in the second quarter of 2013. A positive feature is the acceleration in the growth
of private-sector fixed investment expenditure to 4,4 per cent, which more than offset the
decline in outlays by the public corporations, mainly due to unplanned construction delays.
Gross fixed capital formation as a percentage of GDP increased marginally to 19,5 per cent
in the second quarter, still well below the levels of around 24 per cent reached in 2008 and
the National Development Plan target of 30 per cent by 2030.
Employment trends remain extremely subdued, consistent with the slow pace of economic
growth. According to the Quarterly Employment Statistics (QES) of Statistics South Africa
(Stats SA), formal non-agricultural employment increased by a mere 7,000 employees or
0,1 per cent between the quarters ended June 2012 and June 2013. Of great concern is

Monetary Policy Review November 2013
the loss of jobs in the tradeable sectors of the economy. Over this period there was a loss
of 23 000 employees in the mining sector and a total of 7 000 in the manufacturing and
construction sectors, while there was an increase of 26 000 employees in the community,
social and personal services industry.
Growth in final consumption expenditure by households has been on a declining trend since
the first quarter of 2012, but may have bottomed out, having increased from 2,3 per cent in
the first quarter to 2,5 per cent in the second quarter. There was a notable increase in the
consumption of durable goods, which could include pre-emptive buying ahead of possible
exchange rate-induced price increases, as reflected in the sharp decline in new vehicle sales in
August. The moderate trend in consumer demand is also reflected in the 2,8 per cent yearon-year increase in retail trade sales in July, and the month-on-month decline of 0,5 per cent.
The FNB/BER Consumer Confidence Index increased significantly in the third quarter
and expenditure is expected to be positively affected by high wage settlements and positive
wealth effects. Nevertheless, consumption expenditure growth is expected to be constrained
by low employment creation, high household debt levels, declining rates of credit extension
to households, and high petrol and electricity price increases, all of which are likely to curtail
discretionary spending.
The trend of wage settlements remains an upside risk to inflation and job creation. The
current wage bargaining round has seen a wide range of settlements, generally above the
current inflation rate. According to Andrew Levy Employment Publications, the overall
average wage settlement rate in collective bargaining agreements was 7,9 per cent in the
first half of 2013 and this is likely to have increased in the third quarter. According to data
derived from the QES, average salary and wages per worker over four quarters increased
by 8,7 per cent in the quarter ending June 2013, but when accounting for productivity
increases, the unit labour cost increase amounted to 6,8 per cent. The ultimate impact on
inflation will depend in part on the increase in the total wage bill, as the impact of higher
wages may be offset by job losses or slower employment creation. We are concerned that
the increase in productivity, although relatively low, reflects job losses and a switch to more
capital intensive production.
The moderate pace of bank credit extension to the private sector has been maintained
with twelve-month growth of 8,7 per cent in total loans and advances recorded in July.
Instalment sale credit and leasing finance remained robust, while growth in general loans
to households, which is mainly unsecured lending, declined to 20,2 per cent in July, the
lowest rate of growth since August 2010. The shorter-term trends for unsecured lending are
more marked, with growth in the three months to July measuring 11,0 per cent and negative
growth in loans of less than R30 000. Growth in mortgage credit extension has remained
subdued. Twelve-month growth in credit extension to the corporate sector declined from
10,5 per cent in June to 8,7 per cent in July, with some indications that this reflects a lack
of demand by corporates. They remain relatively cash flush and have also placed increasing
reliance on corporate bond issues.
Food prices are a risk to the inflation outlook, although the continued downward trend
of international food prices has helped to offset the impact of the weaker rand on maize
and wheat prices. Consumer food inflation measured 7,4 per cent in August, while at the
producer price level, manufactured food price inflation measured 7,5 per cent in July. Price
increases of agricultural products, by contrast, were muted at 0,5 per cent in July, with yearon-year declines in the prices of cereals and meat, but strong increases, of 21,4 per cent, in
fruit and vegetable prices.
The immediate risks to inflation from international crude oil prices appear to have abated
for now following a decline in the political risk premium, but prices remain highly sensitive
to developments in the Middle East in particular. Having increased to a level of around
Monetary Policy Review November 2013

US$118 per barrel in response to events in Egypt and Syria, the price has since moderated
to around US$110 as the risk of US military action in Syria has subsided. Petrol prices
increased at a year-on-year rate of 23,0 per cent in August, but favourable base effects and
the small decline in the price in September are likely to result in a far lower rate of petrol
price inflation in that month. The combination of a lower oil price and a stronger exchange
rate observed in recent days is likely to result in a further moderate price decline in October,
reversing the expectation earlier in the month of a further significant increase.
The MPC assesses the risks to the inflation outlook to be on the upside, mainly due to
exchange rate and wage pressures. The decision of the Fed to delay tapering has provided a
temporary reprieve to the exchange rate. However, the continued uncertainty relating to the
timing of the inevitable slowdown in bond purchases and its data-dependent nature imply
that emerging-market currencies, including the rand, are likely to experience a protracted
period of volatility. In the short run these developments may have moderated the risk to
inflation from the exchange rate, but medium- to longer-term risks remain, which will be
assessed on an ongoing basis.
The MPC remains mindful of the conflicting policy choices that it faces. The breach of the
upper end of the inflation target is expected to be temporary, but the longer-term trajectory
is uncomfortably close to the upper end of the target range. At the same time, there are
still no significant demand-side pressures in the economy and consumption expenditure
growth is subdued. The output gap continues to widen, and the employment data show
that there is very little net employment creation in the economy, while employment in the
manufacturing and mining sectors has been declining. Consumers remain under pressure
with persistently high debt-to-disposable income ratios, further exacerbated by the rising
cost of petrol and other administered prices.
Currently, a sustained breach of the inflation target is not our central forecast, but the
upside risks to the inflation outlook require careful monitoring. Should the risks to the
medium-term inflation outlook deteriorate significantly the MPC will not hesitate to take
appropriate action in order to maintain the integrity of the inflation-targeting framework
and to anchor inflation expectations at a lower level. At this stage, however, given the global
uncertainties and downside growth risks, the MPC has decided to keep the repurchase rate
unchanged at 5,0 per cent per annum.

Monetary Policy Review November 2013
Statement of the Monetary Policy Committee
21 November 2013
Issued by Gill Marcus, Governor of the South African Reserve Bank, at a meeting of the
Monetary Policy Committee (MPC) in Pretoria
Since the previous meeting of the Monetary Policy Committee (MPC), the headline
inflation rate has returned to within the inflation target range. Despite this favourable
development, inflation is expected to remain uncomfortably close to the upper end of the
target band. Moreover, the upside risks to the inflation outlook remain elevated, dominated
by uncertainties primarily relating to both the timing and the speed of the tapering of the
United States (US) Fed’s bond purchasing programme.
The domestic growth outlook remains fragile, with third-quarter growth expected to have
been adversely affected by the protracted work stoppages in the motor vehicle sector in
particular, which also contributed to a decline in exports. Both business and consumer
confidence remain at low levels. The MPC therefore continues to face the dilemma of upside
risks to inflation, against a backdrop of a weaker growth outlook and a possible further
depreciation of the currency.
Having breached the upper end of the inflation target range in July and August, the yearon-year inflation rate, as measured by the consumer price index (CPI) for all urban areas,
declined to 6,0 per cent in September and 5,5 per cent in October. Food and non-alcoholic
beverages inflation surprised on the downside, moderating to 4,3 per cent from 6,0 per cent
in September, and contributing 0,6 percentage points to the annual CPI increase, compared
with 0,9 percentage points in the previous month. Petrol prices increased at a year-on-year
rate of 9,3 per cent, down from 12,8 per cent in September. Core inflation, which excludes
food, petrol and electricity, was unchanged at 5,3 per cent, while administered price inflation
excluding petrol increased marginally to 7,1 per cent. The headline producer price inflation
for final manufactured goods was unchanged in September at 6,7 per cent.
The headline inflation forecast of the Bank is more or less unchanged since the previous
meeting of the MPC. The forecast average inflation rates for 2013 and 2014 are 5,8 per cent
and 5,7 per cent respectively, both years 0,1 percentage point lower than in the previous
forecast. The forecast for 2015 is unchanged at 5,4 per cent, with inflation expected to
average 5,3 per cent in the final quarter of that year. Inflation is expected to remain within
the target range for the entire forecast period, with a peak of 5,9 per cent in the second
quarter of 2014.
The forecast for core inflation for 2013 is unchanged at an average of 5,2 per cent, but has
deteriorated for 2014 when it is expected to average 5,6 per cent compared with the forecast
of 5,4 per cent previously. The forecast for 2015 remains at 5,3 per cent, ending the year at
5,1 per cent. This upward drift of the underlying inflation measure continues to be driven
by the lagged effects of the depreciation of the rand exchange rate and the impact of higher
unit labour costs.
The global economy is characterised by a hesitant multispeed recovery. The outlook for the
US remains positive following third-quarter growth of 2,8 per cent, notwithstanding the
fiscal headwinds and the unresolved budget and fiscal cliff issues, which remain downside
risks. The employment data have generally been positive, prompting speculation that the
Fed may begin cutting back on its programme of bond purchases sooner than previously
anticipated. There is a great deal of uncertainty around the timing and pace of tapering. The
timing is likely to be highly sensitive to labour market developments, and we expect the pace
to be gradual to avoid undue impacts on financial markets. However, as evidenced earlier
this year, the financial markets’ reaction will be key to the process and to spillover effects.
Monetary Policy Review November 2013

While the United Kingdom (UK) economy also appears to be growing relatively strongly,
with annualised growth of 3,2 per cent in the third quarter of 2013, hopes for a rebound in
the eurozone have been undermined by weak growth in the third quarter. Having emerged
from a prolonged recession in the second quarter, the region recorded an annualised growth
rate of 0,4 per cent in the third quarter, with contractions in a number of countries, including
France and Italy, and a slowdown in Germany. The Japanese economy shows signs of a
sustained recovery, but growth moderated to 1,9 per cent in the third quarter, from around
4 per cent in the previous two quarters.
The slowdown in emerging markets remains broad-based but there are signs that some
countries, particularly in emerging Asia, may be responding to the recovery in the advanced
economies. The outlook for China has also improved and it is expected to maintain its
growth rate of around 7,5 per cent, amid recent moves towards further structural reforms.
Subdued growth is expected in most of the larger Latin American economies, including
Brazil and Mexico.
Monetary policy in the advanced economies is expected to remain highly accommodative for
some time against the backdrop of subdued headline and core inflation, as well as persistently
high rates of unemployment. Despite the expected reversal of quantitative easing, the US
policy rate is expected to remain at the zero bound for much longer, while slow growth and
the risk of deflation prompted the recent further easing of monetary policy by the European
Central Bank. Inflation in the UK has declined to below the upper threshold of 2,5 per cent.
Emerging-market economies are facing generally higher inflation dynamics, due in part to
exchange rate reactions to expectations of Fed tapering. Inflation pressures have prompted
monetary policy responses in a number of countries including Brazil, India and Indonesia,
who have all raised rates.
Speculation regarding tapering has been the main driver of rand exchange rate volatility
since the previous meeting of the MPC. The rand appreciated to around R9,55 against the
US dollar following the September decision by the Fed to delay tapering, and then reached a
level of around R10,45 following the November Federal Open Market Committee meeting
when market expectations were for an earlier start to tapering. More recently the rand has
appreciated somewhat as the expected timing was pushed back by the markets, and also in
response to the South African Revenue Service (SARS) release of new trade data. The rand
has depreciated by 17 per cent against the US dollar since the beginning of the year, and by
15 per cent on a trade-weighted basis.
The exchange rate of the rand remains an increasingly upside risk to the inflation outlook,
notwithstanding the relatively slow pass-through to consumer prices to date. The challenge
facing the MPC is not only to anticipate the timing and speed of Fed tapering, but also to
try to assess the extent to which tapering is already priced into the exchange rate. There is a
risk that, should there be a stronger or more disorderly response by the markets to actual Fed
tapering, the reaction of the exchange rate could be more extreme.
These developments have been reflected in the non-resident activity in the domestic bond
and equity markets. In September and October, when expectations of Fed tapering were
modified, non-residents were net buyers of bonds to the value of R17 billion, more or less
reversing the net sales that followed the initial reaction in May. Since early November,
however, when risk aversion returned, net sales of bonds have amounted to R9,7 billion. At
the same time, net sales of equities have amounted to R14,5 billion. Year to date, non-resident
purchases of bonds and equities have totalled R12,8 billion and R4,8 billion respectively.
A further risk is the deficit on the current account of the balance of payments, which makes
the exchange rate more sensitive to possible capital flow slowdowns or reversals. In the
second quarter of 2013 the deficit amounted to 6,5 per cent of GDP, and the published trade

Monetary Policy Review November 2013
data suggest that a further deterioration of the trade account can be expected following the
temporary collapse of motor vehicle exports and significantly higher imports in the third
quarter. The actual outcome may be ameliorated to some extent by the recent inclusion by
SARS of South Africa’s merchandise trade data with its Southern African Customs Union
(SACU) partners in the trade statistics, made possible by the modernisation of the customs
data collections systems. The new inclusive data have resulted in a significant adjustment to
the trade statistics published by SARS.
However, in compiling the balance-of-payments accounts in the past, the Bank made
estimates of South Africa’s trade with Botswana, Lesotho, Namibia and Swaziland, based
on various sources. The historical trade data in the balance-of-payments accounts will be
revised to account for the differences between the new data and our own previous estimates.
These revisions will be published in the December Quarterly Bulletin on 3 December, and
may also result in minor revisions to the gross domestic product (GDP) data. Nevertheless,
the underlying trend of the current account is not expected to change significantly.
The domestic economic growth outlook remains fragile. Following a rebound of growth
to an annualised 3,0 per cent in the second quarter of 2013, the third-quarter outcome is
expected to be significantly lower, and more in line with the 0,9 per cent recorded in the
first quarter of this year. The Bank’s forecast for growth in 2013 has been revised down
from 2,0 per cent to 1,9 per cent, while the forecasts for 2014 and 2015 have been revised
down to 3,0 per cent and 3,4 per cent respectively, from 3,3 per cent and 3,6 per cent. This
is consistent with the Bank’s composite leading business cycle indicator which continues to
trend sideways, while the RMB/BER Business Confidence Index at 43 points was more or
less unchanged in the fourth quarter, indicative of a subdued outlook.
The adverse third-quarter growth outcome is largely due to a quarter-to-quarter contraction
of 2,1 per cent in the manufacturing sector, in part a consequence of the protracted strikes
that resulted in a 27,9 per cent decline in the production of motor vehicles, parts and
accessories in that quarter. Reflecting these developments, the Kagiso PMI declined to
50,0 index points in September from 55,6 points in August, but recovered somewhat to
50,7 index points in October. Industrial action and safety-related stoppages also impacted
negatively on mining output, but despite negative growth in August and September, a
positive quarter-to-quarter growth rate of 1,4 per cent was recorded.
Encouragingly, the construction sector is showing signs of recovery with a generally steady
upward trend in the value of real building plans passed, and the confidence of building
contractors in the business confidence index increasing to its highest level in almost six years.
The moderating trend in the growth of consumption expenditure by households that has
been evident for some time appears to have continued into the third quarter. Retail trade
sales recorded a quarter-to-quarter increase of only 0,4 per cent in that quarter, and a monthto-month contraction of 0,7 per cent in September, although wholesale trade was more
robust. This is consistent with the FNB/BER Consumer Confidence Index which had
reached a ten-year low in the third quarter of 2013, with only a marginal improvement in
the fourth quarter.
The trends in credit extension are likely to constrain consumption expenditure in the short
to medium term. Twelve-month growth in total loans and advances measured 8,4 per
cent in September, down from 9,0 per cent in August, while the quarterly growth rate was
5,3 per cent in the third quarter. There are clear indications of a sharp decline in lending to
households. Twelve-month growth in general loans to households, mostly unsecured lending,
declined to 14,2 per cent in September, the lowest rate of growth since February 2010,
while annualised growth over three months was 2,8 per cent. In August and September a
contraction was recorded in this category. Growth in mortgage lending, at below 3 per cent,
Monetary Policy Review November 2013

remained subdued despite a small acceleration in September, mainly driven by commercial
mortgages. By contrast, instalment sale credit remained buoyant, while twelve-month
growth in total loans and advances to companies increased to 10,6 per cent.
Household consumption expenditure is, however, expected to be supported to some extent
by wage trends. According to Andrew Levy Employment publications, the overall average
wage settlement rate in collective bargaining agreements was 7,9 per cent in the first nine
months of 2013, compared with 7,6 per cent for 2012 as a whole. Although a number of
these settlements are generally well below the initial demands, they are considerably above
the upper band of the inflation target, and pose a potential risk to the inflation outlook.
According to the Quarterly Labour Force Survey of Statistics South Africa (Stats SA), the
official unemployment rate moderated to 24,7 per cent in the third quarter of 2013, from
25,5 per cent a year earlier. This follows an increase in employment of 2,8 per cent or
383,000 jobs over that period. This implies that the economy has only now returned to the
same levels of employment attained before the crisis. These figures, however, are in contrast
to the Quarterly Employment Statistics of Stats SA which showed a 0,1 per cent growth in
the formal non-agricultural sector from June 2012 to June 2013, and which correlates more
closely with GDP trends.
Fiscal policy, as outlined in the Medium Term Budget Policy Statement, continues to be
countercyclical, attempting to balance the need to support the economy and the need for
fiscal consolidation. A deficit of 4,2 per cent is projected for the current fiscal year, and
is expected to narrow to 3,0 per cent by 2015/16. Non-interest real expenditure growth is
capped at an average of 2,2 per cent over the next three years, and the three-year agreement
with civil service unions, due to expire in 2015, is expected to limit the growth in the public
sector wage bill. This pace of consolidation should stabilise the net national debt at 44 per
cent in 2017/18.
Food price inflation moderated to 4,2 per cent in October, from 6,0 per cent in September,
with the deceleration in price increases being broad-based. Final manufactured producer
food price inflation declined from 7,5 per cent peak in July to 6,8 per cent in September.
Agricultural product prices increased by 4,3 per cent at the producer price level in September,
with cereals and other crop prices declining by 6,8 per cent. This was in line with lower
international food commodity prices, which offset the impact of the weaker exchange rate to
some extent. While food price inflation may continue to moderate in the short term, upside
pressures can be expected from the exchange rate and the fact that meat price declines, due
in part by drought-induced culling, are unlikely to persist.
International oil prices have remained relatively contained below the US$110 per barrel
level since the previous MPC meeting. These prices continue to be dominated by political
developments in the Middle East, and the global growth outlook. Should international
oil prices and the exchange rate remain at current levels, a small increase in the domestic
petrol price is likely in December following a cumulative 48 cents decrease in October and
November. It is important to note, however, that further weakness in the exchange rate will
pass through quickly into these prices.
Despite the better-than-expected October inflation outcome, the MPC continues to assess
the risks to the inflation outlook to be on the upside, mainly as a result of further potential
exchange rate pressures. Tapering by the Fed is inevitable, but until a decision is taken
financial markets globally are likely to experience heightened volatility. There is a high
degree of uncertainty regarding the extent to which US policy actions are already priced in
to the exchange rate.
Compounding the risks to the exchange rate is the stubbornly wide current-account
deficit, notwithstanding recent revisions to the trade data. The deficit increases South
Africa’s sensitivity to global spillover effects. The MPC is mindful of the adjustment lags

Monetary Policy Review November 2013
and will be watching carefully for signs of a positive current-account response. We need
to take advantage of the depreciated exchange rate and not allow the benefits to be eroded
through higher wage and other input prices. Action will be required should the adjustment
mechanism not operate effectively.
While the exchange rate impact on CPI is increasingly evident in the core inflation measure,
to date the pass-through has been relatively muted. But this is unlikely to persist should
there be a significant further depreciation.
At the same time the policy dilemma is underlined by the deterioration in the growth
outlook. The committee assesses the risks to be on the downside, amid continued supply
disruptions and low business and consumer confidence. The downward trend of household
consumption expenditure is indicative of relatively weak demand conditions in the economy,
and slower bank credit extension to households is likely to reinforce this trend.
The inflation forecast remains uncomfortably close to the upper level of the inflation target
range but our central forecast remains within the target. Given the increased upside risks to
the outlook, we do not see room for further monetary accommodation. We will continue
to monitor developments carefully on an ongoing basis and remain committed to act as
required. The MPC has decided to keep the repurchase rate unchanged at 5,0 per cent per
annum at this stage.
The MPC meeting dates for 2014 are as follows:
27–29 January 2014 (Monday–Wednesday)
25–27 March 2014 (Tuesday–Thursday)
20–22 May 2014 (Tuesday–Thursday)
15–17 July 2014 (Tuesday–Thursday)
16–18 September 2014 (Tuesday–Thursday)
18–20 November 2014 (Tuesday–Thursday)
Monetary Policy Review November 2013

Abbreviations
Alsi
All-Share Price Index
API
administered price index
BER
Bureau for Economic Research [Stellenbosch University]
BIS
Bank for International Settlements
BOE
Bank of England
BRICS
Brazil, Russia, India, China and South Africa
CPI
consumer price index
CPIX
consumer price index excluding mortgage interest cost for metropolitan
and other urban areas
CRB
Commodity Research Bureau
ECB
European Central Bank
EMBI+
[JPMorgan] Emerging Markets Bond Index Plus
FAO
Food and Agriculture Organization of the United Nations
FAQ
frequently asked questions
FRA
forward rate agreement
GDE
gross domestic expenditure
GDP
gross domestic product
IMF
International Monetary Fund
Jibar
Johannesburg Interbank Agreed Rate
JSE
Johannesburg Securities Exchange Limited
MPC
Monetary Policy Committee
MPF
Monetary Policy Forum
MPR
Monetary Policy Review
MTEF
medium-term expenditure framework
NAB
non-alcoholic beverages
NEER
nominal effective exchange rate
OECD
Organisation for Economic Co-operation and Development
PMI
Purchasing Managers’ Index
PPI
producer price index
QE
quantitative easing
REER
real effective exchange rate
repo
repurchase [rate]
SARS
South African Revenue Service
S&P
Standard & Poor’s
Stats SA
Statistics South Africa
the Bank
South African Reserve Bank
the Fed
United States Federal Reserve
TRJ
Thompson Reuters/Jefferies
US
United States
VIX®
Chicago Board Options Exchange Market Volatility Index
WEO
World Economic Outlook

Monetary Policy Review November 2013
Glossary
Accommodative monetary policy: Monetary policy-related actions intended to stimulate economic
activity by lowering interest rates, increasing the quantity of money or by keeping already low interest
rates stable in the economy.
Administered prices: Prices that are set according to government’s policy rather than determined
by market supply and demand forces (usually because the product is related to social welfare). These
prices may or may not have an economic regulator.
Advanced economies: Advanced economies are highly industrialised countries with high levels of
GDP per capita.
Balance of payments: A record of transactions between the home country and the rest of the world
over a specific period. It includes the current and financial accounts. See also current account.
Bond yield: The return on an interest-bearing instrument accruing to its owner. The yield-
to-maturity takes into account the price of the bond, all coupon cash flows and the remaining term
to maturity.
Break-even inflation: This is calculated as the difference between nominal yields on a conventional
government bond and real yields on an inflation-linked government bond of similar maturity. It is
used as a proxy of market-determined inflation expectations.
Budget deficit: The extent to which government expenditure exceeds government revenue (a budget
surplus occurs when revenue exceeds expenditure).
Business/consumer confidence: Economic indicators measuring the state of optimism about the
economy and its prospects among business managers and consumers.
Capacity utilisation: The percentage utilisation of production capacity in the manufacturing industry
is a measure of the use of manpower, plant and machinery in manufacturing. The degree of capacity
constraint experienced in the manufacturing industry is determined by obtaining indications from
large manufacturing enterprises regarding skills shortages, and other reasons such as downtime due
to maintenance, changes in productivity and seasonal factors. The measure is used to assess the
degree of capacity constraint experienced in the manufacturing industry.
Capital flow reversals: The movement of portfolio investment in bonds and equity from the receiving
country back to the country of origin.
Central projection: The most likely outcome for the variable of interest over the period, according
to South African Reserve Bank forecasts.
Collective bargaining system: A system within which labour market-related issues are resolved by
groups representing labour (trade unions) and groups representing employers (representatives from
individual organisations or chambers representing industries).
Commodity prices: Commodities can refer to food, oil or precious metals. Major South Africanproduced commodities include platinum and gold.
Consumer price index (CPI): CPI provides an indication of aggregate price changes in the domestic
economy. It is calculated using a number of categories forming a representative set of goods and
services bought by consumers.
Core quarterly forecasting model: The South African Reserve Bank’s primary forecasting model,
used to project (core) inflation values on a quarterly basis.
Core inflation: Inflation excluding food and energy (including petrol) prices, which is considered a
better reflection of the trend underlying inflation.
Monetary Policy Review November 2013

Crude oil price: The price in US dollars per barrel of unrefined (North Sea) oil.
Currency spread: A measure of the market-perceived risk embedded in the rand. It is calculated
as the difference in yields between rand-denominated domestic government bonds and US dollardenominated domestic government bonds of a similar maturity.
Current account: The current account of the balance of payments consists of net exports (exports
less imports) in the trade account, as well as the services, income and current transfer account.
Demand pressures: Demand pressures refer to price pressures from increased consumption in the
domestic or foreign economy.
Developing economies: Developing economies have not reached a significant level of industrialisation,
have less developed infrastructure and have lower standards of living and literacy compared to
developed nations.
Emerging-market economies: Emerging-market economies are those with low to middle income per
capita, which are advancing rapidly and are integrating with global (product and capital) markets.
Exchange rate depreciation (appreciation): Exchange rate depreciation (appreciation) refers to a
decrease (increase) in the value of a currency relative to another currency.
Exchange rate pass-through: The effect of exchange rate changes on domestic inflation (i.e.,
percentage change in domestic CPI due to a 1 per cent change in the exchange rate). Changes in
the exchange rate affect import prices, which in turn affect domestic consumer prices and inflation.
Exogenous prices: Exogenous prices are prices of goods that are set outside the influence of domestic
policy. These prices are often influenced by market dominance (e.g., cartels and monopolies) as well
as supply and demand considerations globally. A prime example of a good whose price is exogenous
in the domestic context is crude oil. Most commodities are priced exogenously.
Fiscal consolidation: Government policies that are aimed at reducing budget deficits through
decreases in government spending, increases in taxation or a combination of the two. Other terms
used to refer to fiscal consolidation include fiscal austerity and fiscal reform.
Flexible inflation targeting: Refers to inflation-targeting regimes that consider changes in inflation
and other variables affecting the real economy in the short term. Hence, where under strict inflation
targeting only inflation matters, flexible inflation targeting takes into account other variables, such
as output.
Forecast horizon: The future period over which the Bank generates its forecasts. Typically, between
two and three years.
Forward rate agreement (FRA): A contract that determines the rate of interest to be paid or received
on an obligation beginning at a future start date.
Gross domestic expenditure (GDE): Total value of expenditure on goods and services within the
country plus expenditure on imports less exports.
Gross domestic product (GDP): Total market value of all goods and services produced in a country.
It includes total consumption expenditure, capital formation, government consumption expenditure
and the value of exports less the value of imports.
Gross fixed capital formation: The value of acquisitions of capital goods (e.g., machinery, equipment
and buildings) by firms, adjusted for disposals constitutes gross fixed capital formation.
Headline consumer price index (CPI): CPI for all urban areas that is released monthly by Stats SA.
Headline CPI is a measure of price levels in all urban areas. The 12-month percentage change in
headline CPI is referred to as headline CPI inflation and reflects changes in the cost of living. This
is the official inflation measure for South Africa.

Monetary Policy Review November 2013
Household final consumption expenditure: The amount of money spent by households on consumer
goods and services.
Household disposable income: Household disposable income is defined as primary income, net
current transfers and social benefits, less taxes on income and wealth.
House price index: Measure of the prices at which residential dwellings are bought and sold
over time.
Inflation (growth) outlook: The evolution of future inflation (growth) over the forecast horizon.
Inflation targeting: Monetary policy framework that is used by central banks to steer actual inflation
towards an inflation target level or range.
Interest rate smoothing: The gradual decrease (increase) of the policy rate over the business cycle.
Policymakers target the medium term, thus they will allow time for previous changes to have
an effect before making further changes (if necessary). Gradual interest rate changes also permit
economic stakeholders to adapt their expectations about future interest rate changes.
Median: A statistical term used to describe the observed number that separates ordered observations
in half.
Mortgage: A form of secured loan extended for the purchase of real estate.
Nominal effective exchange rate (NEER): An index that expresses the value of a country’s currency
relative to a basket of other currencies. An increase (decrease) in the effective exchange rate indicates a
strengthening (weakening) of the domestic currency with respect to the selected basket of currencies.
The weighted average exchange rate of the rand is calculated against 15 currencies. The weights
of the five major currencies are in brackets: euro (34,82), US dollar (14,88), Chinese yuan (12,49),
British pound (10,71) and Japanese yen (10,12). Index: 2000 = 100.
Net exports: See current account.
Nominal variables: Nominal variables are stated in current prices and represent the cost of an item.
Output gap/potential growth (GDP): Potential growth is the rate of GDP growth that could
theoretically be achieved if all productive assets in the economy are employed in a stable inflation
environment. The output gap is the difference between actual growth and potential growth. If this
is negative, then the economy is viewed to be underperforming and demand pressures on inflation
low. If the output gap is positive, the economy is viewed to be overheating and demand pressures
inflationary in nature.
Producer price index (PPI): The PPI is an index that measures changes in prices of goods at the
factory gate. Stats SA currently produces five different indices that measure price changes at different
stages of production. Headline PPI is the index for final manufactured goods. PPI measures indicate
potential pressure on consumer prices.
Productivity: The amount of goods and services produced in relation to the resources utilised in the
form of labour and capital. The most common measure is labour productivity.
Purchasing Managers’ Index (PMI): An index that shows the sentiment of purchasing managers in
the manufacturing sector, indicating the broader economic health of the sector.
Quantitative easing (QE): An unconventional monetary policy tool, implemented largely in the US,
the UK, the euro area and Japan. QE involves the central bank purchasing bonds on the open market
so as to inject liquidity into the economy. This also leads to a markedly higher level of money supply
in the economy.
Range-bound: When a variable (e.g., the exchange rate) moves within a relatively narrow range for
a certain period.
Monetary Policy Review November 2013

Real effective exchange rate (REER): The Bank for International Settlements’ REER indices include
a total of 61 entities, including individual euro area countries and the euro area as a separate entity.
The base year for the indices is 2010 and the REERs are geometric-weighted averages of bilateral
exchange rates adjusted by relative consumer prices.
Real variables: Variables that are adjusted for inflation and hence are expressed in constant prices (of
some base year) and represent the volume of an aggregate.
Real repo rate: The nominal repurchase (repo) rate, as set by the Monetary Policy Committee,
adjusted for inflation.
Repurchase rate (repo rate): The rate that commercial banks pay to borrow money from the South
African Reserve Bank.
Second-round effects: This describes the indirect effect of price shocks (first round) on other prices
(second round). For example, should the petrol price rise sharply, not only does it affect the cost of
transport for the consumer, but also for producers who will then increase the price of their goods to
cover the transport cost.
Sovereign spread: The risk attached to the probability that a country will default on its debt. The
sovereign spread (a proxy for sovereign credit ratings) is calculated by comparing the yield on a dollardenominated South African bond with that of US Treasuries.
Terms of trade: Ratio of the value (in price terms) of exports to the value (in price terms) of imports.
If this ratio is below 1 then the value of imports exceeds that of exports.
Unit labour costs: The labour cost of production of one “unit” of output. This is calculated as the
total wages and salaries in the non-agricultural sector divided by the real value added at basic prices
in the non-agricultural sector of the economy.
Unsecured loans: Loans extended without any collateral (guarantees/underlying assets) as security
to protect the value of the loan.
VIX®: The Chicago Board Options Exchange Market Volatility Index (VIX®) measures the implied
volatility of S&P 500 index options and serves as a popular indicator of investors’ perception of risk.

Monetary Policy Review November 2013
Monetary Policy Review November 2013

Monetary Policy Review November 2013