Monetary Policy
Review


November 2008
Monetary Policy
Review
November 2008
South African Reserve Bank
Monetary Policy Review November 2008
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ISSN: 1609-3194
South African Reserve Bank
Monetary Policy Review November 2008
Contents
Monetary Policy Review


Statements issued by Mr T T Mboweni, Governor of the South African Reserve Bank

12 June 2008

14 August 2008

9 October 2008
Boxes


Figures


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


South African Reserve Bank
Monetary Policy Review November 2008
Tables


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


South African Reserve Bank

Monetary Policy Review November 2008
Monetary Policy Review
Introduction
This review of monetary policy is presented against a backdrop of financial turmoil in global
markets, which has increased the degree of uncertainty regarding the world economic
outlook considerably. Although South African markets have been fairly resilient to the
current crisis, the heightened levels of uncertainty about the global economy are
contributing to a challenging monetary policy-making environment. At the same time,
policy has to deal with the continuing pass-through of inflation pressures from a succession
of international food and energy price shocks; developments in domestic electricity prices;
and, more recently, from the foreign-exchange rate of the rand.
An important development for the inflation-targeting framework was the announcement
by the Minister of Finance on 21 October 2008 that the targeted inflation measure would
be changed from 25 February 2009. The year-on-year increase in the consumer price
index excluding mortgage interest cost for metropolitan and other urban areas (CPIX)
would be replaced as the targeted measure with the headline consumer price index (CPI
for all urban areas). More information regarding this change is provided in the boxes that
are included in this document.
In this Monetary Policy Review the latest developments in inflation and the factors that
impact on inflation are analysed. Recent monetary policy developments are then
reviewed, and the outlook for inflation and the inflation forecast are presented. In
addition, three issues are examined in boxes. The first box discusses the changes to the
inflation target measure, while the second reviews the international treatment of owneroccupied housing in measures of consumer prices and places the changes in the South
African consumer price index (CPI) in context. The final box provides an analysis of the
changes in the weights of various expenditure groups for the new headline CPI.
Box 1 Changes to the inflation target measure
On 21 October 2008 the Minister of Finance announced in his Medium Term Budget Policy
Statement that the targeted inflation measure would be changed from 25 February 2009 when the
January 2009 consumer price index (CPI) data were released. Following revisions to the
methodology employed to compile the CPI, which would result, inter alia, in a change in the
treatment of housing (Box 2), the year-on-year increase in the consumer price index excluding
mortgage interest cost for metropolitan and other urban areas (CPIX) would be replaced as the
targeted measure with the headline CPI (CPI for all urban areas). The continuous inflation target
range for headline CPI would remain at 3 to 6 per cent.
The new CPI for all urban areas measure brings into alignment the two most commonly cited
measures of inflation in South Africa, namely the CPI (for metropolitan areas) and the CPIX. The
new index will serve as both the headline measure and the inflation target measure, and will realign
the geographic collection and reporting areas of the measures. The new CPI for all urban areas will
cover the primary and secondary urban areas detailed by Statistics South Africa (2006).
References
National Treasury. 2008. “Medium Term Budget Policy Statement”. Speech by T A Manuel, Minister
of Finance, 21 October.
Statistics South Africa. 2006. “Boundaries and buying: Realigning the publication areas of the CPI with
current political and economic geographic realities”, Pretoria: Statistics South Africa, October.

Recent developments in inflation
This section analyses recent trends in the main inflation indices and reviews
developments in the main determinants of inflation in the South African economy.
The evolution of indicators of inflation
The measure of inflation currently targeted by the South African Reserve Bank (the Bank),
namely the year-on-year increase in the CPIX, has remained above the inflation target
range of 3 to 6 per cent since April 2007 (Figure 1). When the previous Monetary Policy
Review was published in May 2008, the latest available CPIX inflation rate, for March, was
10,1 per cent. Since then, driven mainly by developments in the prices of food and
energy, CPIX inflation increased to 13,6 per cent in August 2008, before declining to
13,0 per cent in September. The transitional upward bias, which is included in the yearon-year CPIX inflation rates for the period from January to December 2008 due to the
treatment of non-discounted clothing and footwear, is estimated to have averaged
0,23 of a percentage point for the months from March to September 2008.
Figure 1 also shows that the inflation rate measured in terms of the headline consumer
price index for metropolitan areas (CPI) moved in tandem with that of the CPIX, rising from
10,6 per cent in March 2008 to 13,7 per cent in August and then slowing to 13,1 per cent
in September.
Table 1 reports the weighted contributions of the main components of the CPIX to the
overall year-on-year inflation rate. The influence of food and energy prices is clearly
evident. The contribution of the food component increased from 4,4 percentage points
in March 2008 to 5,3 percentage points in August, and then decreased to
5,0 percentage points in September. The contribution of the transport component
increased from 2,1 percentage points to 3,2 percentage points between March and July,
before declining to 2,7 percentage points in September. The contribution of the fuel and
power component also increased significantly, rising from 0,4 percentage points in
March–June 2008 to 1,3 percentage points in August and September. This increase
mainly reflects the electricity price increase in July 2008.
Monetary Policy Review November 2008
South African Reserve Bank
Percentage change over twelve months

CPI
CPIX
Figure 1
Consumer price inflation: CPIX and CPI
Source: Statistics South Africa
Table 1
Contributions to CPIX inflation
Percentage change over twelve months* and percentage points

Mar
Apr
May
Jun
Jul
Aug
Sep

Of which:

Medical care and health expenses ....

Source: Statistics South Africa
South African Reserve Bank

Monetary Policy Review November 2008
Box 2 Owner-occupied housing and the consumer price index
The treatment of housing services, which typically account for a large proportion of a household’s
consumption expenditure, is a complex issue faced by compilers of consumer price indices (CPIs),
not only in South Africa but around the world. Internationally, there are three main methodological
approaches to measuring owner-occupied housing services in the CPI,1 namely (1) the
acquisitions, (2) user cost and (3) rental equivalence approaches (Table B2.1). Statistics South
Africa will change from a user cost approach to compiling housing in the CPI to a rental
equivalence approach from January 2009,2 a change that has important implications for the
inflation-targeting framework (see Box 1).
Table B2.1
International comparison of housing in the CPI
Per cent
Country
Method of measuring
Housing weights
owner-occupied housing (OOH)
OOH
Rental
Total
Australia
11,21
5,22
16,43
Canada
16,48
5,36
21,84
Euro area
–
6,00
6,00
Japan
14,22
3,44
17,66
Mexico
11,97
2,52
14,49
New Zealand
5,51
7,85
13,36
Norway
14,95
2,51
17,46
South Africa

Source: Various national statistical agencies
The approaches differ conceptually according to whether the intention is to consider the cost of
the use of the dwelling (the user cost approach and the rental equivalence approach) or the cost
of acquiring the dwelling (the acquisitions approach). The methodologies also differ in their data
requirements.
The acquisitions approach focuses on measuring the cost of new dwellings and renovations to
current dwellings. The data requirements in this case include legal and real-estate agency fees; the
cost of repairs and maintenance; property rates and taxes; and more demanding items such as
the net purchases of the dwelling (by the reference population); and the cost of construction of new
dwellings, and of alterations and renovations. Countries that have implemented this approach
include Australia and New Zealand.
The user cost approach requires that the actual cost of owner-occupied housing services and
other costs related to the use of the dwelling are estimated, as well as the opportunity cost of

Classification differs from
one author to the other.
Poole et al. (2005), for example, classify these approaches
into four categories.

Statistics South Africa
(2008) documents the change.
Haglund (2000) provides a
preliminary discussion of the
issues in the South African
context.

Food prices continued to increase strongly during 2008, although some signs of moderation
are evident. The inflation rate for the overall food price component of the CPIX increased from
15,6 per cent in March to 19,2 per cent in August, before slowing to 17,9 per cent in
September (Figure 2). The prices of grain products and of fats and oils rose particularly
strongly in this period. The price of fats and oils accelerated from a rate of 52,7 per cent in
March to 65,0 per cent in June, before moderating to a rate of 51,8 per cent in September.
The rate of increase of grain product prices rose from 22,9 per cent in March to 36,5 per cent
in August and 36,0 per cent in September. Vegetable price inflation slowed from 17,6 per
cent to 0,5 per cent between March and September 2008.
Monetary Policy Review November 2008
South African Reserve Bank
having invested in the dwelling as opposed to alternative assets and the rate of depreciation of
dwellings. Canada is an example of a country that measures owner-occupied housing using a user
cost approach. Given the complexity of the formulation of the user cost, in part due to the
complexity of estimating or acquiring the necessary information, countries using this approach
usually employ some derivative of the approach rather than the full approach outlined in the
International Labour Organisation (ILO) handbook on compiling the CPI (ILO, 2004).
The use of mortgage interest rates as a measure of homeowners’ cost in the user cost approach
to measuring the CPI, which is currently the case in South Africa, is problematic when the CPI is
used as a reference measure for monetary policy. Increases in policy rates are passed through
mechanically to the measured CPI, perversely increasing CPI inflation. Since such increases do not
reflect authentic inflationary pressures in the economy, countries using this methodology have
sought to remove the effects of interest rate changes from their reference measure. In South Africa
this was the reason why the consumer price index excluding mortgage interest cost (CPIX) was
specified as the target measure for the inflation-targeting framework.
The rental equivalence approach to measuring the CPI, which is used by a number of countries
as specified in Table B2.1, will be followed by Statistics South Africa from the January 2009
release. This approach assumes that housing services from rental property and owner-occupied
property are close substitutes, and requires that the rental market is large enough to provide
representative data. In South Africa, for example, the rental market comprises about one quarter
of occupied dwellings. Under these circumstances, the market rental values of dwellings over time
are held to approximate the corresponding values of services yielded by the use of the same type
of dwelling for the same period (Statistics South Africa, 2008). A rental index can therefore be
compiled and applied to the owner-occupied portion of dwellings in the country. The new South
African CPI will include information from two rental surveys, the first undertaken by Rode &
Associates Property Consultants and the second by Statistics South Africa.
The change in the measurement of owner-occupied housing to a measure that is not directly
related to the interest rate means that the problems associated with using the CPI for monetary
policy purposes will be substantially reduced. An important implication for South Africa – as has
been the case in other countries that have made this transition, which include Australia, New
Zealand and the United Kingdom – is that mortgage interest costs will no longer need to be
removed from the CPI when evaluating the effects of monetary policy.
References
Haglund, M. 2000. “The South African CPI: The reliability of present practices and some potentials
for improvements”. Report from a mission to Statistics South Africa.
(accessed October 2008).
International Labour Organisation. 2004. “Consumer price index and manual: Theory and
practice”.
(accessed August 2008).
Poole, R, Ptacek, F and Verbrugge, R. 2005. “Treatment of owner-occupied housing in the CPI”.
Office of Prices and Living Conditions, Bureau of Labor Statistics. Paper prepared for presentation
to the Federal Economic Statistics Advisory Committee (FESAC) on December 9.
Statistics South Africa. 2008. “Housing in the consumer price index”. Pretoria: Statistics South
Africa, 1 July.
Figure 3 shows that the spot prices of maize have moved closely with export parity prices
in recent months, aided by a maize harvest that was 13,6 per cent larger than initially
estimated. The average price for yellow maize increased from R1 921 per ton in March
2008 to R2 073 per ton in June, before declining again to around R1 818 per ton in
October. White maize prices increased from an average price of R1 787 per ton in May to
R2 014 per ton in June and then declined to average around R1 828 per ton in October.
South African Reserve Bank

Monetary Policy Review November 2008
Percentage change over twelve months
-10

All food items

Fats and oil

Vegetables

Grain products


CPIX

Sugar
Figure 2
CPIX and food inflation
Source: Statistics South Africa
Yellow maize, rand per ton
White maize, rand per ton
Figure 3
Maize prices

Export parity price

Import parity price

SAFEX spot price
Source: Grain South Africa


The effect of excluding food, petrol and electricity prices from the CPIX inflation measure
is illustrated in Figure 4. Since these prices provided upward pressure on CPIX inflation
during 2008, excluding them from the CPIX results in lower inflation rates for the new
measures, although they all remain above the 6 per cent upper limit of the inflation
target. Excluding food prices, the inflation rate for the remaining items in the CPIX
increased from 8,0 per cent in March to 11,4 per cent in August, before declining to
11,2 per cent in September. The inflation rate for CPIX excluding petrol prices increased
from 8,5 per cent in March to 11,4 per cent in August and September. Excluding both
food and petrol prices from the CPIX, inflation increased from 5,6 per cent in March to
8,5 per cent in September. The major contributor to this increase was electricity prices.
However, if electricity prices were excluded in addition to food and petrol prices, the
inflation rate for the remaining items in the CPIX would have been 7,2 per cent in
September 2008.
The inflation rates for the goods and services categories of the CPIX are presented in
Figure 5. Goods prices continued to accelerate at a significantly faster pace than services
prices in 2008, rising from a rate of 12,4 per cent in March to 17,3 per cent in August,
before declining to 16,7 per cent in September. Food and transport prices were again the
main contributors to this acceleration. Services prices increased at a more moderate
pace, accelerating from a rate of 5,9 per cent in March to 6,9 per cent in August and then
slowing to 6,3 per cent in September. The inflation rates for the housing, transport,
medical, communication, and recreation and entertainment components all followed a
similar path to that of the overall services index over this period.
Figure 6 presents the year-on-year inflation rate for the administered prices component of
the CPIX together with the main contributors to this rate. The inflation rate for the
administered price index (API) increased from 14,8 per cent in March 2008 to 22,1 per
cent in August, before decelerating to 20,0 per cent in September. The major driver of
these movements was the petrol component of the index. This component’s contribution
to the API inflation rate increased from 9,9 percentage points in March to 14,0 percentage
Monetary Policy Review November 2008
South African Reserve Bank
Percentage change over twelve months

CPIX

CPIX excluding petrol prices

CPIX excluding food prices

CPIX excluding food and petrol prices

CPIX excluding food, petrol and electricity prices
Sources: Statistics South Africa and SARB calculations
Figure 4
The effect of food, petrol and electricity prices

on CPIX inflation

points in July, before receding to 11,0 percentage points in September. The contribution
of electricity prices to the API inflation rate has also become more significant, following
the regulator’s approval of price increases. After contributing 1,2 percentage points
between September 2007 and June 2008, the electricity component’s contribution
increased to 4,1 percentage points in July, to 5,0 percentage points in August and to
5,3 percentage points in September 2008.
South African Reserve Bank

Monetary Policy Review November 2008
Percentage change over twelve months

Goods
Services
CPIX

Figure 5
CPIX: Goods and services inflation
Source: Statistics South Africa
Percentage points and percentage change over twelve months
Contribution of:


Petrol


Electricity


School fees


Other administered prices

Administered price index
Source: Statistics South Africa
Figure 6
Administered price index
-5

Mar
May
Jul
Jan
Sep
Nov

Mar
May
Jul
Jan
Sep

If petrol prices are excluded from the API, the inflation rate for the remaining
administered prices declined from 7,2 per cent in April 2008 to 6,9 per cent in June,
before increasing sharply to 12,6 per cent in September.
The inflation rate measured in terms of the year-on-year change in the production price
index (PPI) increased from 11,9 per cent in March 2008 to 19,1 per cent in August, before
declining to 16,0 per cent in September. Owing to Statistics South Africa’s release of new
PPI data in early 2008, consistent year-on-year comparisons for the overall PPI will only be
possible from the February 2009 release. For the components of the index, the annual
growth rate of food prices at the agricultural level declined from 18 per cent in March 2008
to 1,8 per cent in July and further to -4,5 per cent in September. However, the rate of
increase in food prices at the manufacturing level remained between 19,1 per cent and
20,8 per cent over the period.
Monetary Policy Review November 2008
South African Reserve Bank
Box 3 Changes in the consumer price index weights
Statistics South Africa will publish the consumer price index (CPI) on the basis of a new basket of
goods and services, and associated weights from the January 2009 release.3 There will be a
number of significant changes in the weights of important expenditure groups for the new CPI,
which are listed in Table B3.1. Relative to the previous weight for the category, communication
experienced the smallest change, while the largest change occurred in the alcoholic beverages and
tobacco category.
Table B3.1
Comparison of the category weights of the inflation target measures
Per cent
CPIX
CPI
(metropolitan
(all urban
and other urban areas)
areas)

Household contents, equipment and maintenance....

Source: Statistics South Africa
The weight for the food and non-alcoholic beverages category will be reduced from 26,92 per cent
to 15,68 per cent. Significant changes were introduced in the way the data underlying the
expenditure weights were collected in the Income and Expenditure Survey (IES) 2005/06. In
previous surveys, the respondents were asked to recall what they had purchased over the previous
week or month, and the cost of each item (per quantity bought). IES 2005/06, instead, asked
respondents to record in a diary how much they had purchased and the cost of the goods.
The weight of the alcoholic beverages and tobacco category will be increased from 3,05 per cent
to 5,58 per cent. Since consumption of these goods has been found to be underreported in
surveys, data on excise taxes and sales volumes by producers were also considered in calculating

Background information
on the process followed in
compiling the new CPI was
provided in the November
2007 Monetary Policy Review
(Box 1).
South African Reserve Bank

Monetary Policy Review November 2008
the weight for this expenditure group. This resulted in the estimated annual consumption of
alcoholic beverages and tobacco being taken into consideration for construction of the CPI 2009
weights; increasing from R8 billion (in IES 2005/06) to R43,6 billion.
The jump of 7,01 percentage points in housing and utilities to 22,56 per cent can be attributed to
the fact that the consumer price index excluding mortgage interest cost for metropolitan and other
urban areas (CPIX) measure does not include the interest component of owner-occupied housing
when measured according to the user cost approach, while the new CPI measures owneroccupied housing according to the rental equivalence approach (see Box 2).
Expenditure on health services has a lower weight in the new CPI, declining from 6,13 per cent to
1,47 per cent. This category has undergone a number of changes in the methodology employed
to collect data. First, for the forthcoming CPI a survey of doctors, dentists and hospitals was
undertaken instead of the previously used National Health Reference Price List. The NHRPL is a list
published by the Department of Health that provides guidelines as to how much should be charged
for consultations, medication, treatment, operations and so on. However, the list contains only
recommendations that are not legislated or required. Second, the cost of health care now includes
only expenses incurred by individuals, excluding contributions made by medical aids and
employers. Finally, medical aid contributions and any health insurance were removed from this
category and captured under insurance in the miscellaneous category.
There are also a number of reasons underlying the increase of 3,79 percentage points to 18,80 per
cent in the weight of transport in the new CPI. First, there will be an increase in the weight of new
purchases (of vehicles). This is mostly attributable to a change in the method used to record the
purchase of a new vehicle. Previously, those who had paid cash would reflect a one-off payment
to that value, while those who had paid for their cars on credit would only reflect the payments
made each year. Over twelve months therefore the sum of the monthly cost was recorded. In the
new CPI the full value of the car is recorded regardless of the payment option chosen. Second, at
the time the IES was undertaken in 2004–2006, the robust economic performance of the economy
meant that new car sales were increasing at an average rate of 20 per cent per annum and this is
reflected in their higher weight. Third, the weight of public transport will also experience an increase
from 2,29 per cent to 2,73 per cent; most likely due to the inclusion of expenditure on minibus taxis
in the CPI (this was previously excluded).
The education category, whose weight declined from 3,77 per cent to 2,19 per cent, has not
experienced any major change in measurement methodology. The relatively large decline in weight
is a result of people changing their spending patterns.
Finally, the weight for the miscellaneous category increases from 10,16 per cent to 13,56 per cent.
This expenditure group has experienced a major change in its overall composition in that it will now
include insurance and personal care products. The insurance item, which includes transport,
household and health-related insurance, itself experienced a large increase in its weighting. This is
mostly attributed to the economic growth experienced in South Africa, with the level of medical aid
contributions increasing substantially.
References
Statistics South Africa. 2008. “Income and expenditure of households 2005/2006: Analysis of
results”. Pretoria: Statistics South Africa, 4 March.
___. 2008. “Income and expenditure of households 2005/2006: Statistical release”. Pretoria:
Statistics South Africa, 4 March.
___. 2008. “Presentation on the consumer price index weights”. Pretoria: Statistics South Africa, July.
___. 2008. “Explanatory note on the 2006 consumer price index weights”. Pretoria: Statistics South
Africa, 1 July.
___. 2008. “Consumer price index: Key changes in 2009”. Pretoria: Statistics South Africa, October.

Factors affecting inflation
Monetary policy decisions are made on the basis of current and expected developments
in the wider macroeconomy. Recent developments in some of the main variables
influencing inflation in South Africa are reviewed in this section, while the outlook for
these variables and their likely impact on inflation are discussed in a later section.
International economic developments
The two global themes that have continued to evolve more emphatically during the
period under review comprise the further slowing of economic growth and rising
headline inflation. The most recent International Monetary Fund (IMF) data show that
world growth in real gross domestic product (GDP) was 5,0 per cent in 2007 and will
slow to an estimated 3,9 per cent in 2008 against the backdrop of increasing turmoil in
global financial markets and stagnating growth in the advanced economies (Table 2).
The IMF forecasts that the pace of world inflation will accelerate to 6,2 per cent in 2008
from 4,0 per cent in 2007, largely because of the run-up in oil and food prices through
the first half of 2008. It is nevertheless becoming increasingly clear that the slowdown
could reduce inflation pressures in some countries and that emerging-market countries
have not decoupled from the downturn in the advanced countries.
Table 2
Annual percentage change in real gross domestic product and
consumer prices
Real GDP
Consumer prices*

(estimate)
(estimate)

Other emerging-market and developing countries ..

Zimbabwe excluded
Source: IMF World Economic Outlook, October 2008
According to the IMF, the United States (US) economy is expected to perform slightly
better in 2008 than initially forecast. Although the housing market continues to weigh on
consumption and investment, growth is expected to slow to 1,6 per cent in 2008 from
2,0 per cent in 2007. However, the IMF warned that the US economy was projected to
contract moderately during the second half of 2008 as the market value of the US
housing stock was rapidly reduced by a continued decline in US housing prices, and
Monetary Policy Review November 2008
South African Reserve Bank
with it the collateral value of many banking assets. These factors have affected, and are
likely to continue to impact adversely on, overall business volumes and earnings. Inflation
in the US is projected to increase from 2,9 per cent in 2007 to 4,2 per cent in 2008.
After advancing strongly in the first quarter of 2008, momentum in Japan’s economy
quickly waned, and real GDP contracted at an annualised rate of 3 per cent in the second
quarter on broad-based weakness in personal consumption, business investment,
residential construction and exports. The IMF forecasts real GDP growth in Japan of
0,7 per cent in 2008 compared with the 2,1 per cent recorded in 2007. The inflation data
for Japan are mixed and although wholesale prices have been rising at the fastest pace
since 1981, there has thus far been little feed-through to consumer prices; at least outside
of food and energy. Inflation in Japan is projected to rise to 1,6 per cent in 2008.
Economic growth in the euro area remained robust in 2007 and surprised to the upside
in early 2008. However, as with Japan’s experience, growth abruptly turned negative in
the second quarter, with GDP contracting by 0,7 per cent to record the first decline since
the formation of the Economic and Monetary Union in January 1999. In the euro area the
IMF projected lower real GDP growth at about 1,3 per cent in 2008 from the 2,6 per cent
recorded in 2007. Inflation in the euro area is projected to increase from 2,1 per cent in
2007 to 3,5 per cent in 2008.
After posting above-trend growth in 2006 and 2007 on the back of robust housing and
consumer spending, the United Kingdom economy is now facing strong headwinds
from a correction in the housing sector and contagion from financial market turmoil.
Most notably, the credit-sensitive housing sector is in the midst of a severe correction
that is weighing heavily on a more indebted household sector amid a credit crisis that is
limiting access to credit. The IMF forecasts that the UK will grow by 1 per cent in 2008
compared with the 3 per cent recorded in 2007. Inflation in the UK is projected to
increase from 2,3 per cent in 2007 to 3,8 per cent in 2008.
The economic cycle in developing Asia began turning down in early 2008. Domestic demand
has softened, as rising food and fuel prices weigh on consumption. The IMF forecasts that
China will grow by 9,7 per cent in 2008 compared with 11,9 per cent in 2007. India is
expected to record growth of 7,9 per cent in 2008 compared with 9,3 per cent in 2007.
Africa has thus far shown some resilience to the global slowdown and is expected to
record a 5,9 per cent growth rate in 2008, compared with 6,3 per cent in 2007. The surge
in commodity prices during the first half of 2008 benefited many countries in sub-Saharan
Africa. However, economic expansion in most countries in sub-Saharan Africa is
expected to moderate in 2008 as their terms of trade deteriorate. Inflation in Africa at the
aggregate level is expected to rise from 6,2 per cent in 2007 to 10,2 per cent in 2008.
Oil prices
The past twelve months have delivered a volatile oil market. During this period,
international crude oil prices rose to new record levels before declining again significantly
as concerns about inadequate supply were superseded by evidence of slowing
demand. Figure 7 shows that in September 2007 the price of Brent crude oil averaged
US$77 per barrel. By early July 2008 it had reached an all-time record level of
US$146 per barrel, and in May–July 2008 the average monthly price measured in
constant US dollar terms had surpassed the level recorded in November 1979. However,
by late October 2008 the price had plunged by 60 per cent to below US$59 per barrel
due to increasing concerns about slower global economic growth.
South African Reserve Bank

Monetary Policy Review November 2008

In May 2008 oil prices rose strongly on the resurgence of the super-spike view that lack
of adequate supply growth coupled with non-Organisation for Economic Co-operation
and Development (OECD) demand growth would ensure sustained higher prices over
the medium term. The oil price surged to consecutively higher levels in subsequent
months, but by August 2008 inventory levels began indicating more demand reduction
than had been expected and analysts began lowering their energy price forecasts. As
the price of oil plunged, production cuts were announced by the Organization of the
Petroleum Exporting Countries (OPEC) on 9 September and 24 October 2008, but the
announcements created uncertainty in the market about the effective size of the
production cuts involved and the likely impact on prices.
Central bank interest rate developments
Financial market turbulence essentially ended the G-7 tightening cycle in mid-2007
(Table 3). Some G-7 central banks reversed course, including the US Federal Reserve, Bank
of England and the Bank of Canada, but inflation concerns initially prevented the European
Central Bank (ECB) from following suit. However, central banks increasingly began
engaging in closer consultation and have co-operated in joint actions throughout the current
financial crisis. These actions included the provision of liquidity to reduce strains in financial
markets and a co-ordinated round of interest rate cuts aimed at unfreezing interbank
lending markets.
Since the second half of 2007, the US Federal Open Market Committee (FOMC) has
deployed a range of policy tools to deal with the combination of economic weakness and
financial market distress. Most notably, in the 14-month period to 27 October 2008, the
FOMC lowered the federal funds target by a cumulative 375 basis points to 1,5 per cent.
Moreover, it cut the discount rate by an even larger 450 basis points, thereby reducing
the penalty for banks borrowing money from the discount window to just 25 basis points.
The central bank also sought to enhance both domestic and international market liquidity
by introducing a number of new programmes, including the Primary Dealer Credit Facility
Monetary Policy Review November 2008
South African Reserve Bank
Figure 7
Price of Brent crude oil

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

Brent crude spot price

Futures prices (13 August 2008)

Futures prices (8 October 2008)

Futures prices (27 October 2008)
Source: Bloomberg

aimed at providing an overnight loan facility to primary dealers. At the end of September
2008 the US Federal Reserve also boosted its currency-swap facility, which allows foreign
central banks to pump dollars into their illiquid banking systems, to a total of US$620 billion
from the previous US$290 billion. Shares in the swap arrangements were apportioned to
the ECB, the Bank of Japan, the Bank of England, the Bank of Canada, the National Bank
of Denmark, Norges Bank of Norway, the Reserve Bank of Australia, the Riksbank of
Sweden and the Swiss National Bank. The move was aimed at allowing other central
banks to increase volumes of dollar-denominated lending to their banking systems for oneweek periods amid a shortage of dollars in interbank money markets. The US Federal
Reserve announced on 6 October 2008 that it would start paying interest on banks’
required and excess reserve balances and that it would also expand one if its key lending
programmes for cash-strapped banks. The next day the creation of the Commercial Paper
Funding Facility was announced to complement the US Federal Reserve’s existing credit
facilities to help provide liquidity to term funding markets.
Table 3
Selected central bank interest rates
Per cent
Countries
1 Jan 2008
27 Oct 2008
Latest decision
(change in
percentage points)
4,25
1,50
8 Oct 2008
(-0,50)
0,50
0,50
14 Oct 2008
(0,00)
4,00
3,75
8 Oct 2008
(-0,50)
5,50
4,50
8 Oct 2008
(-0,50)
4,25
2,25
21 Oct 2008
(-0,25)
4,25
5,50
24 Oct 2008
(+0,50)
4,00
3,75
23 Oct 2008
(-0,50)
2,75
2,50
8 Oct 2008
(-0,25)
6,75
6,00
7 Oct 2008
(-1,00)
8,25
6,50
23 Oct 2008
(-1,00)
4,25
3,50
27 Oct 2008
(-0,25)
7,47
6,93
8 Oct 2008
(-0,27)
5,75
2,00
9 Oct 2008
(-0,50)
8,00
9,50
7 Oct 2008
(+0,25)
3,50
3,50
24 Oct 2008
(0,00)
5,00
4,25
27 Oct 2008
(-0,75)
3,375
3,25
9 Oct 2008
(-0,25)
3,25
3,75
8 Oct 2008
(0,00)
7,75
8,00
20 Oct 2008
(-1,00)
11,25
13,75
10 Sep 2008
(+0,75)
6,00
8,25
9 Oct 2008
(0,00)
7,50
8,25
17 Oct 2008
(0,00)
3,50
3,50
25 Sep 2008
(0,00)
7,50
11,50
22 Oct 2008
(+3,00)
5,00
6,00
24 Sep 2008
(0,00)
10,00
11,00
11 Jul 2008
(+0,25)
15,75
16,75
22 Oct 2008
(0,00)
13,75
12,00
15 Oct 2008
(-3,50)
Source: National central banks
The ECB raised its key lending rate by 25 basis points to 4,25 per cent in July 2008. At
the end of September 2008 the ECB launched a special term refinancing operation
aimed at improving the overall liquidity position of the euro area banking system. After
equity markets across the world had plunged in late September and early October 2008
on fears that frozen money markets would stall business activity and send industrialised
nations spiralling into recession, the ECB, the Bank of Canada, the Bank of England, the
South African Reserve Bank

Monetary Policy Review November 2008

US Federal Reserve, Sveriges Riksbank and the Swiss National Bank announced a
co-ordinated reduction in policy interest rates of 50 basis points on 8 October 2008.
Inflationary pressures had started to moderate in a number of countries, partly reflecting
the decline in energy and other commodity prices. There was also evidence that inflation
expectations were declining and that the intensification of the financial crisis had
diminished the upside risks to price stability further while augmenting the downside risks
to growth.
Iceland’s central bank slashed its benchmark interest rate by 3,5 percentage points on
15 October in an attempt to prevent the failure of three large banks from pushing the
economy into a recession. On the same day Norway’s central bank cut the overnight
deposit rate (for the first time since March 2004) by half a percentage point to 5,25 per
cent on concerns that the global financial crisis looked set to impact on economic
growth. The Bank noted that falling home prices and higher borrowing costs had
weakened consumer demand and dampened economic growth, and that although
inflation remained high, the forces that had fuelled inflation had diminished.
Furthermore, interest rates were reduced in certain countries in the Asia–Pacific region
due to concerns about economic growth. Asian central banks started cutting interest
rates, judging that they needed to counter the effect of the US financial crisis on their
export-dependent economies. While the contagion from the turmoil is not expected to
infect Asia’s banking systems, the credit crisis is beginning to hurt exports. Fewer
orders for made-in-Asia goods are cooling industrial production in China, Singapore
and Taiwan, among others. Taiwan’s central bank reduced interest rates by 25 basis
points to 3,25 per cent on 9 October 2008, noting that the global financial crisis had
heightened the risk of an economic slowdown. Australia’s central bank lowered
borrowing costs on 2 September and again on 7 October, while New Zealand’s central
bank lowered borrowing costs on 11 September and again on 23 October. The
People’s Bank of China joined the co-ordinated action by central banks on 8 October
2008, cutting its benchmark interest rate by 0,27 of a percentage point. The move
came just three weeks after China’s previous rate cut, which also trimmed the oneyear lending rate by 0,27 of a percentage point. The Hong Kong Monetary Authority
also reduced its benchmark interest rate on 9 October, while the Bank of Korea cut
the seven-day repurchase rate by a record 75 basis points on 27 October 2008.
Inflation has slowed in Thailand and policy-makers in the Philippines and Indonesia
have forecast that inflation rates will slow before the end of the year. India’s central
bank unexpectedly lowered its key repurchase rate for the first time since 2004 from
9 per cent to 8 per cent on 20 October 2008. The action came after the bank had
reduced the cash reserve ratio by 2,5 percentage points to 6,5 per cent, effective from
11 October.
Among the so-called BRIC (Brazil, Russia, India and China) economies, only India and
China have joined global policy-makers around the world in cutting interest rates to avert
a recession. However, the Central Bank of the Russian Federation lowered all three of
its reserve requirements to 0,5 per cent for the second time in a month on 14 October,
and Brazil’s central bank reduced reserve requirements on 13 October for the fourth
time in three weeks.
Several other central banks increased interest rates in recent months due to rising
inflationary pressures. Since April 2008, interest rates have been tightened in countries
such as Brazil, Chile, Denmark, Hungary, Indonesia, Mexico, Poland, Russia, Thailand
and Turkey.
Monetary Policy Review November 2008
South African Reserve Bank
On 3 October 2008 the US Congress approved a US$700 billion package to rescue ailing
banks, while various other governments pushed ahead with their own emergency
measures in this regard. These moves complemented interest rate cuts around the world
as central banks and governments struggled to contain the spreading financial crisis.
Exchange rate developments
Since the publication of the previous Monetary Policy Review in May 2008 the exchange
rate of the rand has depreciated against the US dollar by approximately 49 per cent;
from R7,60 at the beginning of May 2008 to R11,31 on 27 October 2008 (Figure 8). Over
the same period, the rand depreciated by around 19 per cent against the euro. When
measured against a basket of 13 currencies, that is, in terms of the nominal effective
exchange rate of the rand (NEER), the currency depreciated by 22 per cent; from
68 index points on 5 May 2008 to 53 index points on 27 October 2008.
The exchange rate movements during the period under review were largely due to
increased volatility in the global financial markets. Concerns about the size of the South
African current-account deficit were also a factor, although emerging-market currencies
in general traded under unfavourable conditions due to risk aversion as investors
reduced their exposures to riskier assets. This phenomenon has persisted due to
concerns over the impact of the global credit crisis on the world economy, despite the
US$700 billion rescue plan approved by the US authorities.
South African Reserve Bank

Monetary Policy Review November 2008
Index: 2000 = 100 (foreign currency per rand)
Rand per euro
Rand per US dollar
Figure 8
Exchange rates of the rand

Mar
May
Jul
Sep
Nov
Jan

Mar
May
Jul
Sep
Jan

Nominal effective exchange rate of the rand (NEER)

Rand per US dollar

Rand per euro (right-hand scale)

The depreciation of the rand against the dollar was also attributable to the strengthening
of the US dollar against the major currencies. Between 5 May and 27 October 2008 the
US dollar strengthened from US$1,55 to US$1,24 to the euro, and from US$1,97 to
US$1,54 to the British pound. Furthermore, sharp declines in commodity prices added
to pressure on the rand. The price of platinum dropped from US$1 910,50 per ounce
on 5 May 2008 to US$784,50 per ounce on 27 October 2008, while the gold price
declined from US$854,25 per ounce to US$720,50 per ounce over the same period.
Labour markets
Evidence of increased inflationary pressure emanating from the labour markets is
discernible from Figure 9. Wage inflation measured in terms of the year-on-year
growth in nominal remuneration per worker in the formal non-agricultural sector, which
grew by just over 7 per cent in the last two quarters of 2007, rose by 12,5 per cent in
the first quarter and by 12,7 per cent in the second quarter of 2008. The growth in
labour productivity (the ratio of real value added to employment in the formal nonagricultural sector) was 1,6 per cent in the first quarter and 2,0 per cent in the second
quarter. Economy-wide unit labour cost, measured as wage inflation adjusted for
productivity changes in the formal non-agricultural sector, rose by 10,7 per cent in the
first quarter of 2008 and 10,5 per cent in the second quarter, after having recorded
an increase of 4,6 per cent in the final quarter of 2007.
The results of the wage settlements survey published by Andrew Levy Employment
Publications in September 2008 also indicate a rising trend in recent months. Figure 10
shows that the average level of wage settlements was 9,6 per cent for the first nine
months of 2008, compared with an average of 7,3 per cent for 2007 as a whole.
Monetary Policy Review November 2008
South African Reserve Bank
Percentage change over four quarters

Figure 9
Remuneration per worker, labour productivity and

unit labour cost in the formal non-agricultural sector

Nominal unit labour cost

Remuneration per worker

Labour productivity


Sources: Statistics South Africa and SARB calculations

Demand and output
The South African economy grew at an annualised rate of 4,9 per cent in the second
quarter of 2008, following a much slower rate of 2,1 per cent attained in the first quarter
(Table 4). However, real gross domestic expenditure contracted by 4,2 per cent during
the second quarter of the year as a result of slowing growth in total final demand,
together with inventory depletion.
Table 4
Growth in real gross domestic product and expenditure components
Per cent*

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

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

Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data
**
Constant 2000 prices
Growth in real final consumption expenditure by households decelerated from an
annualised rate of 3,3 per cent in the first quarter of 2008 to 1,2 per cent in the second
quarter, continuing the downward trend that began in early 2007. Rising interest rates and
South African Reserve Bank

Monetary Policy Review November 2008
Per cent
Figure 10 Average annual inflation and wage settlements

CPI

Average wage settlements

CPIX
* Data for 2008 are for the first nine months of the year
Sources: Andrew Levy Employment Publications and Statistics South Africa
2008*

debt-servicing costs contributed to a further contraction in real household spending on
durable goods, and slower growth in spending on semi-durable goods and non-durable
goods. Growth in real household spending on services accelerated from an annualised
rate of 4,3 per cent to 6,5 per cent between the first and second quarters of 2008.
Growth in real final consumption expenditure by general government contracted at a
rate of 1,4 per cent in the second quarter of 2008. This contraction is mainly attributable
to a base effect, where growth in the first quarter increased significantly due to the
government’s purchase of a submarine which formed part of the Defence Procurement
Programme. Growth in real gross fixed capital formation, although still buoyant, slowed
to an annualised rate of 9,1 per cent in the second quarter.
Developments in the external sector of the economy resulted in the ratio of the deficit on
the current account to GDP declining from 8,9 per cent recorded in the first quarter of
2008 to 7,3 per cent in the second quarter. The growth in the real value of exports of
goods and services rebounded from an annualised rate of decline of 27,9 per cent in the
first quarter of 2008 to an annualised rate of increase of 44,2 per cent in the second
quarter. Growth in the real value of imports of goods and services slowed from an
annualised rate of 10,8 per cent in the first quarter of 2008 to 0,6 per cent in the second
quarter. The shortfall on the country’s net services, income and current transfer account
with the rest of the world remained almost unchanged.
South Africa’s gross saving as a percentage of GDP increased from 13,9 per cent in the
first quarter to 14,9 per cent in the second quarter of 2008. The increase in gross saving
resulted in the lowering of South Africa’s dependency on foreign capital to finance
investment in South Africa. This dependency ratio declined from 39 per cent in the first
quarter of 2008 to 32,8 per cent in the second quarter. While the household sector’s
gross saving ratio increased marginally from 1,3 per cent in the first quarter of 2008 to
1,4 per cent in the second quarter, the corporate sector’s gross saving ratio increased
from 10 per cent to 11,1 per cent between these two quarters. The ratio of general
government gross saving to GDP declined slightly from 2,7 per cent in the first quarter
of 2008 to 2,3 per cent in the second quarter.
South Africa’s gross international reserve position, after strengthening to US$35 billion
at the end of July, lost a little momentum and recorded US$34,4 billion at the end of
September as a result of valuation adjustments following the appreciation of the
US dollar against other currencies. The international liquidity position also declined from
US$34,2 billion at the end of July 2008 to US$33,6 billion at the end of September.
Real-estate and equity prices
The real-estate sector continues to be relatively subdued with the slowdown in the
growth of house prices continuing (Figure 11). This is partly a consequence of declining
housing affordability, following a sustained period of rising house prices and higher
mortgage costs. After reaching a peak of 35,7 per cent in September and October of
2004, the year-on-year rate of increase in the nominal Absa House Price Index was
1,5 per cent in September 2008.4 Similarly, the year-on-year change in the Standard
Bank House Price Index fell sharply from 35,5 per cent in October 2004 to
-13,2 per cent in May 2008, before recovering to 3,6 per cent in September 2008. The
median house price measured by this index was R580 000 in September 2008. The
year-on-year rate of increase in the First National Bank House Price Index has trended
downwards since early in 2005, recording 1,8 per cent in September 2008.
Monetary Policy Review November 2008
South African Reserve Bank

The Absa House Price
Index records the total
purchase price of houses in
the 80–400 m2 size category,
valued at R2,9 million or less
in 2007 and for which loan
applications were approved
by Absa. The Standard Bank
House Price Index is based
on the median price of the
full spectrum of recorded
house prices, while the First
National Bank House Price
Index is based on the
average value of housing
transactions financed by First
National Bank, adjusted for
outliers.
Table 5 presents building statistics published by Statistics South Africa, which show that
the level of economic activity in the real-estate sector continued to moderate in 2008.
The real value of recorded building plans passed by larger municipalities during January
to August 2008, which provides an indication of future construction activity, decreased
by 14,9 per cent compared with the period from January to August 2007. Although the
annual rate of increase in the real value of building plans passed for non-residential
buildings remained positive at 1,8 per cent, that of residential buildings declined by
21,8 per cent, while additions and alterations declined by 12,4 per cent.
Table 5
Real value of building plans passed and buildings completed in
larger municipalities
Annual percentage change

2008*
Building plans passed

Buildings completed

Data for 2008 are for the first eight months of 2008 compared to the same period the previous year
Source: Statistics South Africa
The real value of buildings reported as completed in larger municipalities during January
to August 2008 decreased by 4,2 per cent compared with January to August 2007. The
real value of residential buildings completed declined by 13,6 per cent, while increases
South African Reserve Bank

Monetary Policy Review November 2008
Percentage change over twelve months

-15
-10
-5

Absa House Price Index

Standard Bank House Price Index

First National Bank House Price Index
Sources: Absa, Standard Bank and First National Bank
Figure 11 House prices

of 9,9 per cent for additions and alterations and 12,0 per cent for non-residential
buildings were reported.
In the period under review share prices on the JSE Limited (JSE) followed global trends.
The all-share index (Alsi) traded above the 32 000 level on average in May 2008, but
declined to 18 364 index points on 27 October 2008; a decline of over 42 per cent. These
trends are consistent with weaker global equity markets, mostly owing to the ongoing
global financial crisis and volatile commodity prices. Figure 12 shows the relative
performance of various international equity markets over the past three years.
Fiscal policy
Amid the global financial market crisis and weaker economic activity, the Medium Term
Budget Policy Statement (MTBPS) presented by the Minister of Finance on
21 October 2008 depicts a slightly deteriorating fiscal position (Table 6). The revised
budget balance amounts to a surplus of R3,2 billion, which represents 0,1 per cent of
GDP. This revised budget balance is lower than the surplus of 0,8 per cent of GDP
projected in the Budget Review 2008. In the medium term, deficits of 1,6 and 1,1 per cent
of GDP are projected for the fiscal years 2009/10 and 2010/11 respectively, and a
balanced budget is projected for fiscal year 2011/12. These revisions are a consequence
of moderating revenue growth due to slower economic growth. Revenues are expected
to average 27,4 per cent of GDP between 2009/10 and 2011/12, while expenditures will
average 28,3 per cent of GDP over this period.
The revised public-sector borrowing requirement (PSBR) is estimated at 1,3 per cent of
GDP in 2008/09 and is projected to rise to 3,0 per cent of GDP in 2009/10, to 3,2 per
cent of GDP in 2010/11 and to 2,6 per cent of GDP in 2011/12. The budget deficit and
borrowing by state-owned enterprises, most notably Eskom, are the main drivers of the
increase in the PSBR. Net loan debt as a share of GDP has been revised upwards to
Monetary Policy Review November 2008
South African Reserve Bank
Indices: 30 September 2005 = 100

Dow Jones Euro Stoxx 50
FTSE/JSE All share
Brazil Bovespa
Dow Jones Composite 65
Figure 12 Share price indices

MCSI Emerging Markets
India BSE (100) National
FTSE All share
Shanghai SE Composite (right-hand scale)
Sources: Datastream and Bloomberg
20,8 per cent from 19,7 per cent of GDP in the Budget Review 2008. State debt costs
are estimated at 2,3 per cent of GDP for 2008/09 and are expected to assume a
declining path in the medium term.
Table 6
Public finance data
R billions and per cent

Actual
Budget
Revised
Medium-term
estimates
estimates
Consolidated national
government

As a percentage of GDP

PSBR: Public-sector borrowing requirement
Source: National Treasury Medium Term Budget Policy Statement 2008
Monetary conditions
Figure 13 shows that the twelve-month growth rate of the broad monetary aggregate
(M3) declined from 20,1 per cent in April 2008 to 15,2 per cent in September. The
corresponding slowing in the growth rate for the narrower M2 was from 19,9 per cent
to 10,2 per cent, while that of M1 declined from 10,1 per cent in April to 4,6 per cent in
September.
South African Reserve Bank

Monetary Policy Review November 2008
Percentage change over twelve months

Figure 13 Growth in the monetary aggregates
M1
M2
M3

Total loans and advances to the private sector5 have been trending downwards since
mid-2007 (Figure 14). In 2008 the year-on-year growth in total loans and advances to
the private sector declined from 23,4 per cent in March to 17,7 per cent in September.
The growth in the mortgage advances component was influential in this regard, slowing
from 23,2 per cent in March to 16,6 per cent in September. The growth in instalment
sale credit and leasing finance declined from 11,6 to 10,7 per cent over the period, while
growth in the other loans and advances category slowed from 29,0 per cent in March
to 22,2 per cent in September.
Monetary policy
Inflation has been outside the target range since April 2007. It is generally accepted that
a flexible inflation-targeting regime should allow for a deviation from the target in the
event of exogenous shocks that are beyond the control of the monetary authorities. This
framework also allows for deviations from the target in such instances, to avoid an
excessive impact on output variability. Under such circumstances it is appropriate to
focus on a reasonable time horizon for bringing inflation back to within the target range.
However, to prevent second-round effects, it is important that expectations remain well
anchored. Failure to respond to inflation pressures will inevitably cause expectations to
become dislodged and result in a further acceleration of inflation.
Since the publication of the previous Monetary Policy Review there have been three
meetings of the Monetary Policy Committee (MPC). At the first of these meetings, in June,
the monetary policy stance was tightened further when the repurchase (repo) rate was
increased by 50 basis points, bringing the cumulative increase in the current interest rate
cycle to 500 basis points (Figure 15). The repo rate remained unchanged at the
subsequent two meetings. During these meetings there was a clear change in the balance
of risks. In particular, the exogenous shocks that had had a significant influence on the
inflation outlook – mainly food and oil price increases – appeared to have dissipated
somewhat, and even reversed in the case of oil. However, by the October meeting, the
exchange rate was seen to pose the single biggest risk to the inflation outlook.
Monetary Policy Review November 2008
South African Reserve Bank
Percentage change over twelve months

Figure 14 Banks’ loans and advances
Other loans and advances
Mortgage advances
Total loans and advances
Instalment sale and leasing finance
-10

Total loans and
advances to the private
sector consist of instalment
sale credit, leasing finance,
mortgage advances,
overdrafts, credit-card and
general advances. The first
three categories are referred
to as asset-backed credit,
while the last three are
referred to as other loans and
advances.
A concern for the MPC over this period was the more generalised nature of the inflation
dynamics. While accepting that monetary policy cannot do much to prevent supply-side
shocks, such as oil and food price increases, from having first-round effects on inflation,
the MPC has had to be mindful of the impact of these shocks on inflation expectations
and of the need to act against the emergence of generalised inflation pressures. These
pressures became more evident during the past three meetings. By August, when
overall year-on-year CPIX inflation measured 13,6 per cent, a measure of core CPIX
inflation which excludes food and petrol prices had increased to 8,1 per cent, compared
with 5,5 per cent in January 2008. While some of the increase in this core measure can
be ascribed to another supply-side shock in the form of electricity price increases,
excluding this item as well would have resulted in CPIX inflation of 6,9 per cent in August.
From the MPC meeting of February 2007 until the August 2008 meeting, the inflation
forecast of the Bank deteriorated progressively. This was due, to a large extent, to the
international oil price continuing to surprise on the upside, and this required a continuous
revision of the oil price assumption in subsequent forecast rounds. The prolonged
uncertainty surrounding the size of the electricity price increase to be granted to Eskom
by the National Energy Regulator of South Africa also contributed to the risk of the
administered price assumptions being overshot. Changes in the exchange rate
assumption at times also contributed to changes in the forecast. At the June 2008
meeting, year-on-year CPIX inflation was forecast to peak at 12 per cent during the third
quarter of 2008, compared with the previous forecast of a peak of 9,3 per cent in the
first quarter of 2008. Inflation was expected to return to within the target range in the
third quarter of 2010. The subsequent forecasts, in August and October, showed that
the peak would be higher, at 13 per cent and 13,3 per cent respectively, although the
timing remained unchanged. These two forecasts predicted inflation to return to within
the target range by the second quarter of 2010. The most recent forecast is discussed
in more detail in a later section of this review.
The two most recent forecasts were also complicated by the impending rebasing and
reweighting of the CPI basket, which is to be implemented by Statistics South Africa
from January 2009. In trying to account for these changes, certain assumptions had to
South African Reserve Bank

Monetary Policy Review November 2008
Per cent

Prime overdraft rate
Repo rate
3-month NCD rate
Figure 15 The repo and other short-term interest rates

be made, and the central forecast was therefore subject to additional uncertainty. Partly
as a result of these assumptions, there was a significant decline in the inflation trajectory
in the first quarter of 2009 in both these forecasts. This meant that although inflation was
expected to exceed the upper end of the inflation target range for some time, the extent
of the deviation from the target was now much lower than previously expected.
Despite these developments, the MPC had to consider the fact that inflation
expectations were no longer well anchored within the inflation target range. The inflation
expectations survey conducted on behalf of the Bank by the Bureau for Economic
Research (BER) at Stellenbosch University showed that this was particularly the case for
trade unionists and business people. The expectations of analysts, which were also
reflected in the Reuters consensus forecast, were more favourable and more or less in
line with those of the Bank. Nevertheless, while there was a progressive deterioration in
the inflation outlook, there was still an expectation that inflation would moderate over the
coming years. However, the average expectation was that inflation would remain above
the target range in 2009 and 2010.
The trends in wage settlements were also viewed by the committee as an indication that
inflation expectations were not well anchored. Nominal wage settlements were
increasing consistently although they were still generally below the inflation rate.
The balance of risks to the inflation forecast, as assessed by the MPC, changed during
the past few months. In general, the main risks identified emanated from electricity, food
and petrol prices. During the past period, the major change in the risk profile related to
international oil prices and the exchange rate. At the August meeting oil was still
regarded as one of the major upside risk factors. At that time it was trading at levels of
around US$140 per barrel and there were no indications that this trend was about to be
reversed. By the following meeting oil prices had declined to around US$112 per barrel,
but there was still uncertainty as to whether this trend would be sustained. Oil prices fell
by a further US$30 per barrel by the time of the October meeting. The committee was
of the view that although oil could resume its upward trend at any time, the degree of
upside risk had declined significantly.
While the risks posed by oil prices had subsided, the depreciation of the rand emerged
as a significant upside risk. Although the exchange rate had been relatively volatile
during the months before the October 2008 MPC meeting, it was at levels of around
R8,00 against the US dollar at the July and August meetings. By the time of the October
meeting, heightened risk aversion in the global financial markets put pressure on a
number of emerging-market currencies. The rand was no exception in this regard and
at the time of the meeting the rand was trading at around R9,10 against the US dollar,
having reached a level of around R9,45 at one stage. The MPC noted that the extent of
the risk to the inflation outlook would depend to a significant degree on the sustainability
of these levels. It noted that if the exchange rate were to revert to levels of the previous
month, the degree of pass-through would likely be muted.
Food prices continued to pose an upside risk, but the MPC noted that the extent of this
risk appeared to be declining, despite the elevated level of food price inflation. Wheat,
maize and rice prices had declined in global and domestic markets during 2008, and
agricultural food inflation at the production price level decelerated over the period.
Manufactured food producer price inflation remained high, which indicated that overall
food prices were likely to remain elevated in the short run.
Monetary Policy Review November 2008
South African Reserve Bank
The inflation momentum over the past two years has been caused by both exogenous
shocks and strong domestic demand. While monetary policy cannot prevent the firstround effects of supply-side shocks, it can, however, impact directly on household
consumption expenditure. In the past few months there was clear evidence that
consumption was responding to the change in the monetary policy stance. Household
consumption expenditure grew at annualised rates of 3,3 per cent and 1,2 per cent in
the first two quarters of 2008 respectively, significantly lower than the peak in excess of
9 per cent seen in the final quarter of 2006. The committee also noted continued weaker
growth trends in retail and wholesale trade, declining motor vehicle sales and low levels
of consumer confidence.
The committee noted that the weaker household consumption trends were also having
an impact on credit extension to the private sector, which was showing a steady
deceleration. Nevertheless, there was still a concern that the growth rates in credit
extension were relatively high. Asset prices and their associated wealth effects also
declined significantly over this period. This was particularly the case in the housing and
equity markets. The committee was of the view that these wealth effects could constrain
consumer demand further in the coming months.
The committee also gave emphasis to the slower growth and widening output gap over
this period. This focus was often interpreted by analysts as representing a change in the
objective of monetary policy away from inflation and towards growth. Any inflationtargeting central bank would focus on growth and the output gap. Firstly, monetary policy
would not want to cause excessive output variability. This is the essence of a flexible
inflation-targeting framework. Secondly, the output gap, that is, the difference between
potential output and actual output, is one of the main determinants of inflation. A widening
output gap – a decline in output growth relative to potential – would reduce pressure on
inflation. Estimating potential output is difficult, but research done at the Bank (reported in
the Monetary Policy Review of May 2006) suggests that potential output growth may be
in the region of 4,5 per cent per annum. Over the past months therefore it appeared that
the economy was growing below potential, in contrast to the experience of the previous
three years. During the period under review, the MPC consistently pointed to signs of
moderation in growth. These indicators, apart from the actual growth outcomes, included
the persistently declining leading business cycle indicator of the Bank, the declining
utilisation of production capacity in manufacturing, the weaker trend in mining and
manufacturing output, as well as the low levels of the Investec/BER Purchasing Managers
Index (PMI). The Rand Merchant Bank/Bureau for Economic Research (RMB/BER)
Business Confidence Index over this period also showed persistent weakness.
Global growth and inflation developments were generally favourable to the domestic
inflation outlook over this period. Although there were risks emanating from rising world
inflation as a result of global food and energy price developments, most forecasts saw
world inflation reasonably under control. During this period global growth prospects
were also seen to be deteriorating, and this was particularly the case at the October
meeting. This meant that widening output gaps and declining commodity prices were
likely to help contain inflation, despite a general trend towards more accommodative
monetary policies.
Monetary policy decisions in a number of countries are currently being dominated by
financial stability considerations. While the South African Reserve Bank MPC was
mindful of the turmoil in the financial markets, the continued stability of the domestic
financial system meant that it could maintain its focus on its mandate to achieve price
South African Reserve Bank

Monetary Policy Review November 2008

stability. While the market uncertainties and heightened risk make forecasting more
difficult, the MPC’s view at the most recent two meetings was that the balance of risks
was such that an unchanged monetary policy stance was appropriate.
The outlook for inflation
The outlook, risk and uncertainties relating to some of the factors that determine the
outlook for inflation are presented in this section.
International outlook
Increasing turmoil in financial markets, and rising food and fuel prices have contributed
to lower global growth forecasts and higher global inflation forecasts. The IMF’s October
2008 World Economic Outlook (WEO) indicated that central banks and governments
were confronted by the twin problems of slowing economic growth and surging inflation,
and that they needed to head off rising inflationary pressure while being mindful of
downside risks to growth.
Global economic growth is forecast to slow from 3,9 per cent in 2008 to 3 per cent in
2009 (Table 7). Global inflation, driven mainly by escalating food and energy prices, is
projected at 6,2 per cent for 2008 and 4,6 per cent for 2009. Inflation pressures are
expected to be most pronounced in the emerging and developing economies where
food carries a relatively large weight in consumption expenditure. However, the recent
easing of oil prices and some other commodity prices could serve to reduce these
pressures.
Table 7
IMF projections of world growth and inflation for 2008 and 2009*
Per cent
Real GDP
Consumer prices**


Other emerging-market and developing countries....

IMF projections for 2008 as at April 2008 in parentheses
**
Zimbabwe excluded
Source: IMF World Economic Outlook, October 2008
Monetary Policy Review November 2008
South African Reserve Bank
The global economic downturn is expected to deepen during the latter half of 2008,
primarily due to the ongoing financial market crisis. While some advanced economies
are moving closer to a recession, growth in the emerging economies is also slowing
and reflecting an increasingly synchronised deceleration in economic activity. Growth in
the advanced economies is expected to decline to 1,5 per cent in 2008 and further to
0,5 per cent in 2009.
US growth is expected to decline to 1,6 per cent during 2008 and further to 0,1 per cent
during 2009. Stronger than expected consumption in the first half of 2008 was fuelled by
tax rebates and may be of a temporary nature as consumption increasingly reflects the
impact of continued declines in house prices and deteriorating net wealth positions,
together with increasingly difficult access to credit and rising unemployment. An
unexpected slowdown in export growth could also impact negatively on the US growth
outlook. Other downside risks to the US growth outlook include a deepening of the
housing correction through 2009. Together with recent declines in oil prices, productivity
increases, moderate wage increases and a widening output gap, inflationary pressures in
the US are likely to decline. US inflation rates of 4,2 per cent and 1,8 per cent are
projected for 2008 and 2009 respectively.
Risks to Japan’s growth outlook are mainly to the downside. These downside risks
include the possibility of a severe global slowdown, as well as the impact of relatively
high commodity prices on corporate profits and the incomes of households. Japan’s
growth is projected to slow to 0,7 per cent in 2008 and 0,5 per cent in 2009.
The IMF’s October 2008 WEO projects euro area growth of 1,3 per cent for 2008,
slowing further to 0,2 per cent during 2009. Inflation rates of 3,5 per cent for 2008 and
1,9 per cent for 2009 are projected for the euro area. These projections are in line with
those of the ECB, which in August projected growth of between 1,1 per cent and
1,7 per cent for 2008 and between 0,6 per cent and 1,8 per cent for 2009. The ECB
forecasts an average Harmonised Index of Consumer Prices (HICP) inflation rate of
between 3,4 per cent and 3,6 per cent in 2008 and a lower projected range of 2,3 per
cent to 2,9 per cent for 2009. Higher wage increases together with lower labour
productivity growth, resulting in higher unit labour costs, will contribute to the projected
higher 2008 inflation range. However, the pressure from unit labour cost may be partly
offset by profit margin movements resulting from weaker economic activity during 2008.
For the UK, the IMF has revised its 2008 growth forecast from 1,6 per cent to 1 per cent
and projects a contraction in real output of 0,1 per cent for 2009. The inflation forecast
for 2008 has been revised upwards by the IMF to 3,8 per cent, from 2,3 per cent in
2007, while inflation of 2,9 per cent is projected for 2009. The Bank of England’s August
2008 Inflation Report describes the risks to the UK’s growth outlook as tilted to the
downside over the medium term, while risks to the UK inflation outlook are on the
upside. As is the case in the US, household consumption will be dampened by tight
credit conditions and a weakening housing market.
Difficult access to external financing and slowing global trade are external factors that
may impact negatively on growth in the emerging-market and developing countries.
Domestic demand will also be adversely affected by deteriorating financial conditions
and housing-market corrections. Although commodity prices have moderated
somewhat during the second half of 2008, wage demands may continue to place
pressure on inflation in these countries. The IMF has significantly increased its inflation
forecast for the emerging-market and developing countries to 9,4 per cent for 2008 and
7,8 per cent for 2009, and GDP growth in these countries is expected to decline to
6,9 per cent in 2008 and 6,1 per cent in 2009.
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Monetary Policy Review November 2008

The IMF projected growth in Africa to remain around 6 per cent during both 2008 and
2009, while inflation is forecast at 10,2 per cent for 2008 and 8,3 per cent for 2009.
The IMF’s growth projection for developing Asian countries is for growth of 8,4 per cent in
2008 and 7,7 per cent in 2009. Inflation of 7,8 per cent in 2008 and 6,2 per cent in 2009
is projected for these countries. The Asian Development Bank (ADB) is less optimistic and
expects growth to slow slightly against the backdrop of the international financial crisis
from 7,5 per cent in 2008 to 7,2 per cent in 2009. The contribution of the prices of food,
energy and other raw materials towards increased inflation in the region has resulted in an
ADB inflation forecast of 7,8 per cent for 2008 and 6,0 per cent for 2009.
With forecasts of 9,7 per cent for 2008 and 9,3 per cent for 2009, the IMF projects a
strong growth outlook for China. The IMF has increased its inflation forecast for China
for 2008 from 5,9 per cent to 6,4 per cent and projects an inflation rate of 4,3 per cent
for 2009. India’s growth is expected to slow from 7,9 per cent in 2008 to 6,9 per cent
in 2009, while inflation is set to slow from 7,9 per cent to 6,7 per cent over the period.
Supporting the IMF and other global forecasts, the composite leading indicator
compiled by the OECD also projects a continuing slowdown in economic activity in
some major OECD countries (Figure 16). The OECD composite leading indicator
continued to fall, recording a decline of 4,9 points in August 2008 compared with the
same month of the previous year. This decline reflects slowing economic activity for
countries such as the US, the euro area, Japan, the UK, Canada, France, Germany and
Italy. While the non-OECD country data point towards a possible increase in economic
activity for Brazil, slowing economic activity is projected for India, China and Russia.
A signal that the downturn in global manufacturing is set to become broader and deeper
was provided by the JPMorgan Global Manufacturing PMI, which fell to 44,2 index
points in September 2008 from 48,6 in August. The downturn was larger than
Monetary Policy Review November 2008
South African Reserve Bank
Percentage change over twelve months
Index points


OECD composite leading indicator

OECD industrial production index

JPMorgan global manufacturing PMI (right-hand scale)
Sources: OECD and JPMorgan
Figure 16 Selected indicators of global economic activity
anticipated and was the lowest reading since November 2001, as manufacturing
conditions continued to weaken in the US, the euro area, the UK, Japan and Russia.
Global oil demand was projected in early October 2008 by the International Energy
Agency to increase by 0,5 per cent in 2008 (averaging 86,5 million barrels per day). The
OECD supply is projected to decline by 400 000 barrels per day to 19,4 million barrels
per day in 2008, while non-OECD supply is expected to remain unchanged at
27,8 million barrels per day during the same period. Non-OPEC supply is expected to
decrease by 200 000 barrels per day to 49,9 million barrels per day in 2008. On
27 October 2008 the futures prices for Brent crude oil to be delivered in May and June
2009 were around US$67 per barrel and US$68 per barrel respectively.
Outlook for domestic demand and supply
There is a general expectation that domestic growth will moderate during 2009 due to
weaker economic conditions before improving in 2010. According to the latest Reuters
consensus forecasts surveyed in October 2008, the South African economy is expected
to grow by 3,3 per cent in 2008, 3,2 per cent in 2009 and 4,3 per cent in 2010. These
forecasts represent the mean of 21 individual forecasts for 2008 and 2009, and the
mean of 17 forecasts for 2010. They range from 1,8 to 4,4 per cent for 2008, from
1,8 to 5,3 per cent for 2009, and from 3,9 to 5,5 per cent for 2010.
The National Treasury in its MTBPS expects real economic growth of 3,7 per cent in
2008 and 3 per cent in 2009. Depending on international economic developments and
trends in public-sector capital expenditure together with private-sector investment
momentum, GDP growth is expected to recover to around 4 per cent in 2010 and
4,3 per cent in 2011.
Surveys of consumer and business confidence indicate that confidence levels in the
economy are currently low. Consumer confidence, measured by the First National Bank/
Bureau for Economic Research (FNB/BER) Consumer Confidence Index as the percentage
of respondents expecting an improvement in conditions less the percentage expecting
deterioration, declined from +12 in the first quarter of 2008 to -6 in the second quarter
before increasing to -1 in the third quarter. Consumer confidence in the second quarter of
2008 was at its lowest level since the first quarter of 2004 when it registered -7. The small
rise in consumer confidence in the third quarter can be attributed to consumers’ views on
the economy and the expected status of their own finances. In terms of the components of
the overall index, the sub-index measuring the percentage of consumers expecting an
economic improvement in the coming year exceeded the percentage expecting
deterioration by 2 per cent. Furthermore, the sub-index measuring the net percentage of
consumers expecting their finances to improve during the next 12 months rose from 5 per
cent in the second quarter of 2008 to 13 per cent in the third. However, the final sub-index,
measuring the net percentage of consumers rating the present as an inappropriate time to
buy durable goods, increased from 9 per cent to 17 per cent, the most unfavourable level
since the first quarter of 2004.
The level of business confidence, measured in terms of the RMB/BER Business
Confidence Index, declined to its lowest level in six years in the second quarter of 2008
(Figure 17). The index measures business confidence on a scale of 0 to 100, with 0
indicating an extreme lack of confidence, 50 neutrality and 100 extreme confidence.
After recording levels of around 85 in 2006, the index declined to 45 in the second
quarter of 2008 and to 34 in the third quarter of 2008. All subcomponents declined
between the second and third quarters of 2008. The largest decreases occurred among
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Monetary Policy Review November 2008

new vehicle traders and wholesalers; declining by 23 and 18 index points respectively.
Building contractors’ confidence declined from 47 index points to 41 index points.
Manufacturers’ confidence fell from 37 to 30 index points due to weaker domestic
orders, rising levels of finished goods inventories and declining profit margins, while
retailers’ confidence declined by 4 index points to a level of 49 in the third quarter of
2008. The net negative sentiment that prevailed can be attributed to a contraction in
business volumes, the impact of high interest rates, reduced profitability, declining
household spending as well as increases in energy costs.
Although the Investec/BER PMI, a barometer of manufacturing activity, remained below
the critical level of 50 index points, it rose from a seasonally adjusted 42,8 index points
in July 2008 to 47 index points in August and September. Input price inflation slowed as
pressure from international commodity prices receded, and purchasing managers’
estimates of business conditions in six months’ time were revised upwards in both
August and September. The recent PMI results suggest a possible bottoming of the
deterioration in manufacturing business conditions, although the deterioration in the
global economic outlook is viewed as presenting a significant threat to a recovery.
The FNB Civil Construction Confidence Index, which reflects the proportion of managers
expressing satisfaction with current conditions in the industry, decreased from an index
value of 71 in the second quarter of 2008 to 69 in the third quarter of 2008. Tendering
competition increased during the third quarter of 2008, reflecting weak demand
conditions. Overall profitability of survey respondents suffered due to thin gross margins.
The BER Retailer Confidence Index declined from 53 index points in the second quarter
to 49 in the third quarter of 2008. Wholesaler confidence declined considerably from 51
to 33 index points; the lowest level in seven years. The downturn in retailer and
wholesaler confidence is due to disappointing sales growth, lower profitability and rising
inventory levels during the third quarter. However, purchase and selling price increases
have remained high, also evidenced by record-high PPI and CPIX inflation data during
the third quarter. Retailers and wholesalers alike expect business conditions to
deteriorate further on weak sales volumes during the fourth quarter of 2008.
Monetary Policy Review November 2008
South African Reserve Bank
Percentage

98 2000

Sources: Rand Merchant Bank and Bureau for Economic Research
Figure 17 RMB/BER Business Confidence Index
Net positive
Net negative
Indicators of inflation expectations
Inflation expectations for the forecast period from 2008 to 2010 obtained from the BER
survey conducted during the third quarter of 2008 show that CPIX inflation expectations
increased relative to the second-quarter survey. However, the survey results also show
that average inflation expectations are expected to decline over the forecast years,
although they remain above the upper limit of the CPIX inflation target range. As
depicted in Figure 18, CPIX inflation expectations for 2008 increased by 1,2 percentage
points to 10,2 per cent, by 0,2 percentage points to 8,1 per cent for 2009, and by
0,2 percentage points to 7,4 per cent for 2010.
Financial analysts revised their forecasts upwards by the biggest margin, compared to
the other groups surveyed (Table 8). Although all groups expect CPIX inflation to decline
over the forecast horizon, only financial analysts expect a movement of inflation back to
within the target range by 2010. Business expects CPIX inflation to remain outside the
target band for the forecast period, while trade unions expect CPIX inflation to decline in
2009, but to rise again in 2010 and also remain outside the target range.
Table 8
BER survey of CPIX inflation expectations: Third quarter 2008*
Per cent


Second-quarter 2008 results in parentheses
Source: Bureau for Economic Research, Stellenbosch University
South African Reserve Bank

Monetary Policy Review November 2008
Annual averages, per cent

Figure 18 BER surveys of CPIX inflation expectations

Survey conducted during:

07Q4

08Q1

08Q2

08Q3
Source: Bureau for Economic Research, Stellenbosch University

The September 2008 Reuters survey of long-term forecasts for the South African
economy (Table 9) shows that although CPIX inflation expectations remain high, they are
expected, on average, to decline over the forecast horizon, moving back to within the
target range in 2010. It is expected that CPIX inflation will average 11,6 per cent in 2008,
representing a 0,2 percentage point upward revision from the August 2008 survey. For
2009 and 2010, the mean CPIX inflation forecasts are unchanged from the previous survey
result at 7,5 and 5,9 per cent respectively.
Table 9
Reuters survey of CPIX forecasts: September 2008*
Per cent


(17)

(13)

*
August 2008 survey results in parentheses
Source: Reuters
Break-even inflation rates, measured as the difference between the yields on South
African CPI inflation-linked bonds and conventional nominal bonds of similar maturity,
suggest that inflation expectations peaked at the beginning of July 2008 and then
declined sharply until October when they began rising again (Figure 19). Break-even
inflation rates obtained from the R189 (maturing 2013) inflation-linked bonds remained
above the inflation target, rising from 6,3 per cent at the beginning of 2008 to a peak of
9,8 per cent at the beginning of July. These rates then receded to 6,4 per cent by the
middle of October, before rising once more to 7,9 per cent on 24 October 2008. Those
obtained from the R197 (maturing 2023) inflation-linked bonds peaked at 8,3 per cent
at the beginning of July 2008 after which they declined to 5,4 per cent in early October
before rising to 6,4 per cent on 24 October 2008. However, break-even inflation rates
Monetary Policy Review November 2008
South African Reserve Bank
Percentage points

Figure 19 Break-even inflation rates

Spread between R189 and R153 bonds

Spread between R197 and R186 bonds

reflect not only inflation expectations, but also changes in perceived uncertainty about
future inflation and in the perception of liquidity risk, and thus need to be interpreted
cautiously.
The South African Reserve Bank inflation forecast
The latest quarterly inflation projections of the core inflation forecasting model of the
Bank, as presented to the MPC on 8 and 9 October 2008, are reproduced in Figure 20.
The central projection of the baseline forecast suggests that inflation is expected to peak
at an average rate of 13,3 per cent in the third quarter of 2008 and after a significant
decline in the first quarter of 2009, to average 6,9 per cent in the calendar year 2009.
Consumer price inflation is expected to return to within the inflation target range in the
second quarter of 2010 and to average 5,5 per cent in the final quarter of that year.
The decline in the projected inflation rate between the fourth quarter of 2008 and the first
quarter of 2009 is largely related to the announced rebasing and reweighting of the CPI
basket that will be introduced by Statistics South Africa in January 2009. To account for
these effects, a number of additional assumptions have had to be made to prepare the
forecast, resulting in further uncertainties around the forecast.
In addition to the uncertainties surrounding the estimates for the rebasing and reweighting
exercise, there are numerous other risks associated with the inflation forecast. These
include the recent deterioration in the inflation expectations and related higher wage
settlements. The international financial markets turmoil has also caused renewed risks to
the inflation outlook, with the main upside risk to the inflation forecast coming from
exchange rate developments and the main downside risk from oil price developments.
South African Reserve Bank

Monetary Policy Review November 2008
Per cent

Figure 20 Inflation forecast

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

Assessment and conclusion
The volatile and uncertain financial market environment will continue to complicate
monetary policy decision-making for some time. Whereas initially the crisis appeared to
be confined to financial markets, the turmoil has directly affected the real sectors in a
number of advanced economies and a global slowdown is expected. The South African
economy cannot expect to be immune from these developments, but because the
domestic banking system has remained relatively unaffected, the impact on growth is
unlikely to be as severe as may be the case in other countries. The strong domestic
infrastructure expenditure programme is also likely to help underpin growth.
One of the consequences of the financial turmoil has been a decline in commodity
prices. From a narrow inflation perspective this means that one of the biggest risk
factors to the inflation outlook has subsided significantly. This, in conjunction with the
widening output gap and the subdued household consumption expenditure, indicates
that some of the pressures on inflation may be abating. However, another risk has
emerged in the form of the rand exchange rate which, along with other emerging-market
currency exchange rates, has been negatively affected by the global turmoil. The impact
of the exchange rate on the inflation outlook will depend, to a significant degree, on the
extent to which these new levels are sustained.
The Bank’s current forecast is for inflation to have peaked in the third quarter of 2008,
and eventually to return to within the inflation target range by the second quarter of
2010. However, in a world of heightened turmoil and uncertainty, the risks to the outlook
are amplified. Monetary policy will continue to focus on the expected medium-term
inflation outcomes and will act appropriately to ensure that inflation returns to within the
inflation target range over a reasonable time frame.
Monetary Policy Review November 2008
South African Reserve Bank
Statements issued by
Mr T T Mboweni,
Governor of the South African Reserve Bank

Statement of the Monetary Policy Committee
12 June 2008
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
The outlook for inflation remains bleak in an environment of sustained increases in
international oil and food prices. An increasing number of countries are experiencing
intensified inflation pressures, and the risk to both global and domestic inflation is seen
to be firmly on the upside against the backdrop of a slowing international and domestic
economy. Domestically, price increases have become more broad-based, and inflation
expectations have deteriorated further. Adding to the inflation uncertainty is the
impending announcement of the electricity price increases to be granted to Eskom.
Recent developments in inflation
CPIX inflation measured 10,4 per cent in April 2008, compared with 10,1 per cent in the
previous month. Sustained food and petrol price pressures were primarily – but not only –
responsible for this trend. Petrol prices increased at a year-on-year rate of 30,5 per cent,
while food prices increased by 15,9 per cent. Together these two categories accounted for
over half of the increase in CPIX. Broad-based pressures are also intensifying. If food and
energy were excluded, CPIX inflation would have measured 6,1 per cent. The stronger
underlying inflation trend has been driven by price increases in a range of categories,
notably clothing and footwear, water, household consumables, and fuel and power.
Year-on-year producer price inflation measured 12,4 per cent in April, compared with
11,9 per cent in March. Agricultural food output price increases declined to a year-onyear rate of 6 per cent in April, compared with a recent peak of 27 per cent in
October 2007. Manufactured food price increases remained elevated at around recent
highs of around 20 per cent.
The outlook for inflation
The most recent central forecast of the South African Reserve Bank (the Bank) indicates a
further deterioration in the inflation outlook when compared with the previous forecast.
CPIX inflation is now expected to peak at around 12 per cent in the third quarter of 2008
and to return to within the inflation target range by the third quarter of 2010. The previous
forecast was for a peak of 9,3 per cent in the first quarter of 2008. The deterioration in the
forecast is a result of higher-than-expected inflation outcomes, a more depreciated
exchange rate of the rand, as well as further upward revisions in international oil price
projections over the forecast period. As with the previous forecast, the possibility of an
electricity price increase in excess of that granted to Eskom in December 2007 has not
been factored into the central forecast.
The forecasts made by private-sector analysts have also deteriorated since the previous
MPC meeting. According to the May 2008 Reuters consensus forecast, CPIX inflation is
expected to peak at 11,3 per cent in the third quarter of 2008. Most respondents see
inflation back within the target range during 2010. Break-even inflation rates, measured
as the yield differential between conventional government bonds and inflation-linked
bonds, also indicate a deterioration of inflation expectations and are now firmly above
the upper end of the target range.
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Monetary Policy Review November 2008

Deteriorating inflation expectations are also evident in the survey conducted on behalf of the
Bank by the Bureau for Economic Research (BER) at Stellenbosch University. During the
second quarter of 2008, CPIX inflation expectations in respect of all forecast years
increased further. CPIX inflation is now expected to average 8,9 per cent in 2008, up from
7,8 per cent in the previous survey. Some moderation is then forecast for 2009 and 2010
when CPIX inflation is expected to average 7,9 per cent and 7,2 per cent respectively.
The main risks to the inflation outlook emanate from the possibility of further electricity
price increases, which will be announced next week by the National Energy Regulator
of South Africa (Nersa); petrol and food price increases; and the exchange rate.
There has been no respite from the acceleration in the international oil prices which has
continued to surprise on the upside. In recent days North Sea Brent crude oil prices
reached levels of almost US$140 per barrel, compared with US$107 per barrel at the
time of the previous MPC meeting. Domestic petrol prices increased by 55 cents and 50
cents per litre in May and June respectively, bringing the cumulative increase in the petrol
price since January 2008 to about R2,50 per litre. A further increase is possible in July.
Food prices still pose an upside risk to the inflation outlook although some positive
domestic developments may partially offset the global trends. Despite higher
international maize prices, the domestic spot price of maize declined in response to the
release of the domestic crop estimates. Nevertheless, the depreciation of the rand
exchange rate in recent weeks limited this decline. International wheat and rice prices
are still high, but wheat prices have declined from their recent record levels. As noted
earlier, agricultural producer price inflation declined significantly in April, but it is still too
early to know if this trend will be sustained.
The exchange rate of the rand against the US dollar is little changed from the levels
prevailing at the time of the previous MPC meeting, when it was trading at around
R7,90 to the US dollar. However, the rand has been relatively volatile and the related
uncertainty poses a risk to the inflation outlook. In May the rand appreciated to around
R7,50 to the US dollar, to a large extent as a result of speculation relating to a sizeable
FDI transaction which did not subsequently materialise.
The volatility of the rand is also explained by fluctuations of the US dollar against other
major currencies, commodity price movements, domestic growth concerns and
expectations regarding any further monetary policy actions in South Africa. The rand
also remains vulnerable to possible negative perceptions related to the further widening
of the current-account deficit of the balance of payments in the first quarter of 2008. This
development was a result of higher crude oil prices and strong demand for capital goods
imports related to infrastructural investment projects. The volume of mining exports
declined as a result of electricity load-shedding to the mines. To date, the currentaccount deficit, including that in the first quarter, has been adequately financed.
Despite these upside risks, there are a number of offsetting effects which confirm the
responsiveness of the economy to the less accommodative monetary policy stance of
the Bank.
Growth in household consumption expenditure has continued to decline in response to
higher interest rates and slower growth in households’ real disposable income. Real final
consumption expenditure by households grew at an annualised rate of 3,3 per cent in
the first quarter of 2008 compared with 3,8 per cent in the previous quarter, having
peaked at around 9 per cent in the final quarter of 2006. The recent quarter-on-quarter
moderation was due to an 8,1 per cent contraction in spending on durable goods. The
total number of new vehicles sold in May 2008 was 24,6 per cent lower than in May
2007. Both commercial and passenger vehicle sales registered significant declines.
Monetary Policy Review November 2008
South African Reserve Bank
Retail sales growth has also continued to moderate. On a year-on-year basis, real retail
sales declined by 1,7 per cent in March, while growth in the first quarter of 2008
compared with the same quarter in 2007 measured 0,6 per cent.
Reflecting these expenditure trends, growth in credit extension to the private sector also
showed some signs of moderation, although still at relatively high levels. Twelve-month
growth in banks’ total loans and advances extended to the private sector declined to
21,5 per cent in April 2008, compared with 23,6 per cent in March. Year-on-year growth in
mortgage advances declined to 21,9 per cent in April, while growth over the same period in
instalment sale credit and leasing finance declined to 11,8 per cent, reflecting the downward
trend in motor vehicle and other durable goods consumption. Household debt as a ratio of
disposable income increased to 78,2 per cent from 77,6 per cent, while the ratio of debt
service cost to disposable income increased from 10,9 per cent to 11,3 per cent.
The economy has shown signs of slowing down following a number of years of growth
above the estimated potential growth rate. In the first quarter of 2008, growth in real
gross domestic product was an annualised rate of 2,1 per cent compared with 5,3 per
cent in the previous quarter. Despite a strong performance by the agricultural sub-sector,
the primary sector contracted by 13,0 per cent, mainly as a result of electricity supply
constraints. The slowdown was fairly broad-based, with growth in the secondary sector
declining to 1 per cent. The utilisation of production capacity in manufacturing declined
in the first quarter of 2008, while the Investec/BER Purchasing Managers Index (PMI)
shows that the manufacturing sector continues to face low growth in new sales orders
and strong pressure on input costs, despite an improvement in manufacturing output
growth in April. Overall business confidence, as measured by the RMB/BER Business
Confidence Index declined further in the second quarter of 2008. Gross fixed capital
formation, however, has remained relatively robust.
The all-share index on the JSE Limited reached new highs in recent weeks, but has
moderated since then. However, while the all-share index has increased by about 6 per
cent since the beginning of 2008, this has been due primarily to the resources sector
which has increased by about 26 per cent as a result of high commodity prices. The
industrial index is almost unchanged while the financial index has declined by over
23 per cent over the same period. There is evidence that house prices are beginning to
decline. According to the Absa House Price Index, house prices in the middle segment
of the market have been declining marginally in nominal terms on a month-on-month
basis since February 2008. The Standard Bank index shows that the median house
price declined by 13,3 per cent in May on a year-on-year basis.
The outlook for the global economy remains uncertain although there is some tentative
evidence that the worst of the banking and credit crisis may be over. Global growth is
also expected to remain subdued, but there is uncertainty regarding the extent and
duration of the slowdown. Many countries are experiencing increasing inflationary
pressures and are facing the challenge of dealing with higher inflation and slowing
growth. As the inflation pressures have intensified, monetary policy is becoming more
focused on this threat, and an increasing number of central banks have adopted a
tighter monetary policy stance.
Monetary policy stance
In the light of the further deterioration in the inflation outlook, but mindful that the
economy is responding to a less accommodative monetary policy stance, the Monetary
Policy Committee has decided that at this stage further tightening of monetary policy is
warranted. Accordingly the repurchase rate will be increased by 50 basis points to
12 per cent per annum with effect from 13 June 2008. The MPC remains committed to
bringing inflation back to within the target range over a reasonable time period.
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Monetary Policy Review November 2008

Statement of the Monetary Policy Committee
14 August 2008
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
The outlook for inflation remains uncertain. Food and oil price increases continue to
cloud the inflation outlook, but there are tentative signs that these pressures may be
moderating. Domestic consumption expenditure also remains subdued. However,
electricity price increases are set to have an impact on inflation going forward, and there
is evidence that underlying inflation has maintained some of its upward momentum.
Conflicting pressures are being felt from the global economy, which is experiencing
slower growth and higher inflation.
While there are clear signs that the economy is responding to the less accommodative
monetary policy stance, the MPC had to assess whether recent monetary policy
actions are sufficient to bring inflation back to within the inflation target range over the
medium term.
Recent developments in inflation
CPIX inflation increased at a year-on-year rate of 11,6 per cent in June 2008, compared
with 10,9 per cent in May. Food price inflation accelerated from 16,9 per cent in May to
18,2 per cent in June, mainly as a result of significant increases in the prices of grain
products, as well as fats and oils. Petrol prices increased by almost 36 per cent in June,
and together with food prices accounted for about 56 per cent of the increase in CPIX.
However, if food and petrol were excluded, CPIX inflation would have measured 6,3 per
cent. Services price inflation has been increasing consistently over the past few months
and reached a level of 6,7 per cent in June.
Producer price inflation increased at a year-on-year rate of 16,8 per cent in June, driven
mainly by petroleum products and mining output prices. Food price increases at the
producer price level continue to show some moderation. Agricultural food price increases
measured 2,0 per cent in June, while manufactured food price increases, while still high,
measured 19,4 per cent, compared with a peak of 20,4 per cent in March 2008.
The outlook for inflation
The central forecast of the Bank has been complicated by the impending rebasing and
reweighting of the CPI basket, to be implemented by Statistics South Africa from January
2009. In trying to account for these changes, certain assumptions have to be made, and
the central forecast is therefore subject to additional uncertainty.
The central forecast generated on the above basis indicates a near-term deterioration of
the inflation outlook when compared with the previous forecast. CPIX inflation is expected
to peak at an average rate of around 13 per cent in the third quarter of 2008, compared
with 12 per cent. Thereafter, inflation is expected to decline significantly in the first quarter
of 2009, partly as a result of the reweighting and rebasing effects. Inflation is then expected
to decline gradually, and to fall below the upper end of the inflation target range in the
second quarter of 2010. Inflation is expected to average about 7,2 per cent in 2009 and
5,9 per cent in 2010. The forecast takes account of the additional electricity price
Monetary Policy Review November 2008
South African Reserve Bank
increases granted to Eskom in June. However, there is some uncertainty about the timing
of these increases, or the full extent of the increases that will be passed on to household
consumers by the municipalities.
Forecasts by private-sector economists have also been influenced by the coming technical
adjustments to the inflation basket. Between June and July, the Reuters consensus CPIX
forecast for 2009 declined from 8,2 per cent to 7,5 per cent, while the forecast for 2010
declined from 6 per cent to 5,9 per cent. Since July, the break-even inflation rates,
measured as the yield differential between conventional government bonds and inflationlinked bonds, have also reflected some improvement in medium-term inflation expectations.
The yield curve moved down markedly, particularly at the long end of the curve, with the
R157 having declined by about 100 basis points since the previous MPC meeting.
The higher inflation outcomes and expectations have had an impact on wage settlements.
According to the Wage Settlement Survey of Andrew Levy Employment Publications, the
average level of wage settlements for the first half of 2008 was 8,3 per cent, compared
with 6,8 per cent in the same period in 2007. Unit labour costs increased by 10,2 per cent
in the first quarter of 2008, compared with the same quarter in the previous year, while unit
labour cost increases in manufacturing measured 6,6 per cent. These trends, while not
unexpected, were noted by the MPC.
Significant risks to the inflation outlook remain, although there are tentative signs that some
of the risk factors may have moderated somewhat. International oil prices are well below
the levels reached in early July 2008 when the price of North Sea Brent crude oil was
around US$145 per barrel. Currently oil is trading at around US$112 per barrel, compared
with around US$140 per barrel at the time of the previous MPC meeting. These price
developments were reflected in domestic petrol price adjustments. In July the price of
95 octane petrol in Gauteng increased by 74 cents per litre, but in August the price
declined by 30 cents per litre. If current oil price and exchange rate levels are maintained,
a further sizeable decline can be expected in September. It is still too early to tell if the lower
international oil price is a temporary phenomenon.
The risks to inflation posed by food price developments remain. Grain product prices in
particular appear to have gained some momentum at both the producer price and
consumer price levels. As noted earlier, however, manufactured food producer price
inflation remains high, but agricultural food inflation has declined to low levels, indicating
the possibility of some price relief in the future. The spot price of yellow maize declined in
early August following the release of local crop estimates. Wheat prices have also declined
on international markets, but nevertheless remain high.
The exchange rate of the rand has exhibited some volatility since the previous meeting of
the MPC when it was trading at around R8,00 per US dollar. In late July the rand began to
appreciate and reached a level of around R7,20 against the US dollar, but has since
depreciated to current levels of around R7,85 per US dollar. On a trade-weighted basis the
rand has appreciated by about 4 per cent since the previous meeting.
The outlook for most of the other determinants of inflation has been relatively unchanged
since the previous meeting.
Growth in household consumption expenditure appears to have remained subdued. Real
retail sales declined on a year-on-year basis in the four consecutive months to June 2008.
In May and June retail sales declined by 3,4 per cent and 2,6 per cent respectively. Motor
vehicle sales also remain under pressure with the total number of vehicles sold in July
declining by over 20 per cent when compared with the same time last year. In the second
quarter of 2008, the FNB/BER Consumer Confidence Index experienced its largest
quarter-on-quarter decline in 24 years.
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Monetary Policy Review November 2008

Credit extension to the private sector exhibited further moderation, although it still
remained at relatively high levels. Growth over twelve months in mortgage advances
measured 19,9 per cent in June 2008, while growth in instalment sale credit and leasing
finance grew by 14 per cent. Growth in credit extension to households remains on a
downward trend.
Real growth in gross domestic product also appears to be lower than the rates achieved
in the past few years, although growth in the second quarter is expected to exceed the
first quarter growth rate of 2,1 per cent. This improvement will be a result of base effects
and improved performances of mining and manufacturing in the second quarter. The
expected subdued trend in output growth is evident in a number of indicators. The South
African Reserve Bank composite leading business cycle indicator, which has been
declining since March 2007, continued its downward trend in May 2008, while the
RMB/BER Business Confidence Index also declined significantly in the second quarter of
2008. The Investec/BER Purchasing Managers Index also points to continued slow growth
in the manufacturing sector, primarily due to sluggish new sales orders. The utilisation of
production capacity in manufacturing declined in both of the first two quarters of 2008. The
real value of building plans passed and approved also declined in the past three months.
The lower growth trend has also been reflected in asset prices, and the associated
negative wealth effects could moderate consumption expenditure growth further. Equity
prices have declined in recent weeks as a result of a weaker economy and lower
commodity prices. The all-share index on the JSE Limited has declined by 7 per cent since
the beginning of the year, and by about 13 per cent since the previous MPC meeting. All
the major sub-indices are lower than they were at the beginning of 2008. The housing
market is also subdued, with both the Absa and Standard Bank indices reflecting negative
real house price growth.
The global economy is characterised by slowing growth, particularly in the industrialised
countries, and intensified inflationary pressures. Growth prospects in the US are being
clouded by the persistent weakness in the local housing market and continued financial
market uncertainty. Growth in emerging markets also shows some signs of moderation,
but nevertheless remains relatively strong. Most central banks have recently either adopted
a tighter monetary policy stance or have kept their policy rates unchanged.
The MPC also noted economic developments in Lesotho, Namibia and Swaziland – South
Africa’s Common Monetary Area (CMA) partners. Food and energy price developments
have also intensified in these countries, raising inflation to high levels. Recent developments
in real sector indicators have been mixed. Government financial balances are supported by
high import duty revenue, and government debt levels are well contained. While interest
rates throughout the CMA increased significantly over the past two years, it was noted that
most recently not all of the countries have tightened monetary policy.
Monetary policy stance
The MPC has considered recent economic developments and the outlook for
inflation and has concluded that, notwithstanding certain risks to future inflation
outcomes, the current monetary policy stance is appropriate. Consequently, the
repurchase rate will for now remain unchanged at 12 per cent per annum. The MPC
will continue to monitor developments closely and will not hesitate to act to deliver
on its mandate.
Monetary Policy Review November 2008
South African Reserve Bank
Statement of the Monetary Policy Committee
9 October 2008
Issued by Mr T T Mboweni, Governor of the South African Reserve Bank, at a meeting
of the Monetary Policy Committee (MPC) in Pretoria
Introduction
Since the previous meeting of the MPC the turmoil on global financial markets has
intensified. This development has impacted negatively on the outlook for the international
economy. As the banking crisis has deepened, global markets have been characterised by
declining equity prices, exchange rate volatility and widening spreads on emerging-market
debt. The prices of many commodities, including oil, have also declined, although gold is
a notable exception by virtue of its safe-haven status.
Governments and central banks have undertaken various actions, both individually and
in concert. The South African banking and financial system remains stable. However,
domestic financial markets have experienced the impact of these developments. The
domestic equity market has suffered losses in line with international markets, and the
exchange rate of the rand has been negatively affected by increased global risk aversion,
resulting in higher volatility and a significant depreciation. The South African Reserve
Bank (the Bank) is monitoring developments closely.
The inflation outlook remains uncertain, as the risk profile has changed somewhat. The
outlook has improved on account of the lower oil prices, but the exchange rate has
emerged as a significant risk factor.
Recent developments in inflation
CPIX inflation increased from 13,0 per cent in July 2008 to 13,6 per cent in August. Food
and petrol price increases were again the main contributors to this rising trend. Food
prices increased at a year-on-year rate of 19,2 per cent in August, driven to a significant
extent by grain product prices which increased by 36,5 per cent. Petrol prices increased
at a year-on-year rate of 45,9 per cent in August, despite the 30 cent per litre reduction
in the petrol price in that month. If food and petrol were excluded, CPIX inflation would
have measured 8,1 per cent in August, compared with 7,4 per cent and 6,3 per cent in
the prior two months. The significant upward trend in this measure was mainly due to
electricity price increases of 23,9 per cent and 28,2 per cent in July and August
respectively, but it also reflects continued generalised inflation pressures.
Producer price inflation also remained strong. Producer prices increased at a year-onyear rate of 19,1 per cent in August. The rate of increase in agricultural food prices
declined to 2,3 per cent, but manufactured food price inflation remained elevated at over
20 per cent.
The outlook for inflation
The most recent central forecast of the Bank shows a moderate improvement in the
inflation outlook since the previous MPC meeting, although the peak is slightly higher. As
was the case at the previous meeting, some assumptions were made to try to account
for the rebasing and reweighting of the CPI basket that will be introduced by Statistics
South Africa in January 2009. Inflation is expected to peak at an average rate of
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Monetary Policy Review November 2008

13,3 per cent in the third quarter of this year, and to average 6,9 per cent in 2009, after
a significant decline in the first quarter of that year. Consumer price inflation is still
expected to return to within the inflation target range only in the second quarter of 2010,
and to reach a level of 5,5 per cent in the final quarter of that year.
According to the most recent inflation expectations survey conducted on behalf of the
Bank by the Bureau for Economic Research (BER) at Stellenbosch University, CPIX
inflation is expected to average 10,2 per cent in 2008 and 8,1 per cent and
7,4 per cent in 2009 and 2010 respectively. The increases in respect of 2009 and 2010
were significantly smaller than the increases observed in the previous survey. However,
only the financial analysts expect inflation to return to within the target range by 2010.
This is similar to the Reuters consensus survey conducted in August which indicates
that inflation is expected to average 7,5 per cent in 2009 and 5,9 per cent in 2010.
Inflation expectations as measured by the yield differential between conventional
government bonds and inflation-linked bonds indicated some improvement in
expectations over the longer term. The break-even inflation expectation declined from
just over 9 per cent in July 2008 to around 6,3 per cent at the end of September. The
yield curve has remained inverted but has moved down since the previous meeting.
The continued upward trend in wage settlements also indicates that inflation
expectations are not well anchored. According to the Quarterly Economic Survey of
Statistics South Africa, year-on-year growth in unit labour cost measured 10,5 per cent
in the second quarter of 2008, compared with 10,7 per cent in the previous quarter. The
most recent Wage Settlement Survey of Andrew Levy Employment Publications shows
that the average wage settlement rate increased to 9,6 per cent in the nine months to
September 2008 compared with 8,3 per cent in the six months to June 2008.
The turmoil in international financial markets has resulted in some changes in the
balance of risks as perceived by the MPC. The most significant of these changes relate
to oil price and exchange rate developments.
The recent depreciation in the rand exchange rate poses a significant upside risk to the
inflation outlook. Following the initial rejection by the US Congress of the Troubled Asset
Relief Program (TARP), there was significant volatility in foreign-exchange markets as the
dollar strengthened against a number of major currencies, particularly against those in
emerging-market economies. The domestic foreign-exchange market was also affected,
and the rand is currently trading at around R9,12 against the US dollar, compared with
R8,00 at the previous MPC meeting. On a trade-weighted basis, the rand has depreciated
by around 20 per cent since the beginning of the year and by almost 9 per cent since the
previous meeting. The impact of the exchange rate on the inflation outlook will depend, to
a significant degree, on the extent to which these new levels are sustained.
In most other instances the risks to the outlook have declined or remained unchanged.
International oil prices have declined considerably over the past few weeks. Having
peaked at around US$145 per barrel in July 2008, the price of North Sea Brent crude
oil (Brent) has declined to current levels of around US$83 per barrel. At the time of the
previous MPC meeting Brent was trading at US$112 per barrel. In line with these oil
market developments, the price of 95 octane petrol in Gauteng has declined by a total
of R1,29 per litre since August. The impact of the lower international oil prices on
domestic petrol prices will be offset to some extent by the recent depreciation of the
rand against the dollar.
Monetary Policy Review November 2008
South African Reserve Bank
As noted, food price inflation remains elevated, although agricultural price inflation at
producer price level has declined further. International rice prices appear to have peaked
and both maize and wheat prices are currently below the peaks reached earlier in 2008
in the global and domestic markets. Favourable base effects are also expected to
contribute to a declining trend in food price inflation. However, food prices are expected
to remain elevated in the short term, as evidenced by high increases in processed food
prices at the producer level.
Household consumption expenditure has remained subdued in line with declining
growth in disposable income and the less accommodative monetary policy stance.
Growth in household consumption expenditure declined to 1,2 per cent in the second
quarter of 2008 as expenditure on durable goods contracted by almost 15 per cent. This
is reflected in the further decline in motor vehicle sales in September at a year-on-year
rate of almost 20 per cent. Retail and wholesale trade sales growth have continued their
negative trends. The latest FNB/BER Consumer Confidence Index shows an
improvement relative to the second quarter, but remains at levels last seen in 2004.
Credit extension to the private sector exhibited further moderation. Growth over twelve
months in total loans and advances to the private sector declined from 21,3 per cent in June
2008 to 19,7 per cent in August. Growth in mortgage advances moderated to 17,6 per cent
in August 2008 while instalment sale credit and leasing finance grew by 11,3 per cent. The
slower growth in credit extension to households is reflected in the ratio of debt to disposable
income which declined in the second quarter of 2008 to 76,7 per cent.
Asset prices have been significantly affected by the recent global market turmoil and the
softer trend in commodity prices. The associated negative wealth effects could
contribute to a further moderation in consumption expenditure growth. The all-share
index on the JSE Limited has declined by about 27 per cent since the beginning of the
year, and by about 25 per cent since the previous MPC meeting. The housing market is
also subdued with the Absa and Standard Bank House Price indices continuing to
record negative real house price growth.
Domestic economic growth appears to be moderating, despite the rebound in the
second quarter of 2008 when GDP growth of 4,9 per cent was recorded. This
improvement was mainly the result of base effects following the 2,1 per cent growth rate
recorded in the first quarter of 2008. Short-term indicators suggest that growth in the
third quarter is likely to be subdued and that growth will remain below its estimated
potential rate. The composite leading indicator of the Bank declined further in July and
the RMB/BER Business Confidence Index also declined further in the third quarter of this
year. The manufacturing sector remains under pressure as seen in the weaker trend in
the volume of manufacturing production, as well as in the Investec/BER Purchasing
Managers Index. Growth in real gross fixed capital formation remained relatively robust,
despite declining from 16,9 per cent in the first quarter to 9,1 per cent in the second
quarter. Investment expenditure is expected to underpin a positive growth rate.
Developments in the international markets have already had a negative impact on
growth in a number of regions and global growth forecasts are being revised down
further, particularly in the OECD countries. The slowing world economy is also likely to
have an adverse effect on domestic growth prospects. The continuing crisis has led to
a generally more accommodative monetary policy stance in a number of countries, and
some governments and central banks are taking unprecedented steps to help stabilise
the situation. At this stage it is unclear how the crisis will unfold, but heightened risk and
uncertainty are likely to persist for some time.
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Monetary Policy Review November 2008

Monetary policy stance
The MPC considered recent developments in the South African economy and the risks
to the inflation outlook against the backdrop of conditions prevailing in the international
financial markets. The MPC is of the view that an unchanged monetary policy stance is
appropriate at this stage. Accordingly, the repurchase rate remains at 12 per cent per
annum. The MPC remains committed to, and focused on, the achievement of the Bank’s
mandate.
Monetary Policy Review November 2008
South African Reserve Bank
Abbreviations
ADB
Asian Development Bank
Alsi
all-share index
API
administered price index
BER
Bureau for Economic Research (Stellenbosch University)
Brent
Brent crude oil
BRIC
Brazil, Russia, India and China
CPI
consumer price index for metropolitan areas
CPIX
consumer price index excluding mortgage interest cost for metropolitan and other
urban areas
ECB
European Central Bank
FDI
foreign direct investment
FNB
First National Bank
FOMC
Federal Open Market Committee
GDP
gross domestic product
HICP
Harmonised Index of Consumer Prices
IES
Income and Expenditure Survey
ILO
International Labour Organisation
IMF
International Monetary Fund
JSE
JSE Limited
MPC
Monetary Policy Committee
MTBPS
Medium Term Budget Policy Statement
NEER
nominal effective exchange rate of the rand
Nersa
National Energy Regulator of South Africa
NHRPL
National Health Reference Price List
OECD
Organisation for Economic Co-operation and Development
OOH
owner-occupied housing
OPEC
Organization of the Petroleum Exporting Countries
PMI
Purchasing Managers Index
PPI
producer price index
PSBR
public-sector borrowing requirement
repo
repurchase
RMB
Rand Merchant Bank
TARP
Troubled Asset Relief Programme
the Bank
South African Reserve Bank
UK
United Kingdom
US
United States
WEO
World Economic Outlook
South African Reserve Bank

Monetary Policy Review November 2008