impact on consumer demand and, therefore, potentially on inflation. various issues emerge here. firstly, it is not always easy to recognise a bubble. secondly, there is the question of whether or not monetary policy should try and prick asset price bubbles in order to avoid the consequences of the bubble popping at even higher levels with the attendant risks to financial stability. generally the response of central banks has been to argue that the best monetary policy can do is to try and anticipate the impacts of asset price movements on inflation, and to react in the same way that we react to any factor that can cause inflation to rise beyond the inflation target. this is in essence our approach as well. however in most countries there is not a full understanding of how these wealth effects affect the inflation process and the transmission mechanism of monetary policy. 6. international oil prices in any discussion of international developments we cannot ignore the oil price. as we all know, international oil prices have increased significantly over the past few years. it is almost unbelievable that the price of brent crude was around us $ 11 per barrel in january 1999. by january 2004 brent crude oil prices had exceeded us $ 30 per barrel and had subsequently reached a high of around $ 80 per barrel during august 2006. since then there has been some moderation and the price has fallen to current levels of below us $ 60 per barrel. the causes of these increases have been the tight supply and demand conditions in the market, as well as periodic bouts of geopolitical tensions. the increases in oil prices have had a significant impact on domestic petrol prices. during 2006 for example, the price of 95 octane petrol in gauteng increased from r5, 49 per litre in january to peak at r7, 04 per litre in august. fortunately, as a result of falling international prices, we have experienced three successive declines totaling r1, 07. the contribution of transport costs to cpix inflation provides an indication of the direct inflationary impact of petrol price increases. this has averaged around 15 per cent of the overall monthly increase in the cpix during 2005 and around 17 per cent during the first 9 months of this year. we also saw that for most of 2004 and 2005, most of the volatility observed in cpix inflation was directly attributable to petrol price movements. more recently, other factors have also been exerting upward pressure on cpix inflation. we have often emphasised that it is not the first round effects of oil price increases,

t t mboweni : economic developments and monetary policy speech by mr t t mboweni, governor of the south african reserve bank, at a dinner of the south african institute of electrical engineers, rand club, johannesburg, 22 july 2004. * 1. * * introduction ladies and gentlemen, i thank you for the invitation to attend your dinner in these illustrious surroundings. it is indeed always an honour to attend a function at one of the oldest clubs in south africa, and even more so because of the role that it played in the history of our country. i appreciate having the opportunity to talk to your institute on this occasion because of your role in the development of our economy. as a topic for discussion i thought it may be useful to briefly look at recent economic developments in the world and in south africa and conclude my address with a few remarks on monetary policy and exchange rates. 2. global economic developments the global economy started to recover at an accelerated pace during the course of 2003 and the first quarter of 2004 and then growth seems to have slowed down somewhat in the second quarter of this year. this was mainly due to slower growth in the united states and china. the softening in the economic growth of the united states'economy is probably a temporary phenomenon related to the spike in the international price of oil, which affects consumer expenditure. it is, however generally expected that business investment in the united states will pick up strongly in the second half of 2004 and give further impetus to the world economic recovery. the slowdown in the chinese economy was the result of deliberate policy actions taken by the chinese authorities to cool down the rapid growth that they have experienced over the past years. although the slower growth in china will occur from a very high level, it could have a significant impact on other asian economies. a slowdown in china's energy, steel and chemical production could also affect demand in international commodity markets, resulting in a decline in international prices. china has become a major player in the world economy and is also now the fifth largest trading partner of south africa. however, it seems unlikely that this slower growth will be a lasting feature of the world economy and most international organisations such as the international monetary fund and the bank for international settlements are still projecting a marked recovery in the global economy in the rest of this year and in 2005. another important risk that the world economy is facing is the substantial increase in international oil prices. brent crude oil prices have increased from levels around us $ 24 per barrel in may