and new ones have emerged to frustrate sustained growth in output. the capital flows challenge needs fresh thinking. over the medium term, to moderate the real exchange rate, we need fiscal and monetary policy settings that reflect that policy objective and seek to achieve it. for fiscal policy this means a credible consolidation path and a return to sustainable public debt levels. it also implies that public spending be directed at addressing south africa ’ s competitiveness challenges and infrastructure needs. getting these areas of policy right, in turn, implies that foreign investment will start to shift in composition towards greater fdi relative to portfolio investment and in a wider range of industries. more efficient infrastructure, more competitive firms with sustained productivity growth, and more skilled labour are as integral to achieving a permanently more competitive economy as forward - looking fiscal and monetary policy settings. how we address our home - grown economic challenges is not to suggest that global difficulties can be left unattended. three serious disorders confront the short and medium term. the first is the effects of macroeconomic policy making in advanced economies. these policy settings, intended to resolve the combination of slow growth and over indebtedness, and conducted in a globalised world economy ; contribute at some level to the flow of capital into emerging markets and the developing world. like the experiences of the asian crisis over a decade ago, for some economies these flows run the risk of pushing economies into very poor decisions of what to do with the surplus of capital. capital pushed into uses where the returns are speculative and high will tend to result in inefficient use of capital and cause foreign currency liabilities that cannot be met. for other economies, such as south africa, the flow of capital may ease the adjustment process by enabling a faster consolidation away from unsustainable fiscal positions. but they also can result in dutch disease effects, particularly as in south africa, where shocks affecting one sector are transmitted to others via input pricing and sector - level collective bargaining. the trade channel works in the opposite direction. the markedly slower economic growth of advanced economies will result in lower exports in the short term and will accelerate the shift in exports towards more rapidly growing regions. china is the fastest growing export destination for south africa, while india and a number of african countries are also receiving a rising volume of exports. the slowing advanced economies however also pose a less obvious trade challenge to south africa ’ s manufacturing ambitions. the market space for south africa ’ s relatively high cost and specialised manufactures will narrow and competition will

t t mboweni : monetary and economic trends in south africa statement of the monetary policy committee by mr t t mboweni, governor of the south african reserve bank, at the south african reserve bank, victoria, 13 october 2005. * * * introduction for the past two years, cpix inflation has been within the inflation target range of 3 - 6 per cent. in recent months, however, oil price developments have posed an increasing risk to the continued attainment of the inflation target and since the last meeting of the monetary policy committee, cpix inflation has risen by 1, 3 percentage points. these increases were in line with expectations, and our current forecasts show that we should remain within the target range over the forecast period. more recently there has been some respite in the oil market, and prices have moderated from recent peaks caused by hurricanes katrina and rita. however, oil prices remain at high levels and continue to be of concern. despite the petrol price increases, the economy continues to perform at a robust pace, domestic demand remains strong, and formal sector employment has increased. recent inflation developments inflation as measured by the consumer price index for metropolitan and other urban areas excluding the interest cost on mortgage bonds ( cpix ) reached a low of 3, 1 per cent in february and then began to increase, mainly as a result of petrol price movements. after measuring 3, 5 per cent in june, cpix inflation increased to 4, 2 per cent and 4, 8 per cent in july and august respectively. during these two months, the petrol price increased by a total of r0, 56. excluding petrol and diesel costs, cpix inflation measured 3, 6 per cent in both july and august having averaged 3, 4 per cent for the previous 12 months. this indicates that thus far there has been limited pass - through from petrol prices to prices of other goods and services. other categories of goods and services that have shown significant price increases are tobacco products, domestic workers ’ wages, medical costs and education. in contrast, prices of clothing and footwear have continued to fall, while most other categories show very subdued price increases. despite recent increases in the maize price, food price inflation has remained low, measuring 2, 7 per cent in august. administered prices excluding petrol rose at 5, 9 per cent, marginally below the upper limit of the inflation target range. however if the petrol price is included, administered prices increased by 11, 2 per cent. production price inflation has