South African Reserve Bank Annual Economic Report and Monetary Policy Review Parliamentary Portfolio Committee November 2007

South African Reserve South African Reserve BankBank

Annual Economic Report Annual Economic Report and Monetary Policy and Monetary Policy

ReviewReview

South African Reserve South African Reserve BankBank

Annual Economic Report Annual Economic Report and Monetary Policy and Monetary Policy

ReviewReviewParliamentary Portfolio

Committee

November 2007

Annual Economic Report 2007

OutlineOutline

The Annual Economic Report of the South African Reserve Bank

presents the broad economic context within which South African

monetary policy is conducted

Covers some longer-term trends and emphasises past 18 months

Focus in this presentation is a limited selection of developments which

are exceptional or noteworthy – the full document must be consulted

for the full story

Some of the graphs in the presentation have been updated beyond

what was published

Quite a number of records have been set…


World growth in real GDP and range of growth rates for World growth in real GDP and range of growth rates for individual countries: individual countries: Stronger and with less variability than beforeStronger and with less variability than before


World consumer price inflation and range of inflation rates World consumer price inflation and range of inflation rates for individual countries: for individual countries: More subdued and consistent than beforeMore subdued and consistent than before


South African real GDP growth: Also stronger and more consistent


Real production and capacity utilisation in Real production and capacity utilisation in manufacturing: manufacturing: High levels reachedHigh levels reached


Real GDP and expenditure:Real GDP and expenditure: Expenditure stronger than production Expenditure stronger than production


Real final consumption expenditure and disposable income of Real final consumption expenditure and disposable income of households: households: Tentative signs of consumption slowdown Tentative signs of consumption slowdown


Household debt and debt service ratios: Household debt and debt service ratios: Record high Record high debt ratio, but slowingdebt ratio, but slowing


Real gross fixed capital formation: Real gross fixed capital formation: Strong upward trend, Strong upward trend, investment now exceeding 20% of GDPinvestment now exceeding 20% of GDP


Current-account balances: Current-account balances: Familiar pattern sustainedFamiliar pattern sustained


SA current-account balance as percentage of GDP: SA current-account balance as percentage of GDP: 6%-plus deficits6%-plus deficits


South Africa's export commodity prices and volume of mining exports: Slow volume reaction to favourable prices


Real merchandise imports: Real merchandise imports: StrongStrong


Foreign debt and interest paid: Foreign debt and interest paid: Foreign participation Foreign participation comes at a costcomes at a cost


Commodity price indices and terms of trade:Commodity price indices and terms of trade: Export prices are rising more strongly than import pricesExport prices are rising more strongly than import prices


BOP net financial transactions as percentage of GDP: BOP net financial transactions as percentage of GDP: Strong, consistent inflowsStrong, consistent inflows


Gross reserves and international liquidity position of the SARB: Substantial progress in becoming less vulnerable


Total loans and advances extended to private sector Total loans and advances extended to private sector Exceptionally strong growth despite record level of securitisationExceptionally strong growth despite record level of securitisation


Share prices: Share prices: Volatile in August 2007, nevertheless still an Volatile in August 2007, nevertheless still an exceptional performance each year since mid-2003exceptional performance each year since mid-2003


House prices, mortgage borrowing and real interest House prices, mortgage borrowing and real interest rates: rates: Understandable that house market remains buoyantUnderstandable that house market remains buoyant


ConclusionConclusion

The international environment is fairly favourable… …but not without risks and turbulence SA inflation has been above the target range for 6 months

in succession Policy has been tightened, but takes time to work through Household consumption growth has started to slow… …but price and wage inflation continue to edge higher Nevertheless, the SA growth performance has been

exceptionally strong and consistent.. …and strong capital formation bodes well for the future


Monetary PolicyMonetary PolicyReviewReview

November 2007November 2007

Introduction …Introduction …Introduction …Introduction …

Inflation breached the upper end of the inflation target Inflation breached the upper end of the inflation target range for the first time since August 2003 when a year-range for the first time since August 2003 when a year-on-year increase of 6,3 per cent was recorded in April on-year increase of 6,3 per cent was recorded in April 2007 2007

The pressures which were primarily responsible for the The pressures which were primarily responsible for the breach in the inflation target range were largely breach in the inflation target range were largely exogenous, emanating from oil and food price shocksexogenous, emanating from oil and food price shocks

However, the breach of the inflation target is of However, the breach of the inflation target is of significant concern to the South African Reserve Banksignificant concern to the South African Reserve Bank

The most important challenge for the MPC is to ensure The most important challenge for the MPC is to ensure that inflation is brought back to within the target range that inflation is brought back to within the target range and and that inflation expectations remain anchored that inflation expectations remain anchored within the rangewithin the range

Preview …Preview …Preview …Preview …

In the period since the previous Monetary Policy In the period since the previous Monetary Policy Review was published in May 2007, some of the key Review was published in May 2007, some of the key inflation risks have proved persistent, and there has inflation risks have proved persistent, and there has been significant volatility and uncertainty in the been significant volatility and uncertainty in the international environmentinternational environment

However, there are some signs that the economy is However, there are some signs that the economy is responding to the changes which have been made to responding to the changes which have been made to the the monetary policy stance. monetary policy stance.

As inflation reacts with a lag to these changes, the task As inflation reacts with a lag to these changes, the task of the MPC is to assess whether the observed inflation of the MPC is to assess whether the observed inflation response at a particular point in time is consistent with response at a particular point in time is consistent with the desired return to within the target range in future.the desired return to within the target range in future.

This This Monetary Policy ReviewMonetary Policy Review … …This This Monetary Policy ReviewMonetary Policy Review … …

Also presents 3 boxes:Also presents 3 boxes:

1.1. sets out the key points contained in a recent sets out the key points contained in a recent discussion document published by Statistics South discussion document published by Statistics South Africa on proposed changes to the consumer price Africa on proposed changes to the consumer price indexindex

2.2. considers the implications for monetary policy of the considers the implications for monetary policy of the turmoil in financial markets that has arisen from turmoil in financial markets that has arisen from spill-over effects of the subprime lending crisis in the spill-over effects of the subprime lending crisis in the USUS

3.3. provides an international perspective on the impact provides an international perspective on the impact of biofuels production on food prices of biofuels production on food prices

Recent developments in Recent developments in inflationinflation

Recent developments in Recent developments in inflationinflation

Consumer price inflation: CPIX and CPIConsumer price inflation: CPIX and CPIConsumer price inflation: CPIX and CPIConsumer price inflation: CPIX and CPI

CPIX and food inflationCPIX and food inflationCPIX and food inflationCPIX and food inflation

CPIX and food inflationCPIX and food inflationCPIX and food inflationCPIX and food inflation

Contributions to CPIX inflationContributions to CPIX inflationContributions to CPIX inflationContributions to CPIX inflation

Percentage change over twelve months* and percentage pointsPercentage change over twelve months* and percentage points

20072007Mar Mar Apr Apr May May Jun Jun Jul Jul Aug Aug SepSep

Total*Total* 5,5 5,5 6,36,3 6,4 6,4 6,4 6,4 6,5 6,5 6,3 6,3 6,76,7Of which:Of which:FoodFood 2,1 2,1 2,3 2,3 2,4 2,4 2,5 2,5 2,7 2,7 3,0 3,0 3,23,2HousingHousing 0,6 0,6 0,7 0,7 0,7 0,7 0,7 0,7 0,9 0,9 0,8 0,8 0,80,8Medical care andMedical care andhealth expenses health expenses 0,5 0,5 0,5 0,5 0,50,5 0,5 0,5 0,5 0,5 0,50,5 0,50,5Household operation Household operation 0,4 0,4 0,5 0,5 0,5 0,5 0,4 0,4 0,4 0,4 0,4 0,4 0,40,4Transport Transport 0,7 0,7 1,1 1,1 1,1 1,1 1,0 1,0 0,6 0,6 0,2 0,2 0,40,4Education Education 0,40,4 0,40,4 0,40,4 0,4 0,4 0,4 0,4 0,4 0,4 0,40,4Clothing and footwear Clothing and footwear -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2 -0,2-0,2Fuel and power Fuel and power 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,4 0,4 0,4 0,4 0,30,3OtherOther 0,7 0,7 0,7 0,7 0,7 0,7 0,8 0,8 0,8 0,8 0,8 0,8 0,90,9

Source: Statistics South AfricaSource: Statistics South Africa

The effect of food and energy prices on CPIX The effect of food and energy prices on CPIX inflationinflation

The effect of food and energy prices on CPIX The effect of food and energy prices on CPIX inflationinflation

CPIX and administered pricesCPIX and administered pricesCPIX and administered pricesCPIX and administered prices

Production price inflationProduction price inflationProduction price inflationProduction price inflation

Factors affecting Factors affecting inflationinflation

Factors affecting Factors affecting inflationinflation

Annual percentage change in real gross Annual percentage change in real gross domestic product and consumer pricesdomestic product and consumer prices

Annual percentage change in real gross Annual percentage change in real gross domestic product and consumer pricesdomestic product and consumer prices

Real GDP Real GDP Inflation*Inflation*2006 2006 2007 2007 2006 2006 20072007

(estimate) (estimate) (estimate) (estimate)

World World 5,4 5,4 5,2 5,2 3,6 3,6 3,93,9Advanced economies Advanced economies 2,9 2,9 2,5 2,5 2,3 2,3 2,12,1

United States United States 2,9 2,9 1,9 1,9 3,2 3,2 2,72,7Japan Japan 2,2 2,2 2,0 2,0 0,3 0,3 0,00,0Euro area Euro area 2,8 2,8 2,5 2,5 2,2 2,2 2,02,0United Kingdom United Kingdom 2,8 2,8 3,1 3,1 2,3 2,3 2,42,4Other advanced economiesOther advanced economies 4,4 4,4 4,3 4,3 2,0 2,0 1,91,9

Other emerging-market andOther emerging-market anddeveloping countries developing countries 8,1 8,1 8,1 8,1 5,1 5,1 5,95,9

AfricaAfrica 5,6 5,6 5,7 5,7 6,3 6,3 6,66,6Central and eastern Europe Central and eastern Europe 6,3 6,3 5,8 5,8 5,0 5,0 5,15,1Commonwealth of Independent States Commonwealth of Independent States 7,7 7,7 7,8 7,8 9,4 9,4 8,98,9Developing AsiaDeveloping Asia 9,8 9,8 9,8 9,8 4,0 4,0 5,35,3 China China 11,1 11,1 11,5 11,5 1,5 1,5 4,54,5 IndiaIndia 9,7 9,7 8,98,9 6,1 6,1 6,26,2Middle East Middle East 5,6 5,6 5,9 5,9 7,5 7,5 10,810,8Western hemisphere Western hemisphere 5,5 5,5 5,0 5,0 5,4 5,4 5,35,3

* Inflation data exclude Zimbabwe* Inflation data exclude ZimbabweSource: IMF Source: IMF World Economic Outlook, World Economic Outlook, October 2007October 2007

Price of Brent crude oilPrice of Brent crude oilPrice of Brent crude oilPrice of Brent crude oil

Selected central bank interest ratesSelected central bank interest ratesSelected central bank interest ratesSelected central bank interest rates

Per centPer centCountries 1 Jan 2007 Countries 1 Jan 2007 2 Nov 2007 2 Nov 2007 Latest change Latest change

(percentage points)(percentage points)

United States United States 5,25 5,25 4,50 4,50 31 Oct 2007 31 Oct 2007 (-0,25)(-0,25)Japan Japan 0,25 0,25 0,50 0,50 21 Feb 2007 21 Feb 2007 (+0,25)(+0,25)Euro area Euro area 3,50 3,50 4,00 4,00 13 Jun 200713 Jun 2007 (+0,25)(+0,25)United Kingdom United Kingdom 5,00 5,00 5,75 5,75 5 Jul 2007 5 Jul 2007 (+0,25)(+0,25)Canada Canada 4,25 4,25 4,50 4,50 10 Jul 2007 10 Jul 2007 (+0,25)(+0,25)Denmark Denmark 3,50 3,50 4,00 4,00 7 Jun 20077 Jun 2007 (+0,25) (+0,25)Sweden Sweden 3,00 3,00 4,00 4,00 30 Oct 2007 30 Oct 2007 (+0,25)(+0,25)SwitzerlandSwitzerland 1,50 – 2,50 1,50 – 2,50 2,25 – 3,25 2,25 – 3,25 13 Sep 2007 13 Sep 2007 (+0,25)(+0,25)AustraliaAustralia 6,25 6,25 6,50 6,50 8 Aug 2007 8 Aug 2007 (+0,25)(+0,25)New Zealand New Zealand 7,25 7,25 8,25 8,25 26 Jul 2007 26 Jul 2007 (+0,25)(+0,25)Israel Israel 4,50 4,50 4,00 4,00 30 Aug 2007 30 Aug 2007 (+0,25)(+0,25)China China 6,12 6,12 7,29 7,29 15 Sep 2007 15 Sep 2007 (+0,27)(+0,27)Hong KongHong Kong 6,75 6,75 6,00 6,00 1 Nov 2007 1 Nov 2007 (-0,25)(-0,25)

Selected central bank interest ratesSelected central bank interest ratesSelected central bank interest ratesSelected central bank interest rates

Countries 1 Jan 2007 Countries 1 Jan 2007 2 Nov 2007 2 Nov 2007 Latest change Latest change (percentage points)(percentage points)

Indonesia Indonesia 9,75 9,75 8,25 8,25 5 Jul 2007 5 Jul 2007 (-0,25)(-0,25)Malaysia Malaysia 3,50 3,50 3,50 3,50 26 Apr 2006 26 Apr 2006 (+0,25)(+0,25)South Korea South Korea 4,504,50 5,00 5,00 9 Aug 2007 9 Aug 2007 (+0,25)(+0,25)TaiwanTaiwan 2,75 2,75 3,25 3,25 21 Sep 2007 21 Sep 2007 (+0,125)(+0,125)Thailand Thailand 5,00 5,00 3,25 3,25 18 Jul 2007 18 Jul 2007 (-0,25)(-0,25)India India 7,25 7,25 7,75 7,75 30 Mar 2007 30 Mar 2007 (+0,25)(+0,25)Brazil Brazil 13,25 13,25 11,25 11,25 6 Sep 2007 6 Sep 2007 (-0,25)(-0,25)Chile Chile 5,25 5,25 5,75 5,75 13 Sep 200713 Sep 2007 (+0,25)(+0,25)Mexico Mexico 7,00 7,00 7,50 7,50 26 Oct 2007 26 Oct 2007 (+0,25)(+0,25)Czech RepublicCzech Republic 2,50 2,50 3,253,25 31 Aug 2007 31 Aug 2007 (+0,25)(+0,25)Hungary Hungary 8,00 8,00 7,50 7,50 24 Sep 2007 24 Sep 2007 (-0,25)(-0,25)Poland Poland 4,00 4,00 4,75 4,75 29 Aug 2007 29 Aug 2007 (+0,25)(+0,25)Russia Russia 11,00 11,00 10,00 10,00 19 Jun 2007 19 Jun 2007 (-0,50)(-0,50)Turkey Turkey 17,50 17,50 16,75 16,75 16 Oct 2007 16 Oct 2007 (-0,50)(-0,50)

Source: National central banksSource: National central banks

Exchange rates of the randExchange rates of the randExchange rates of the randExchange rates of the rand

Remuneration per worker, labour productivity and unit Remuneration per worker, labour productivity and unit labour cost in the formal non-agricultural sectorlabour cost in the formal non-agricultural sector

Remuneration per worker, labour productivity and unit Remuneration per worker, labour productivity and unit labour cost in the formal non-agricultural sectorlabour cost in the formal non-agricultural sector

Average annual inflation and wage Average annual inflation and wage settlementssettlements

Average annual inflation and wage Average annual inflation and wage settlementssettlements

Growth in real gross domestic product and Growth in real gross domestic product and expenditure componentsexpenditure components

Growth in real gross domestic product and Growth in real gross domestic product and expenditure componentsexpenditure components

Per cent*Per cent*

2006 2006 2007 2007

2nd qr 2nd qr 3rd qr 3rd qr 4th qr 4th qr Year Year 1st qr 1st qr 2nd qr2nd qr

Final consumptionFinal consumptionexpenditure:expenditure:

Households Households 8,1 8,1 7,6 7,6 7,8 7,8 7,3 7,3 7,4 7,4 5,55,5General government General government 15,7 15,7 -4,4 -4,4 4,74,7 5,4 5,4 13,9 13,9 -3,1-3,1

Gross fixed capital formation Gross fixed capital formation 12,8 12,8 14,0 14,0 16,4 16,4 12,7 12,7 21,8 21,8 14,214,2Change in inventories (R billions)** Change in inventories (R billions)** 16,3 16,3 9,0 9,0 21,8 21,8 15,8 15,8 11,8 11,8 10,510,5Gross domestic expenditure Gross domestic expenditure 9,0 9,0 1,4 1,4 12,3 12,3 8,78,7 5,8 5,8 1,11,1Exports of goods and servicesExports of goods and services 24,9 24,9 19,4 19,4 38,7 38,7 5,5 5,5 -11,2 -11,2 4,04,0Imports of goods and services Imports of goods and services 34,4 34,4 5,5 5,5 58,3 58,3 18,4 18,4 -5,0 -5,0 -5,8-5,8Gross domestic product Gross domestic product 5,5 5,5 4,5 4,5 5,65,6 5,0 5,0 4,7 4,7 4,54,5

* Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data* Quarterly data refer to quarter-on-quarter growth at annual rates of seasonally adjusted data** Constant 2000 prices** Constant 2000 prices

House pricesHouse pricesHouse pricesHouse prices

Share price indicesShare price indicesShare price indicesShare price indices

Public finance dataPublic finance dataPublic finance dataPublic finance data

R billions* and per centR billions* and per cent

2006/07 2006/07 2007/08 2007/08 2007/08 2007/08 2008/09 2008/09 2009/10 2009/10 2010/112010/11Actual Actual Budget Budget Revised Revised Medium-termMedium-term estimatesestimates

Nat. government*:Nat. government*:

RevenueRevenue 481,2 481,2 544,6 544,6 553,1 553,1 616,0 616,0 679,6 679,6 740,5740,5

Expenditure Expenditure 470,2 470,2 533,9 533,9 542,4 542,4 599,9 599,9 665,6 665,6 726,2726,2

Budget balance Budget balance 11,0 11,0 10,7 10,7 10,8 10,8 16,2 16,2 14,0 14,0 14,314,3

As % of GDP:As % of GDP:

Budget balance Budget balance 0,6 0,6 0,6 0,6 0,5 0,5 0,7 0,7 0,6 0,6 0,50,5

Total net loan debt Total net loan debt 26,7 26,7 24,3 24,3 23,0 23,0 20,3 20,3 17,9 17,9 15,815,8

Debt service cost Debt service cost 2,9 2,9 2,7 2,7 2,6 2,6 2,3 2,3 2,1 2,1 1,91,9

PSBR** PSBR** -0,2 -0,2 0,3 0,3 0,3 0,3 0,8 0,8 1,1 1,1 1,21,2

** PSBR: Public-sector borrowing requirement** PSBR: Public-sector borrowing requirementSource: National Treasury Source: National Treasury Medium Term Budget Policy Statement 2007Medium Term Budget Policy Statement 2007

Growth in the monetary aggregatesGrowth in the monetary aggregatesGrowth in the monetary aggregatesGrowth in the monetary aggregates

Growth in loans and advancesGrowth in loans and advancesGrowth in loans and advancesGrowth in loans and advances

Monetary policyMonetary policyMonetary policyMonetary policy

Monetary Policy …Monetary Policy …Monetary Policy …Monetary Policy …

Since the previous Since the previous Monetary Policy ReviewMonetary Policy Review there there have been further changes in the stance of have been further changes in the stance of monetary policymonetary policy

The repo and other short-term interest ratesThe repo and other short-term interest ratesThe repo and other short-term interest ratesThe repo and other short-term interest rates


At the past three meetings of the MPC, the focus At the past three meetings of the MPC, the focus remained on ensuring a return of the inflation rate to remained on ensuring a return of the inflation rate to within the target rangewithin the target range

However, it was stressed that the actions of the MPC However, it was stressed that the actions of the MPC were not predicated on the actual breach but on the were not predicated on the actual breach but on the expected path of inflationexpected path of inflation


By the June 2007 meeting there had been some By the June 2007 meeting there had been some deterioration in the inflation outlook compared to the deterioration in the inflation outlook compared to the previous two meetings previous two meetings

The risks to the outlook were seen to be strongly on The risks to the outlook were seen to be strongly on the upsidethe upside

Oil and food prices, household consumption Oil and food prices, household consumption expenditure growth and changes in inflation expenditure growth and changes in inflation expectations were all factors in this regardexpectations were all factors in this regard

The forecasts of the Bank also showed a further The forecasts of the Bank also showed a further deterioration compared to the April forecastdeterioration compared to the April forecast

It was decided to increase the repo rate by 50 basis It was decided to increase the repo rate by 50 basis points to 9,5 per cent per annumpoints to 9,5 per cent per annum


At the August 2007 meeting, the international At the August 2007 meeting, the international environment had become increasingly volatile and environment had become increasingly volatile and uncertainuncertain

The MPC felt it was still too early to assess the longer-The MPC felt it was still too early to assess the longer-term implications of these developments, and that it term implications of these developments, and that it was appropriate to remain focused on the inflation was appropriate to remain focused on the inflation target and react to financial market developments target and react to financial market developments insofar as they impacted on the inflation outlookinsofar as they impacted on the inflation outlook

The upside risks to the inflation outlook identified in The upside risks to the inflation outlook identified in June remained in place, and the central forecast of the June remained in place, and the central forecast of the Bank indicated a slight deteriorationBank indicated a slight deterioration

the repo rate was increased by 50 basis points to 10,0 the repo rate was increased by 50 basis points to 10,0 per cent per annumper cent per annum


At the October 2007 MPC meeting there were signs At the October 2007 MPC meeting there were signs that the economy was responding to the higher that the economy was responding to the higher interest rate environmentinterest rate environment

The challenge for the committee was to assess The challenge for the committee was to assess whether these developments would be sustained and whether these developments would be sustained and sufficient to bring inflation comfortably within the sufficient to bring inflation comfortably within the inflation target rangeinflation target range

The view of the MPC was that despite this moderation, The view of the MPC was that despite this moderation, the risks to the outlook were still on the upsidethe risks to the outlook were still on the upside

On balance, it was decided that a further upward On balance, it was decided that a further upward adjustment of the repo rate was required and it was adjustment of the repo rate was required and it was accordingly increased by 50 basis points to 10,5 per accordingly increased by 50 basis points to 10,5 per cent per annumcent per annum

The outlook for Inflation The outlook for Inflation The outlook for Inflation The outlook for Inflation

IMF projections of world growth and inflation IMF projections of world growth and inflation for 2007 and 2008*for 2007 and 2008*

IMF projections of world growth and inflation IMF projections of world growth and inflation for 2007 and 2008*for 2007 and 2008*

Real GDP (growth) Real GDP (growth) Inflation rates**Inflation rates** 2007 2007 2008 2008 2007 2007 2008 2008

World World (4,9) (4,9) 5,2 5,2 (4,9) (4,9) 4,8 4,8 (3,5) (3,5) 3,9 3,9 (3,5) (3,5) 3,63,6Advanced economies Advanced economies (2,5) (2,5) 2,5 2,5 (2,7) (2,7) 2,2 2,2 (1,8) (1,8) 2,1 2,1 (2,1) (2,1) 2,02,0

United States United States (2,2) (2,2) 1,9 1,9 (2,8) (2,8) 1,9 1,9 (1,9) (1,9) 2,7 2,7 (2,5) (2,5) 2,32,3Japan Japan (2,3) (2,3) 2,0 2,0 (1,9) (1,9) 1,7 1,7 (0,3)(0,3) 0,0 0,0 (0,8) (0,8) 0,50,5Euro area Euro area (2,3) (2,3) 2,5 2,5 (2,3) (2,3) 2,1 2,1 (2,0) (2,0) 2,0 2,0 (2,0) (2,0) 2,02,0United Kingdom United Kingdom (2,9) (2,9) 3,1 3,1 (2,7)(2,7) 2,3 2,3 (2,3) (2,3) 2,4 2,4 (2,0) (2,0) 2,02,0Other advanced economies Other advanced economies (3,8) (3,8) 4,3 4,3 (3,8) (3,8) 3,83,8 (2,0) (2,0) 1,91,9 (2,2) (2,2) 2,32,3

Other emerging-market andOther emerging-market anddeveloping countries developing countries (7,5) (7,5) 8,1 8,1 (7,1) (7,1) 7,4 7,4 (5,4) (5,4) 5,9 5,9 (4,9) (4,9) 5,35,3

AfricaAfrica (6,2) (6,2) 5,7 5,7 (5,8) (5,8) 6,56,5 (10,7) (10,7) 6,6 6,6 (10,4) (10,4) 6,06,0Central and eastern Europe Central and eastern Europe (5,5) (5,5) 5,8 5,8 (5,3) (5,3) 5,2 5,2 (4,8) (4,8) 5,1 5,1 (3,7) (3,7) 4,14,1Commonwealth of Ind. States Commonwealth of Ind. States (7,0) (7,0) 7,8 7,8 (6,4) (6,4) 7,0 7,0 (9,0) (9,0) 8,9 8,9 (8,3) (8,3) 8,38,3Developing Asia Developing Asia (8,8) (8,8) 9,8 9,8 (8,4) (8,4) 8,8 8,8 (3,9) (3,9) 5,3 5,3 (3,4) (3,4) 4,44,4 China China (10,0) (10,0) 11,5 11,5 (9,5) (9,5) 10,0 10,0 (2,2) (2,2) 4,5 4,5 (2,3) (2,3) 3,93,9

India India (8,4) (8,4) 8,9 8,9 (7,8) (7,8) 8,4 8,4 (6,2) (6,2) 6,2 6,2 (4,3) (4,3) 4,44,4Middle East Middle East (5,5) (5,5) 5,9 5,9 (5,5) (5,5) 5,9 5,9 (10,6) (10,6) 10,8 10,8 (8,7) (8,7) 9,29,2Western hemisphereWestern hemisphere (4,9) (4,9) 5,0 5,0 (4,2) (4,2) 4,3 4,3 (5,2) (5,2) 5,3 5,3 (5,7) (5,7) 5,85,8

* IMF projections for 2007 and 2008 as at April 2007 in parentheses* IMF projections for 2007 and 2008 as at April 2007 in parentheses** Inflation data exclude Zimbabwe** Inflation data exclude ZimbabweSource: IMF Source: IMF World Economic OutlookWorld Economic Outlook, October 2007, October 2007

Per cent

Domestic outlookDomestic outlookDomestic outlookDomestic outlook

Domestic growth is set to remain robust. Domestic growth is set to remain robust. According According to the September Reuters consensus forecasts the to the September Reuters consensus forecasts the South African economy is expected to grow by 4,8 South African economy is expected to grow by 4,8 per cent in 2007; 4,7 per cent in 2008 and 5,1 per per cent in 2007; 4,7 per cent in 2008 and 5,1 per cent in 2009cent in 2009

However, although consumer and business However, although consumer and business confidence remain at relatively high levels, both confidence remain at relatively high levels, both have moderated in 2007. Measures of trade, have moderated in 2007. Measures of trade, manufacturing and fixed investment activity have manufacturing and fixed investment activity have also decelerated recently (although the PMI did also decelerated recently (although the PMI did rebound in October)rebound in October)

BER surveys of CPIX inflation expectationsBER surveys of CPIX inflation expectationsBER surveys of CPIX inflation expectationsBER surveys of CPIX inflation expectations

BER survey of CPIX inflation expectations: BER survey of CPIX inflation expectations: Third quarter 2007*Third quarter 2007*

BER survey of CPIX inflation expectations: BER survey of CPIX inflation expectations: Third quarter 2007*Third quarter 2007*

Per centPer cent

2007 2007 2008 2009 2008 2009

1. Financial analysts 1. Financial analysts (5,5) 6,1 (5,5) 6,1 (5,0) 5,7 (5,0) 5,7 (4,7) 5,0(4,7) 5,0

2. Business 2. Business (5,3) 5,7 (5,3) 5,7 (5,4) 5,8 (5,4) 5,8 (5,4) 5,8(5,4) 5,8

3. Trade unions 3. Trade unions (5,5) 5,7 (5,5) 5,7 (5,5) 5,9 (5,5) 5,9 (5,4) 5,9(5,4) 5,9

Average 1 – 3 Average 1 – 3 (5,4) 5,9 (5,4) 5,9 (5,3) 5,8 (5,3) 5,8 (5,2) 5,6(5,2) 5,6

* Second-quarter 2007 results in parentheses* Second-quarter 2007 results in parenthesesSource: Bureau for Economic Research, University of StellenboschSource: Bureau for Economic Research, University of Stellenbosch

Reuters survey of CPIX forecasts: September Reuters survey of CPIX forecasts: September 2007*2007*

Reuters survey of CPIX forecasts: September Reuters survey of CPIX forecasts: September 2007*2007*

Per centPer cent

2007 2007 2008 2008 2009 2009

1. Mean 1. Mean (6,1) 6,2 (6,1) 6,2 (5,7) 5,8 (5,7) 5,8 (5,1) 5,1(5,1) 5,1

2. Median 2. Median (6,1) 6,2 (6,1) 6,2 (5,7) 5,8 (5,7) 5,8 (5,3) 5,2(5,3) 5,2

3. Highest 3. Highest (6,4) 6,3 (6,4) 6,3 (6,1) 6,4 (6,1) 6,4 (5,5) 5,7(5,5) 5,7

4. Lowest 4. Lowest (5,9) 6,0 (5,9) 6,0 (5,5) 5,3 (5,5) 5,3 (4,6) 4,6(4,6) 4,6

Number of forecasters (15) 16 Number of forecasters (15) 16 (15) 16 (15) 16 (11) 13 (11) 13

* August 2007 survey results in parentheses* August 2007 survey results in parenthesesSource: ReutersSource: Reuters

Break-even inflation ratesBreak-even inflation ratesBreak-even inflation ratesBreak-even inflation rates

CPIX forecastCPIX forecastCPIX forecastCPIX forecast

Assessment and Assessment and conclusionconclusion

Assessment and Assessment and conclusionconclusion

Assessment and conclusionAssessment and conclusionAssessment and conclusionAssessment and conclusion

The past six months have been challenging from a The past six months have been challenging from a monetary policy perspective. monetary policy perspective.

The inflation outlook deteriorated somewhat despite the The inflation outlook deteriorated somewhat despite the tighter monetary policy stance adopted in 2006tighter monetary policy stance adopted in 2006

However, there have been some signs of moderation in However, there have been some signs of moderation in consumption expenditure. The outlook for monetary consumption expenditure. The outlook for monetary policy will depend to a significant degree on whether policy will depend to a significant degree on whether these signs of moderation are sustained and sufficient these signs of moderation are sustained and sufficient to bring about the desired inflation outcometo bring about the desired inflation outcome

Assessment and conclusionAssessment and conclusionAssessment and conclusionAssessment and conclusion

Monetary policy in South Africa will remain focused on Monetary policy in South Africa will remain focused on bringing inflation back to within the inflation target bringing inflation back to within the inflation target range. range.

Thank You!Thank You!Thank You!Thank You!

Documents

South African Reserve Bank Annual Economic Report and Monetary Policy Review Parliamentary Portfolio Committee November 2007