Briefing By Reserve Bank Governor; Net Open Forward Position; Rand Stability

Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
27 June 2001
BRIEFING BY RESERVE BANK GOVERNOR; NET OPEN FORWARD POSITION; RAND STABILITY

Relevant Submissions
South African Reserve Bank presentation:
Current international economic conditions
Domestic economic developments [.pdf file]
Statement of the Monetary Policy Committee: 14 June 2001 (See Appendix 1 below)
Statement of the Monetary Policy Committee: 25 April 2001 (See Appendix 2)

Reducing economic risk: a case for closing the Net Open Forward Position: Standard Bank
The Rand Five Years Hence: comment from Merrill Lynch & Co

SUMMARY
The Reserve Bank, led by Governor Tito Mboweni, gave a detailed analysis of the country’s economic situation, in terms of growth, financial markets and global competitiveness. Mboweni highlighted the general slowdown in world economic performance and the fact that this would inevitably impact negatively on the South African economy. An economist at Standard Bank presented on the Net Open Forward Position. He explained the challenges that the Reserve Bank would face in eradicating this system. The chief economist at Merrill Lynch & Co presented on the stability of the rand in the next few years.

MINUTES
Mr Mboweni said that the oil price was stabilising in the range between $22 and $28 per barrel and this would stabilise the domestic fuel price in the long run. The World Bank had forecast global economic growth to be 2.2% for the year 2002, and the growth rate in developing countries is expected to be 5.0% which he said is a very good prospect for the South African economy. He said that what was of prime importance was the economic performance of the USA, since what happens in the USA affects many other economies. The impact of the United States slowdown had been quite drastic on Asian economies. The United States had been trying to address this slowdown in terms of monetary and fiscal policy.

The Governor emphasised the fact that Europe constitutes 40% of South Africa’s trade and was therefore more important than other economic regions. He said that inflation was decreasing by 5% in South Africa. However, what should be cause for concern was that South Africa was not in line with world standards in terms of inflation. He said that despite the gloom, the inflation picture is improving. He also said that a general reduction across the board for interest rates was evident.

In South Africa, a general slowdown in economic growth was taking place. A slowdown of overall spending by households had been recorded, while acceleration of spending on durable goods had taken place. He said that the interest-rate sensitive components of household spending were still the thrust of spending since interest-rates had been favourable. Government spending on the business community had also induced spending. He said that fixed investment spending increased by 8% throughout the productive sectors of the economy and there had been notable inventory accumulation on the part of business.

Export growth had declined in accordance with general global decline in growth, and imports had decreased largely due to the depreciation of the rand. There had been increased improvements in the trade and service account in the balance of payments. The surplus on the current account increased and is currently sitting around 2.7% of GDP. Mergers and acquisitions had been the primary source of increased foreign direct flows. The offshore expansion of South African companies had resulted in a major outflow of the economy. The inflow of portfolio capital was due to the high number of non-residents participating in the securities market. He said that trade-related capital flows related to the strong performance by South African exporters.

Mr De Jager continued the presentation by highlighting the slight increase in overall employment that had occurred in the mining, financial services and trade sectors. Wage growth had been moderated with nominal growth having slowed down in 2000. Productivity growth had increased at around 6% while nominal wage growth had increased at a slower pace. Headline inflation was down from 8% to 6%. Money supply growth had been induced by the increase in demand. Credit growth was still increasing signalling a gradual increase in demand also attributed to a decline in the cost of credit. Turnover in the secondary bond market was very high due to growth in the financial services sector. Another encouraging factor was that the public sector had decreased their borrowing requirement as a percentage of GDP to less than 2%. The Anglo-American/De Beers and the Anglo-American/Billiton deals had brought in over $700 million to the economy.

He said that he hoped that the privatisation proceeds would address the budget deficit. Inflationary pressures were easing and the country was well within the inflation target that had been set for calendar year 2002.

Mr Mboweni said that the REPO rate had been reduced from 12% to 11%. However the banking prime rate had only decreased from 14.5% to 13.7% and he said that he could not understand why the banks had not moved down the full 100 basis points to 13.5%.

Discussion
Prof B Turok (ANC) asked if the increase in the private sector had been for formal or informal employment and also asked for the profitability of the manufacturing industry.

Mr De Jager answered that increase in employment was for the formal sector and that there had been shift in the distribution of income away from employees to employers as reflected in the increase on the Return on Investments in the private sector.

Dr Koornhof (UDM) asked for the extent of the increase in administrated prices in affecting inflation as a whole

Mr Mboweni answered that administrated prices were publicly induced prices and said that the Reserve Bank was trying to convince the public-sector that inflation targeting was everyone’s responsibility. He said that education and medical costs directly influence peoples’ perception of the trend of inflation.

Mr K Andrew (DP) asked if the increase in household debt as a percentage of household income simultaneous to the increase in per capita growth in disposable income would not be counter-active.

Mr Mboweni replied that household debt had increased very slightly from 55% to 56% and should not be cause for concern.

Mr Lokgoro (ANC) asked what constituted the bulk of imported goods.

Mr De Jager answered that it was primarily capital and intermediary goods used in production processes.

Prof Turok (ANC) suggested that it would be good to get a presentation from the Banking Council on the profitability of the industry.

Net Open Forward Position: briefing
Mr Goolam Ballim, a Standard Bank economist, said that the Net Open Forward Position (NOPF) reflects the Reserve Bank’s shortage of foreign exchange and is a mechanism to insure private sector exchange risk.

He said that the exchange rate risk should be shifted from the private sector onto the taxpayer. The participation of the Reserve Bank in the forex market leads to fiscal losses and ultimately to lower economic growth.

He said that the benefits of closing the NOPF would be elimination of future fiscal losses, reduced speculative risk and improved economic growth. The best mechanisms for unwinding the NOPF would be through offshore bond issues and state asset restructuring.

The future stability of the Rand: briefing
Dr Jos Gerson, chief economist at Merrill Lynch & Co, said that he agreed with the contents of the Reserve Bank Quarterly Bulletin. He said that monetary and fiscal policy in broad terms having being stable is a necessary but not sufficient condition for inducing economic growth. The major problem of the South African economy was the scarcity and skewness of skills.

He said that improving the skills-base was outside the realm of the South African Reserve Bank and National Treasury since it impinged on education and immigration.

He felt that the extraordinary role played by platinum metals had been downplayed in the quarterly bulletin.

Discussion
Mr Feinstein (ANC) asked for the difference between secular and cyclical economic swings

Dr Gerson said that secular swings were long term economic swings whereas cyclical swings were upward and downward swings in the economic cycle.

The Chairperson adjourned the meeting.

Appendix 1:
SOUTH AFRICAN RESERVE BANK
STATEMENT OF THE MONETARY POLICY COMMITTEE

14 JUNE 2001

At a meeting on 13 and 14 June 2001 the Monetary Policy Committee analysed international and domestic economic developments in order to evaluate the monetary policy stance. After lengthy deliberations the Committee decided that the repo rate should decline by 100 basis points to 11,0 per cent with effect from 15 June 2001. The Committee believes that this should lead to downward adjustments in the lending rates of banks. This decision was based primarily on the following considerations:

1. INTERNATIONAL ECONOMIC DEVELOPMENTS
1.1 The economic performance of the United States of America remains weak with first-quarter growth now estimated at a seasonally adjusted annualised rate of 1,3 per cent, i.e. only marginally higher than the 1,0 per cent in the fourth quarter of 2000. Inventory depletion was higher than expected in the first three months of 2001, though private consumption expenditure is still supporting economic growth. Industrial production, particularly durable goods production, declined in April. This brought the capacity utilisation rate of manufacturing enterprises to its lowest level in more than a decade. The manufacturing sector continued to shed jobs and productivity declined in the first quarter for the first time since 1995. This latter development caused a rise in unit labour costs, which may, if sustained over time, put upward pressure on inflation.

1.2 The Japanese economy appears to be heading for a recession. In the first quarter of 2001, real gross domestic product declined by 0,8 per cent. Lower industrial production figures in April point to an even weaker second quarter. Growth in the euro area is also starting to show some effects arising from developments in the United States, with growth in total production amounting to an annualised rate of 2,2 per cent in the first quarter of 2001. The global economic slowdown further curbed demand for British exports, leading to a decline in the industrial production of the United Kingdom in February and March 2001. Asian and Latin American economies were also adversely affected by the slower world economic growth. Particularly in non-Japan Asia, the downturn has been more marked than originally expected. The IMF World Economic Outlook nevertheless still forecasts world growth of 3,2 per cent for 2001, compared with 4,8 per cent in 2000.

1.3 As a result of the poor short-term outlook for the United States' economy, the Federal Open Market Committee (FOMC) reduced interest rates by a further 50 basis points on 15 May 2001. This has been the fifth cut in interest rates since the beginning of the year, with the benchmark rate moving from 6,50 to 4,00 per cent. The European Central Bank decreased rates by 25 basis points in May 2001. Other countries that have reduced official interest rates since the last meeting of the Monetary Policy Committee, include Denmark, Canada, Israel and New Zealand. None of these countries, however, have decreased rates to the same extent as the United States. By contrast, interest rates in Brazil, where the inflation rate is still above the target range, were raised during May.

1.4 Although there are currently no strongly pervasive inflationary trends, higher inflation has been evident in the euro area and some Asian and Latin American countries. The international oil price has moved above the upper end of the OPEC target and, if sustained, could put upward pressure on world inflation. However, OPEC appears to be committed to maintaining oil prices within the target band of US$22 to US$28 per barrel.

2. REAL DOMESTIC ECONOMIC DEVELOPMENTS
2.1 The growth in real gross domestic product in South Africa also slowed down further from an annualised rate of 4 per cent in the third quarter of 2000 to 3 per cent in the fourth quarter and 2 per cent in the first quarter of 2001. At first the lower rate of increase in output could be attributed to a decrease in agricultural production. However, in the first quarter of 2001 output growth slowed down in most sectors, with the exception of financial services and the mining industry.

2.2 The general slowdown in economic activity in the first quarter of 2001 once again proves that the fortunes of the South African economy are inextricably interwoven with the global economy. It is almost inevitable that domestic activity will be influenced by changes in international economic conditions. The current global slowdown led to a decline in South African exports and harmed the goods-producing and the trade sectors of the economy. These developments, in turn, affected most of the tertiary sector activities.

2.3 Aggregate domestic demand increased by 2½ per cent in the first quarter of 2001. Private household spending on durable goods, gross fixed capital formation by the private sector and inventory accumulation by manufacturers and traders increased during the first quarter.

2.4 Households were prepared to incur debt to finance part of their purchases of durable goods, which resulted in some increase in their debt-to-income ratio. At about 56 per cent in the first quarter, this ratio is high but does not seem to have any serious underlying risks. Increases in real private fixed capital formation were reported over the full spectrum of production sectors and were not confined to a few large projects. In addition, businesses added to their stocks of intermediate and finished goods. By contrast, government consumption expenditure at constant prices rose modestly.

2.5 In line with the growth in expenditure, there was some indication towards the end of 2000 that employment was improving. The number of people employed in the formal private non-agricultural sectors of the economy increased during the fourth quarter of 2000. However, public-sector employment declined further.

3. DOMESTIC MONETARY AND FISCAL CONDITIONS
3.1 The seasonally adjusted and annualised quarter-to-quarter growth in the broadly defined money supply (M3) accelerated from 4,9 per cent in the third quarter of 2000 to 14,7 per cent in the fourth quarter and 19,2 per cent in the first quarter of 2001. The year-on-year growth in M3 also increased sharply from 7,5 per cent in December 2000 to 12,3 per cent in April 2001. This acceleration reflected increases in aggregate domestic demand, but M3 growth outpaced the rate of increase in the narrower aggregates because of a comparatively strong rise in longer-term deposits of the public.

3.2 Growth in total bank credit extension slowed down from an annualised 18,9 per cent in the fourth quarter of 2000 to 2,8 per cent in the first quarter of 2001. The year-on-year growth in bank credit extension, however, remained below 10 per cent in the first four months of 2001. The largest part of this increased demand for credit came from households.

3.3 Public finances were characterised by disciplined spending in the fiscal year ended 31 March 2001. As a result of this, and with national government revenue exceeding earlier expectations, the deficit before borrowing was reduced to a level well below that which had originally been budgeted. The non-financial public-sector borrowing requirement amounted to only 2,2 per cent of gross domestic product in fiscal 2000/01, compared with an average ratio of 4,2 per cent in the preceding five fiscal years.

4. DOMESTIC FINANCIAL MARKETS
4.1 Activity in the secondary bond and share market generally remained strong in the first five months of 2001. Bond yields, which move inversely to bond prices, declined from a monthly average of 12,9 per cent in December 2000 to 11,9 per cent in May. Share prices rose by 24 per cent from the most recent low in May 2000 to February 2001. The average monthly level of share prices then declined by 8 per cent until April, before increasing again by 9 per cent to an all-time high in May 2001.

4.2 Money-market conditions remained relatively stable throughout the first five months of 2001, with the liquidity requirement fluctuating between R8 billion and R11,7 billion. Since the last meeting of the Monetary Policy Committee, overnight rates have increased by approximately ½ percentage point. By contrast, longer-term money-market rates eased, resulting in a substantial flattening of the money-market yield curve.

5. BALANCE OF PAYMENTS AND FOREIGN-EXCHANGE MARKET
5.1 A small deficit of R0,5 billion was recorded in the overall balance of payments in the first quarter of 2001, which put some downward pressure on the exchange rate of the rand.

5.2 Despite the already noted increase in domestic demand, the surplus on the current account of the balance of payments improved in the first quarter of 2001. After adjustment for seasonal factors and annualised, this surplus increased from R2,5 billion in the fourth quarter of 2000 to R6,9 billion in the first quarter of 2001. This was largely the result of a decline in interest and dividend payments to the rest of the world. The volume of merchandise exports declined in the first quarter of 2001, but export earnings were boosted by a general improvement in export prices following the depreciation of the rand. Simultaneously, higher prices for imported goods dampened the demand for imports, holding back growth in the nominal value of imports.

5.3 The deficit on the external financial account exceeded the surplus on the current account of the balance of payments. This deficit was mainly the result of direct investments made abroad by South African companies wishing to expand their activities in other parts of the world and a rise in foreign assets related to trade finance. Portfolio capital, on a net basis, continued to flow into the country. The net purchases of domestic shares by non-residents amounted to R15,9 billion in the first five months of 2001. This was offset to some extent by net sales of bonds to the value of R3,6 billion over the same period. In May, however, non-resident investors were net buyers of bonds to the amount of R2,8 billion.

5.4 After the exchange rate of the rand had been under considerable pressure during the first four months of 2001, it regained most of its losses in May due in large measure to the restructuring of the De Beers Diamond Corporation which led to a substantial inflow of capital. The trade-weighted value of the rand, which had declined by 3,0 per cent from the end of 2000 to 25 April 2001, was therefore on 14 June 2001 only 0,9 per cent below its level at the end of last year.

6. MONETARY POLICY
6.1 Consumer and production prices clearly indicate that inflation is slowing down. CPIX inflation, targeted to attain an annual average rate of between 3 and 6 per cent in the year 2002, fell from a year-on-year rate of 8,2 per cent in August 2000 to 6,7 per cent in April 2001. Measured from quarter to quarter and at seasonally adjusted and annualised rates, CPIX inflation came down from 8,8 per cent in the second quarter of 2000 to 6,1 per cent in the fourth quarter and remained at that level in the first quarter of 2001. All-goods production price inflation slowed down on a year-on-year basis from 10,0 per cent in December 2000 to 8,1 per cent in April 2001, and on a quarter-to-quarter basis from 11,8 per cent in the first quarter of 2000 to 8,5 per cent in the first quarter of 2001.

6.2 This moderation in price increases was mainly the result of more moderate rises in food and energy prices, which had shown exceptionally large increases in 2000. More fundamentally, the slowdown in inflation was related to the moderate rise in unit labour costs over the past two years. This relieved pressure on price increases in an environment that is now relatively open to foreign competition. Although growth in domestic demand has accelerated noticeably, there is still no sign of excessive aggregate demand. Moreover, the current account of the balance of payments has been in surplus during the past two quarters. The rate of capacity utilisation in manufacturing at about 80 per cent is clearly still well below any level that could put pressure on prices, and the private sector has continued to increase investment over the past five quarters. The recent pace of growth of money supply is, however, somewhat disconcerting. Fortunately, it has still been relatively constrained in cheque and transmission deposits, which are usually held mainly for transaction purposes.

6.3 With continued fiscal and monetary discipline, the target range of inflation in the year 2002 is achievable. This is supported by the projections made using the Reserve Bank's suite of models. However, the latest quarterly survey of inflation expectations by the Bureau of Economic Research of the University of Stellenbosch indicates a slight increase in average inflation expectations for the year 2001 through 2003. The upside risks for inflation remain primarily developments in the international price of oil, the second-round effects of last year's depreciation of the rand and continued increases in administered prices.

6.4 After carefully considering these risks, the Monetary Policy Committee decided that the repo rate should be reduced. Amongst other factors considered by the Committee in reaching this decision were the following changes that have taken place since the beginning of the year:

(i) A clearly discernible declining trend in inflation in line with the projections of the Committee that the average annual rate of increase in CPIX will be in the target range in 2002.

(ii) A stronger external value of the rand. After the trade-weighted value of the rand had decreased sharply in the first four months of 2001, it started to increase from the end of April to just below the level that it had reached at the end of 2000.
(iii) Only moderate signs of any pressure on inflation arising from the depreciation of the rand during 2000.

(iv) A current account of the balance of payments that changed from a deficit in the third quarter of 2000 to two consecutive quarterly surpluses.

(v) Greater stability in international oil prices than during 2000.

(vi) A declining trend in long-term bond yields.

Continued moderation in nominal wage increases, no signs of excessive aggregate demand growth and an underutilisation of production capacity were also factors taken into consideration by the Committee.


T.T. Mboweni
GOVERNOR

Appendix 2:
SOUTH AFRICAN RESERVE BANK
STATEMENT OF THE MONETARY POLICY COMMITTEE

25 APRIL 2001

The Monetary Policy Committee evaluated the monetary policy stance at a meeting on 25 April 2001. After taking the impact of current and likely future economic and price developments into consideration, the Committee decided to maintain the current monetary stance. This decision was based primarily on the following considerations:

1. INTERNATIONAL ECONOMIC DEVELOPMENTS
1.1 The international economic outlook continues to be dominated by the downturn of activity in the United States and the effect that this will likely have on the rest of the world economy. Recent information indicates that economic growth in the United States will probably remain subdued for much of the year. Although industrial production rose in March after it had declined from September 2000, other data indicate that the economy remains under pressure. These include lower retail sales, a rise in the unemployment rate, a decline in imports, lower fixed investment, the erosion in current and expected profitability and the possible negative effects that lower equity prices may have on consumption.


1.2 The full extent of the impact of the United States' downturn on the rest of the world is still unclear. The countries that will probably be most affected will be those with a strong export orientation to the United States, particularly the East Asian economies specialising in high-technology products. Sluggish conditions in Japan are likely to accentuate the overall weakness of Asian trade. The World Bank nevertheless still predicts only a modest fall in the growth rate of gross domestic product in all developing economies from 5,4 per cent in 2000 to 4,2 per cent in 2001, whereas growth in high-income countries is expected to fall from 3,7 per cent to 1,7 per cent over the same period.

1.3 As a result of the continued poor performance of the United States' economy, the Federal Reserve Board announced a further cut of 50 basis points in its targeted federal funds rate on 18 April 2001. This brought the federal funds rate to 4,5 per cent, representing a decrease of 2 percentage points since the beginning of the year. The decline in interest rates in the United States has resulted in generally lower interest rates internationally, in both developed and emerging-market economies. A notable exception in this regard is the euro area, where the European Central Bank has maintained short-term rates at the levels prevailing since October 2000. Another exception is Brazil where interest rates have been raised on two occasions in the past two months when inflation exceeded the target range.

1.4 Generally there has been little evidence of an increase in inflationary pressures internationally. In the United States, United Kingdom and the euro area, the rate of inflation is lower than levels recorded at the end of 2000 because of declines in oil prices. The inflation rate in the euro area at 2,6 per cent in March, compared with the same month in the preceding year, was nevertheless still above the target ceiling of 2 per cent. With the exception of Asia, consumer prices in developing countries are increasing at considerably higher rates than those in advanced economies.

2. REAL DOMESTIC ECONOMIC DEVELOPMENTS
2.1 Information on real domestic economic activity for the first quarter of 2001 is still incomplete and due to conflicting signals, it is difficult to determine whether the strong growth in the last half of 2000 has been maintained. All in all, it seems that economic growth levelled off during the first three months of 2001, although activity remained at a relatively high level. This is confirmed by a downward movement in the volume of imports in the first two months of the year, a decline in the physical volume of manufacturing and non-gold mining production in January and February and a decrease in wholesale and retail sales during January from the high levels reached in December. In contrast to these developments, the quarter-to-quarter growth in new vehicle sales was substantial in the first quarter of 2001 and the value of unfilled orders in manufacturing rose to a new record level in February 2001. The volume of merchandise exports was not significantly affected by the slower international economic growth and continued to rise in the first two months of 2001.

2.2 The creation of employment opportunities for South Africa's growing population, remains the major challenge facing the country. The new Labour Force Survey of Statistics South Africa reports an increase in the unemployment rate during 2000 because of the majority of new work seekers who were unable to find jobs. The oversupply of labour, rationalisation of production processes and increases in output contained the increase in the cost of labour per unit of output. The growth in nominal unit labour cost therefore decreased from an already low level of 2,8 per cent in 1999 to 2,3 per cent in 2000, alleviating pressures on price increases. Towards the end of 2000 there was a moderate acceleration in the growth of nominal unit labour cost when the year-on-year rate of increase rose from 1,8 per cent in the third quarter to 3,7 per cent in the fourth quarter.

3. DOMESTIC MONETARY AND FISCAL CONDITIONS
3.1 The growth in the monetary aggregates continued to reflect the higher level of real economic activity and easier monetary conditions. The year-on-year rates of expansion in the broadly defined money supply (M3) accelerated from 6,0 per cent in July 2000 and 7,5 per cent in December to 9,3 per cent in February 2001. More rapid growth was also discernible in the narrower monetary aggregates, with the exception of M1A.

3.2 The relatively high level of economic activity resulted in a moderate expansion in the loans and advances of banks to the domestic non-bank private sector. The year-on-year growth in this aggregate amounted to 8,2 per cent in February 2001. The demand for instalment sale credit and mortgage finance continued to strengthen in line with brisk motor vehicle sales and better property market conditions. In contrast to these developments, other loans and advances by banks to the private sector, including bank overdrafts, declined from a high of R239,6 billion in November 2000 to R233,4 billion in February 2001.

3.3 Preliminary information about the national government's finances for the full fiscal year 2000/2001 indicates that the deficit before borrowing was even smaller than that which had been anticipated at the time of the Budget. This deficit is now estimated at 1,9 per cent of gross domestic product, largely owing to higher revenue collections than had initially been expected as well as prudent management of the fiscus.

4. DOMESTIC FINANCIAL MARKETS
4.1 In the first quarter of 2001 turnover in the secondary bond and share market slid back slightly from the record levels reached in the fourth quarter of 2000. Bond rates and share prices fluctuated considerably during the first few months of 2001. Bond yields reached a lower turning point in early March following a bull run of about ten months, but then rebounded by about half a percentage point as a result of profit taking by investors. Share prices peaked on 16 February 2001, but have declined by about 14 per cent up to 3 April 2001. Subsequently share prices have recovered again somewhat. Early indications are that property rents and real-estate prices rose less rapidly in the first quarter of 2001 than during most of the preceding year.

4.2 Money market conditions remained relatively stable throughout the first quarter of 2001 with slight fluctuations in short-term interest rates and a liquidity requirement that fluctuated between R8 billion and R10,4 billion. Since the last meeting of the Monetary Policy Committee, on 16 March 2001, money market rates have generally firmed. This led to a steepening of the money-market yield curve. The short end of the money-market yield curve is now higher than immediately after the 25-basis-point increase in the repo rate on 16 October 2000.

5. BALANCE OF PAYMENTS AND FOREIGN EXCHANGE MARKET
5.1 South Africa's overall balance of payments position is expected to have remained sound during the first quarter of 2001. This is firstly indicated by a trade surplus, at a seasonally adjusted and annualised rate, of R23 billion in the first two months of 2001. Although this surplus was smaller than in the fourth quarter of 2000 it was brought about by a continued strong export performance. In particular, the exports of platinum and manufactured goods did well, reflecting a firm international demand and the improved price competitiveness of South African goods related to the depreciation of the rand. The improvement in exports was partly neutralised by a rise in the value of imports, largely capital and intermediate goods.

5.2 Secondly, the transactions by non-residents in domestic securities indicate some improvement in South Africa's financial flows with the rest of the world. Non-residents have been net buyers on the JSE Securities Exchange to an amount of R11,4 billion since the beginning of 2001, compared with R2,6 billion in the first four months of 2000. On the bond market they were net sellers in January and February 2001, but became net buyers in March. These purchases have brought their cumulative net bond sales since the beginning of the year down to R6,5 billion.

5.3 Despite these favourable developments, the exchange rate of the rand has remained under pressure in 2001, and heightened volatility has been experienced in the market for foreign exchange. Since the previous meeting of the Monetary Policy Committee, the rand has declined to new record levels against the dollar and has traded in a range between R8,00 and R8,20 per dollar during April. This reflected to a significant extent the strength of the US dollar. The trade-weighted value of the rand nevertheless declined by 3,0 per cent from the end of 2000 to 25 April 2001.

6. MONETARY POLICY
6.1 Although the depreciation of the rand exerted upward pressure on the prices of imported goods, the overall effect on prices was counteracted by the lower international prices of oil combined with moderate inflation rates in South Africa's main trading-partner countries. As a result, the year-on-year rate of increase in the prices of imported goods moderated from 15,0 per cent in December 2000 to 12,3 per cent in March 2001. Slower rates of increase in domestic food prices further contained the inflation in production prices in 2001. The year-on-year rate of increase in the all-goods production price index consequently declined from 10,0 per cent in December 2000 to 8,9 per cent in March 2001.

6.2 The same factors were responsible for a marked slowdown in consumer price inflation during the first three months of 2001. In fact, the quarter-to-quarter seasonally adjusted and annualised rate of increase in the consumer price index excluding mortgage costs (CPIX) has declined consistently from 8,8 per cent in the second quarter of 2000 to 6,1 per cent in the first quarter of 2001. The year-on-year increase in the CPIX also decreased from a high of 8,2 per cent in August 2000 to 7,5 per cent in March 2001.

6.3 The South African Reserve Bank remains focussed on achieving the inflation target. Factors mentioned in previous statements of the Monetary Policy Committee, such as surplus production capacity, no signs of excessive domestic demand, low increases in nominal unit labour costs, low growth in monetary aggregates, fiscal prudence and monetary discipline, are all pointing to lower future domestic inflation. Projections for the year 2002 accordingly indicate that the average annual rate of increase in the CPIX should fall within the target range of 6 to 3 per cent if all other things remain the same. The main risk in this projection is the impact of prices of imported goods on domestic prices.


T.T. Mboweni
GOVERNOR