Economic growth robust, inflation under control: Reserve Bank Governor Tito Mboweni

23 August 2006

By Lavinia Mahlangu and Thapelo Sakoana, tel: (012) 314-2175

In a review of South Africa’s economic environment over the past year, Reserve Bank Governor Tito Mboweni described economic growth as robust and inflation as having remained under control.

“Domestically, the economy grew by 4.9 percent in 2005. In the first two quarters of 2006, economic growth remained robust but showed some moderation compared to 2005.

“An annualised growth rate of 4.2 percent was recorded in the first quarter of 2006,” Mr Mboweni said today in Pretoria at the release of the Bank’s Annual Economic Report.

“Inflation remained under control in the period under review, with changes in the Consumer Price Index (CPIX) [that is the CPIX for metropolitan and other areas excluding mortgage interest] remaining within the target range of 3 to 6 percent.”

Inflation targeting is one of government’s interventions aimed at growing the economy. At the forefront of such interventions is the Accelerated and Shared Growth Initiative of South Africa which aims to half unemployment and poverty by 2014 and achieve an economic growth rate of six percent by 2010.

Mr Mboweni said in the 12 months between 1 April 2005 and 31 March 2006, the year-on-year CPIX inflation rate averaged 4.1 percent, with changes ranging between 3.5 percent and 4.8 percent over this period.

He described monetary policy over the past year as having been conducted against the background of a strongly growing international economy and buoyant commodity prices.

This strong growth, he said, combined with rising geopolitical tensions and other supply constrains, placed upward pressure on international oil prices, which reached highs of almost US $80 per barrel in recent weeks.

“Despite the high oil prices, world inflation initially remained subdued, but inflatory pressures have since begun to emerge in a number of countries.

“This has prompted the tightening of monetary policy by several central banks in the past few months,” said Mr Mboweni.

Of increased concern to the Monetary Policy Committee (MPC), he said, was the continued strength of domestic demand, where for the past two years household spending had grown by almost seven percent and retail sales and consumer confidence reached an all time high by the end of 2005.

“This was fuelled by high rates of credit extension which averaged over 20 percent during the past year, and resulted in household debt rising to 66 percent of disposable income in the first quarter of this year,” he said.

Earlier this month, the MPC announced the second consecutive repo rate hike of 50 basis points, which saw the Reserve Bank’s lending rate to commercial banks climbing up to 8 percent.

In the context of the current international economic environment, the increased spending by South African consumers could further threaten the inflation outlook and cause them to pay more for their purchases.

“The sustained strong domestic demand, combined with threats posed by international oil prices, food prices, and exchange rate developments, increased the risk to the inflation outlook.”

Mr Mboweni said in response to these heightened risks, pre-emptive action in the form of the most recent repo rate hike was required.

“However, future monetary policy decisions will depend on changes in the outlook for inflation and economic developments.”

He described confidence in the domestic financial sector as remaining high.

“As you are aware, the Bank is not the sole custodian of financial system stability but contributes towards a larger effort involving the government, other regulators and self-regulatory agencies, and financial market participants.”

Mr Mboweni explained that the activities of the Bank regarding financial stability included the application of policies, instruments as well as norms and tools to prevent, detect and manage systematic instability of institutions and markets, and the payment and settlement system. – BuaNews