MONETARY POLICY REVIEW

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MONETARY POLICYREVIEW
Brian Kahn March 2001
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MONETARY POLICY REVIEW

• Introduction
• Recent developments in inflation
• the evolution of indicators of inflation
• factors affecting inflation
• Monetary Policy
• The outlook for inflation
• Assessment and conclusion

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INTRODUCTION

• Inflation targeting
• Inflation targeting The international
  experience.

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Inflation targets realised inflation rates
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Inflation targets realised inflation rates
(continued)
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Recent developments in inflation

• Evolution of inflation indicators

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Consumer price inflation CPIX CPI
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Contributions to CPIX inflation
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Production price inflation
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The price of Brent crude oil
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Brent crude SA petrol prices
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CPIX consumer price inflation the oil price
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Production price inflation
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FACTORS AFFECTING INFLATION

• External environment

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• Annual percentage change in real GDP and
  inflation rates

Real GDP Inflation rates 1999 2000
1999 2000 (estimate) (estimate) World 3.4 4
.7 5.4 4.6 Advanced economies 3.2 4.2
1.4 2.3 USA 4.2 5.2 2.2 3.2
Japan 0.2 1.4 -0.3 -0.2 Euro area 2.4 3.5
1.2 2.1 Developing countries 3.8 5.6
6.6 6.2 Africa 2.2 3.4 11.8 12.7 Asia
5.9 6.7 2.4 2.4 Western Hemisphere
0.3 4.3 9.3 8.9 Countries in
transition 2.4 4.9 43.8 18.3 Source IMF World
Economic Outlook October 2000
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FACTORS AFFECTING INFLATION

• Exchange rate developments

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US dollar per rand, euro, Australian New Zealand
dollar
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FACTORS AFFECTING INFLATION

• Labour markets

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Remuneration per worker, labour productivity
labour costs
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FACTORS AFFECTING INFLATION

• Demand and output

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Real gross domestic product
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FACTORS AFFECTING INFLATION

• Fiscal policy

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FACTORS AFFECTING INFLATION

• Monetary conditions

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FACTORS AFFECTING INFLATION

• Administered prices

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Component of consumer price index Administered
prices 11,1 Public transport 4,0 Petrol and
diesel 28,4 Communication services
6,2 Electricity 6,0 Paraffin 40,3 Licences
8,3 Water 9,1 Education 14,8 Medical services
7,2 Medical care goods 9,1 Administered prices
excluding petrol and diesel 8,0 Overall
consumer prices 7,0 Overall consumer prices
excluding administered prices 5,4
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MONETARY POLICY
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The repo and short-term interest rates
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OUTLOOK FOR INFLATION

• International context
• World growth expected to moderate

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IMF Projections
Real GDP Inflation Oct 2000 Feb
2001 Oct 2000
(Revised) World 4,2 3,4 3,8 Advanced
economies 3,2 2,1 USA 3,2 1,7 2,6
Japan 1,8 0,5 Euro area
3,4 1,7 Developing countries 5,7 5,2
Africa 4,4 8,6 Asia 6,6 3,3
Western Hemisphere 4,5 7,0 Countries in
transition 4,1 12,5 Source IMF
World Economic Outlook (October 2000)
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OUTLOOK FOR INFLATION

• International context
• World growth expected to moderate
• World interest rates expected to fall
• Oil prices expected to stabilise
• No world inflation pressures
• Points to relatively begin international
  environment.

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OUTLOOK FOR INFLATION

• Domestic outlook
• Expect growth to be above that of 2000
• Government fiscal policy only mildly expansionary
• Private sector consumption expenditure expected
  to remain steady
• Private sector investment expected to rise
• Capacity utilisation rates not a cause for
  concern
• No immediate pressure on labour cost increases
• Current account is manageable, large deficit not
  expected
• Capital flows uncertain, but flows from Anglo/de
  Beers and Telkom expected
• Exchange rate uncertain, unless hit by some
  contagion effects of world economy slowdown.
• Threats to inflation Stronger than expected
  international downturn accompanied by sharp rise
  in domestic expenditure.

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INFLATION EXPECTATIONS
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BER survey of inflation expectations 1st quarter
2001)
Headline CPI inflation CPIX
inflation 2001 2002 2003 2001 2002 2003
Finance 6,0 5,1 4,9 6,1 5,5 5,1 Business 6,3 6,5
6,6 7,9 8,0 8,0 Labour 6,5 6,7 6,3 7,9 7,7 7,7
Average 6,3 6,1 5,9 7,3 7,1 7,0 Households 7,3 -
- - - - Grand average 6,5 - - - - - Source
Bureau for Economic Research, University
of Stellenbosch
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Yield on government bonds
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RESERVE BANK INFLATION FORECAST
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CPIX forecast
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Assessmentandconclusion