South Africa’s inflation outlook generally remains positive, but there are certain developments that will have to be monitored closely by the monetary policy committee (MPC) to ensure that inflation remains within the target range, South African Reserve Bank (SARB) Governor Tito Mboweni said on Thursday.
Speaking at the end of a two-day meeting of the MPC at which it was decided to leave interest rates unchanged, Mboweni said of particular significance for the continuance of inflation within the target range are the lower inflation expectations.
“Inflation expectations are very prominent in the inflation process. The recent lower inflation expectations recorded by the Bureau for Economic Research of the University of Stellenbosch, which fell within the inflation target range for the second consecutive quarter, clearly illustrate the improved credibility of monetary policy.
“These levels of expectations are also an important signal that inflation could remain at low levels.”
The strength of the rand has been an important factor contributing to bringing inflation down in South Africa and countering the effects of the increase in international oil prices on domestic costs. Although the deficit on the current account of the balance of payments has increased considerably during the course of 2004, this shortfall has been comfortably financed by an inflow of funds from the rest of the world.
“This clearly reflects the confidence of non-residents in the performance of our economy. At the same time, domestic expenditure on goods and services has continued to rise rapidly.
“All the main expenditure aggregates contributed to this growth, but the rates of increase in expenditure on durable consumer goods and fixed capital formation were high. Both these expenditure components have a high import content,” Mboweni said.
The growth in the world economy has contributed to the increase in the volume of South African exports as well as the improvement in the terms of trade, which have to some extent offset the rise in imports, he added.
The International Monetary Fund expected global economic growth to be about 5% in 2004, followed by a slower but still relatively high rate of 4% in 2005.
“This should support the growth in South African exports and alleviate pressures on the balance of payments that could arise from the additional imports, which may be engendered by further increases in domestic demand,” the SARB governor added.
According to projections by the International Monetary Fund, global inflation could decline marginally from 3,8% in 2004 to 3,6% in 2005, he said.
Countries where inflation has started to rise during 2004, such as the United States and the newly industrialised countries in Asia, have already taken corrective steps to prevent any further acceleration.
Moreover, the recent substantial increase in international oil prices seemed to level off in November. The price of Brent crude oil that averaged $49 per barrel in October and at one stage during the month reached $52 per barrel, declined to an average of $43,45 per barrel in November.
However, the oil market is still “very nervous”, as clearly illustrated by daily fluctuations in prices.
The low rates of increase in other international prices should nevertheless contribute to the containment of domestic inflation.
Referring to the weakening in the dollar, Mboweni said this appears to be part of a process of adjustment in international imbalances. How far this adjustment will run in the months ahead is unclear.
“The monetary policy stance in South Africa will continue to focus on maintaining inflation within the target range, and to that end, will need to weigh, among other things, the sustainability of recent movements in the rand, the impact such movements may have on the medium-term outlook for inflation, and the desirability of a competitive and stable exchange rate for the rand,” he added.
Other factors that could assist the monetary authority in maintaining inflation within the inflation target range include the commitment by the public authorities to low administered price increases and a generally favourable outlook for food prices, despite the drought in certain parts of the country. — I-Net Bridge
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