Bkahn - MPR MONETARY POLICY REVIEW Brian Kahn March 2001 Brian Kahn March 2001

Bkahn - MPR MONETARY POLICY REVIEW u Introduction u Recent developments in inflation  the evolution of indicators of inflation  factors affecting inflation u Monetary Policy u The outlook for inflation u Assessment and conclusion

Bkahn - MPR INTRODUCTIONINTRODUCTION u Inflation targeting u Inflation targeting: The international experience.

Bkahn - MPR Inflation targets & realised inflation rates

Bkahn - MPR Inflation targets & realised inflation rates (continued)

Bkahn - MPR Recent developments in inflation u Evolution of inflation indicators

Bkahn - MPR Consumer price inflation CPIX & CPI

Bkahn - MPR Contributions to CPIX inflation

Bkahn - MPR Production price inflation

Bkahn - MPR The price of Brent crude oil

Bkahn - MPR Brent crude & SA petrol prices

Bkahn - MPR CPIX consumer price inflation & the oil price

Bkahn - MPR Production price inflation

Bkahn - MPR FACTORS AFFECTING INFLATION u External environment

Bkahn - MPR Real GDPInflation rates (estimate) World Advanced economies USA Japan Euro area Developing countries Africa Asia Western Hemisphere Countries in transition Source: IMF World Economic Outlook – October 2000 Real GDPInflation rates (estimate) World Advanced economies USA Japan Euro area Developing countries Africa Asia Western Hemisphere Countries in transition Source: IMF World Economic Outlook – October 2000 Annual percentage change in real GDP and inflation rates

Bkahn - MPR FACTORS AFFECTING INFLATION u Exchange rate developments

Bkahn - MPR US dollar per rand, euro, Australian New Zealand dollar

Bkahn - MPR FACTORS AFFECTING INFLATION u Labour markets

Bkahn - MPR Remuneration per worker, labour productivity & labour costs

Bkahn - MPR FACTORS AFFECTING INFLATION u Demand and output

Bkahn - MPR Real gross domestic product

Bkahn - MPR FACTORS AFFECTING INFLATION u Fiscal policy

Bkahn - MPR FACTORS AFFECTING INFLATION u Monetary conditions

Bkahn - MPR FACTORS AFFECTING INFLATION u Administered prices

Bkahn - MPR Component of consumer price index Administered prices11,1 Public transport 4,0 Petrol and diesel28,4 Communication services 6,2 Electricity 6,0 Paraffin40,3 Licences 8,3 Water 9,1 Education14,8 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

Bkahn - MPR MONETARY POLICY

Bkahn - MPR The repo and short-term interest rates

Bkahn - MPR OUTLOOK FOR INFLATION u International context  World growth expected to moderate

Bkahn - MPR IMF Projections Real GDPInflation Oct 2000 Feb 2001 Oct 2000 (Revised) World 4,23,43,8 Advanced economies 3,22,1 USA 3,21,72,6 USA 3,21,72,6 Japan 1,80,5 Japan 1,80,5 Euro area 3,41,7 Euro area 3,41,7 Developing countries 5,75,2 Africa 4,48,6 Africa 4,48,6 Asia 6,63,3 Asia 6,63,3 Western Hemisphere 4,57,0 Western Hemisphere 4,57,0 Countries in transition 4,1 12,5 Source: IMF World Economic Outlook (October 2000)

Bkahn - MPR OUTLOOK FOR INFLATION u 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.

Bkahn - MPR OUTLOOK FOR INFLATION u 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.

Bkahn - MPR INFLATION EXPECTATIONS

Bkahn - MPR Headline CPI inflation CPIX inflation Finance6,05,14,96,15,55,1 Business6,36,56,67,98,08,0 Labour6,56,76,37,97,77,7 Average6,36,15,97,37,17,0 Households7, Grand average6, Source: Bureau for Economic Research, University of Stellenbosch BER survey of inflation expectations 1st quarter 2001)

Bkahn - MPR Yield on government bonds

Bkahn - MPR RESERVE BANK INFLATION FORECAST

Bkahn - MPR CPIX forecast

Bkahn - MPR Assessment and conclusion