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MONETARY POLICYMONETARY POLICYREVIEWREVIEW

MONETARY POLICYMONETARY POLICYREVIEWREVIEW

Brian KahnBrian KahnMarch 2001March 2001

Brian KahnBrian KahnMarch 2001March 2001

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MONETARY POLICY REVIEWMONETARY POLICY REVIEWMONETARY POLICY REVIEWMONETARY POLICY REVIEW

IntroductionIntroduction Recent developments in inflationRecent developments in inflation

the evolution of indicators of the evolution of indicators of

inflationinflation factors affecting inflationfactors affecting inflation

Monetary PolicyMonetary Policy The outlook for inflationThe outlook for inflation Assessment and conclusionAssessment and conclusion

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INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

Inflation targetingInflation targeting

Inflation targeting: The international Inflation targeting: The international

experience.experience.

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Inflation targets & realised inflation Inflation targets & realised inflation ratesrates

Inflation targets & realised inflation Inflation targets & realised inflation ratesrates

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Inflation targets & realised inflation Inflation targets & realised inflation rates rates (continued)(continued)

Inflation targets & realised inflation Inflation targets & realised inflation rates rates (continued)(continued)

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Recent developments in Recent developments in inflationinflation

Recent developments in Recent developments in inflationinflation

Evolution of inflation indicatorsEvolution of inflation indicators

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Consumer price inflation CPIX & CPIConsumer price inflation CPIX & CPIConsumer price inflation CPIX & CPIConsumer price inflation CPIX & CPI

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Contributions to CPIX inflationContributions to CPIX inflationContributions to CPIX inflationContributions to CPIX inflation

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Production price inflationProduction price inflationProduction price inflationProduction price inflation

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The price of Brent crude oilThe price of Brent crude oilThe price of Brent crude oilThe price of Brent crude oil

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Brent crude & SA petrol pricesBrent crude & SA petrol pricesBrent crude & SA petrol pricesBrent crude & SA petrol prices

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CPIX consumer price inflation & CPIX consumer price inflation & the oil pricethe oil price

CPIX consumer price inflation & CPIX consumer price inflation & the oil pricethe oil price

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Production price inflationProduction price inflationProduction price inflationProduction price inflation

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

External environmentExternal environment External environmentExternal environment

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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

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

Annual percentage change in real GDP and inflation rates

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

Exchange rate developmentsExchange rate developments

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US dollar per rand, euro, Australian New US dollar per rand, euro, Australian New Zealand dollarZealand dollar

US dollar per rand, euro, Australian New US dollar per rand, euro, Australian New Zealand dollarZealand dollar

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

Labour marketsLabour markets Labour marketsLabour markets

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Remuneration per worker, labour productivity & Remuneration per worker, labour productivity & labour costslabour costs

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

Demand and outputDemand and output Demand and outputDemand and output

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Real gross domestic productReal gross domestic product

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

Fiscal policyFiscal policy

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

Monetary conditionsMonetary conditions

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FACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATIONFACTORS AFFECTING INFLATION

Administered pricesAdministered prices

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Component of consumer price index

Administered prices 11,1Public transport 4,0Petrol and diesel 28,4Communication services 6,2Electricity 6,0Paraffin 40,3Licences 8,3Water 9,1Education 14,8Medical services 7,2Medical care goods 9,1Administered prices excluding petrol and diesel 8,0Overall consumer prices 7,0Overall consumer prices excluding administered prices 5,4

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MONETARY POLICYMONETARY POLICYMONETARY POLICYMONETARY POLICY

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The repo and short-term interest ratesThe repo and short-term interest ratesThe repo and short-term interest ratesThe repo and short-term interest rates

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OUTLOOK FOR INFLATIONOUTLOOK FOR INFLATIONOUTLOOK FOR INFLATIONOUTLOOK FOR INFLATION

International contextInternational context

World growth expected to moderateWorld growth expected to moderate

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IMF ProjectionsIMF ProjectionsIMF ProjectionsIMF Projections

Real GDPInflation

Oct 2000 Feb 2001 Oct 2000 (Revised)

WorldWorld 4,2 4,2 3,43,4 3,83,8Advanced economies Advanced economies 3,2 3,2 2,12,1 USA USA 3,2 3,2 1,71,7 2,62,6 JapanJapan 1,8 1,8 0,50,5 Euro area Euro area 3,4 3,4 1,71,7Developing countriesDeveloping countries 5,7 5,7 5,25,2 AfricaAfrica 4,4 4,4 8,68,6 AsiaAsia 6,6 6,6 3,33,3 Western HemisphereWestern Hemisphere 4,5 4,5 7,07,0Countries in transition Countries in transition 4,1 4,1 12,5 12,5

Source: IMF Source: IMF World Economic Outlook World Economic Outlook (October 2000)(October 2000)

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OUTLOOK FOR INFLATIONOUTLOOK FOR INFLATIONOUTLOOK FOR INFLATIONOUTLOOK FOR INFLATION

International contextInternational context World growth expected to moderateWorld growth expected to moderate World interest rates expected to fallWorld interest rates expected to fall Oil prices expected to stabiliseOil prices expected to stabilise No world inflation pressuresNo world inflation pressures Points to relatively begin international Points to relatively begin international

environment.environment.

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OUTLOOK FOR INFLATIONOUTLOOK FOR INFLATIONOUTLOOK FOR INFLATIONOUTLOOK FOR INFLATION

Domestic outlookDomestic 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 EXPECTATIONSINFLATION EXPECTATIONSINFLATION EXPECTATIONSINFLATION EXPECTATIONS

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Headline CPI inflation CPIX inflation

2001 2002 2003 2001 20022003

FinanceFinance 6,06,0 5,15,1 4,94,9 6,16,1 5,55,5 5,15,1

BusinessBusiness 6,36,3 6,56,5 6,66,6 7,97,9 8,08,0 8,08,0

LabourLabour 6,56,5 6,76,7 6,36,3 7,97,9 7,77,7 7,77,7

AverageAverage 6,36,3 6,16,1 5,95,9 7,37,3 7,17,1 7,07,0

HouseholdsHouseholds 7,37,3 -- -- -- -- --

Grand averageGrand average 6,56,5 -- -- -- -- --

Source: Bureau for Economic Research, University ofSource: Bureau for Economic Research, University ofStellenboschStellenbosch

BER survey of inflation expectations 1sBER survey of inflation expectations 1st t quarter 2001)quarter 2001)BER survey of inflation expectations 1sBER survey of inflation expectations 1st t quarter 2001)quarter 2001)

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Yield on government bondsYield on government bondsYield on government bondsYield on government bonds

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RESERVE BANK INFLATION RESERVE BANK INFLATION FORECASTFORECAST

RESERVE BANK INFLATION RESERVE BANK INFLATION FORECASTFORECAST

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CPIX forecastCPIX forecastCPIX forecastCPIX forecast

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AssessmentAssessmentandand

conclusionconclusion

AssessmentAssessmentandand

conclusionconclusion