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2002-10-11: Statement by Mr T.T. Mboweni, Governor of the South African Reserve Bank on the occasion of the Dinner for Heads of Branches and Representatives of International Banking Institutions, Gallagher Estate
Published Date:
2002-10-11
Last Modified Date:
2020-10-08, 08:14 PM
Category:
Media > Media Releases
Ladies and Gentlemen INTRODUCTION It is indeed a pleasure welcoming you all here this evening. Thank you for accepting our invitation and for honouring us with your presence in large numbers. A particular warm welcome to the partners and spouses of heads of branches and representatives of international banking institutions in South Africa. When organising functions such as this one to express our appreciation for the support we received from your partners and their institutions over the past year, we would like you to know that we are aware of the fact that you are part and parcel of such support. I am only sorry that we were not able to host this event at the Reserve Bank given the fact that our building operations are not complete. We will be back there next year. The ambience of this occasion is greatly improved by having partners present but there is an added advantage for all of us – myself included – namely that only a very brief economic or financial commentary is probably the order of the day. BRIEF COMMENTS ON ECONOMIC MATTERS As we gather here today, the world is characterised by uncertainty and a deteriorating outlook for the world economy, evidenced by sluggish domestic demand in major industrial countries, continuing decline in global equity markets amid corporate governance scandals, concerns about developments in Brazil and their implications for emerging markets as well as fears about war breaking out in Iraq, with expected negative consequences for the oil price. In our own region we are facing a problem of famine. Against this fairly gloomy background, we are grateful that the economic situation in South Africa has held up quite well in the first half of 2002, with GDP growing by 2.0% and 3.1% in the first and second quarter respectively. This growth was supported by a particularly good export performance, allowing us at least to register some benefits as a country from the adjusted value of the rand. Unfortunately, the other side of the coin of rand depreciation has been that inflationary pressures started building up, second round effect became visible and inflation expectations have risen to well above the upper level of the inflation target range. The factors just mentioned, together with others, such as the growth in money supply, led to the Reserve Bank’s decision to increase interest rates on four occasions this year. Whilst it is acknowledged that exogenous factors have played a significant role, monetary policy simply cannot be complacent in the wake of these adverse developments for our inflation outlook. Monetary policy needs to be vigilant to ensure that a temporary problem does not become protracted and end up being to the detriment of sustainable non-inflationary growth. I think it worth reminding ourselves that the pursuit of price stability (or low inflation) is therefore not an end in itself, but is the means whereby monetary policy can contribute to sustainable economic growth and development. INFLATION OUTLOOK Despite the continued rise in consumer and production inflation the inflation outlook has improved significantly. The consensus forecast of most economists and market analysts is that inflation will reach a peak in the fourth quarter of this year and then slow down quite rapidly during the course of next year. These forecasts are based on the restrictive monetary policy stance that the authorities have adopted since January 2002 and the continued fiscal discipline that has been applied.A number of other factors also favour a decline in inflation, such as no signs of excess demand in the domestic economy, excess production capacity, an undervalued exchange rate of the rand and the fact that international inflation pressures have become even more subdued. The Reserve Bank’s latest projection for CPIX-inflation also suggests that inflation will peak above the 10 per cent level during the fourth quarter of 2002. This, of course, might imply that the inflation target of 3 to 6 per cent for the calendar year 2002 might not be achieved. As soon as all the information for calendar 2002