Speech by Mr TT Mboweni, Governor of the South African Reserve Bank,at the City Press/ Peoples Bank Success Club Forum, Johannesburg. 1. Introduction               Ladies and Gentlemen. Thank you for inviting me to speak at this forum. I am told that this platform often provides for robust debate and I am always pleased to participate in such debates. My remarks today will, however, probably not add as much fuel to the fire as you might have hoped. Nevertheless I am pleased to be here this evening to make a contribution to what should be an ongoing general discussion about the economy of South Africa. 2. Domestic Output and Expenditure South Africa's growth performance of 3 per cent in 2002 was relatively sound given the continued underlying weaknesses in the international economy. However, the quarterly GDP growth rate which decreased to 1,5 per cent in the first quarter of this year from 2,4 per cent in the fourth quarter of last year confirmed a slowdown in domestic economic activity. Although manufacturing production grew by 2,7 per cent between the first quarter of 2002 and the first quarter of 2003, on a quarter-on-quarter basis it fell at an annualised rate of 0,3 per cent in the first quarter of 2003. Other indicators also point to a slight slowdown in activity in certain sectors. But there are indications that domestic final demand in both the government and consumer sectors remains fairly robust. A promising aspect of this is the increase in domestic capital formation in recent quarters. Gross fixed capital formation increased by 8,3 per cent in the first quarter of 2003, after reaching 11,6 per cent in the fourth quarter of 2002. Indications are that because the capital expenditure of all spheres of government is improving, there is greater capacity for delivery, and much-needed infrastructural expenditure is now also taking place. On the whole, both domestic and global improvements in growth seem to be on the horizon. 3. Inflation developments The depreciation of the rand during the last quarter of 2001 resulted in a surge in inflation which prevented the Bank from realising the inflation target for 2002. Fortunately CPIX inflation peaked in November last year at 11,3 per cent and there has been a significant decline ever since, with the latest rate for June down to 6,4 per cent. Although still above the target range of 3 to 6 per cent, the Bank's forecasts indicate that inflation should be within the range in the third quarter of this year and remain comfortably within the band in 2004. There are a number of factors that support the outlook for a sustained reduction in inflation. Firstly, the quarter-on-quarter figures, which give a better indication of short-term trends, show that on an annualised basis CPIX decelerated from 12 per cent in the fourth quarter of 2002 to 2 per cent in the second quarter of 2003. What was particularly significant was that the main driver of inflation in 2002, food price inflation, fell steeply from an annualised rate of 17,7 per cent to only 1 per cent over the same period. Secondly, producer price inflation, which tends to lead consumer price inflation, has fallen from a peak of 15,4 per cent in August 2002, to 2,3 per cent. The imported component of the PPI in June was down to minus 3,4 per cent, and the domestic component was down to 4,4 per cent. Thirdly, weak global growth and inflation developments mean that South Africa remains in a low inflation international environment, which will help to contain inflation domestically. Finally, the improved inflation outlook is supported by other factors such as the relatively low levels of capacity utilisation, a responsible fiscal policy, lower money supply growth and the continued recovery of the rand. The improvement in the inflation outlook enabled the Monetary Policy Committee to reduce interest rates by 150 basis points at its last meeting in June. The major threat seen to the inflation target is the trend in unit labour cost, which plays an important role in the inflation process in South Africa. During 2002, wage settlement