Address by Mr TT Mboweni, Governor of the South African Reserve Bank, at a dinner of The South African Institute Of Electrical Engineers, Rand Club, Johannesburg 1. Introduction Ladies and gentlemen, I thank you for the invitation to attend your dinner in these illustrious surroundings. It is indeed always an honour to attend a function at one of the oldest clubs in South Africa, and even more so because of the role that it played in the history of our country. I appreciate having the opportunity to talk to your Institute on this occasion because of your role in the development of our economy. As a topic for discussion I thought it may be useful to briefly look at recent economic developments in the world and in South Africa and conclude my address with a few remarks on monetary policy and exchange rates. 2. Global economic developments The global economy started to recover at an accelerated pace during the course of 2003 and the first quarter of 2004 and then growth seems to have slowed down somewhat in the second quarter of this year. This was mainly due to slower growth in the United States and China. The softening in the economic growth of the United States’ economy is probably a temporary phenomenon related to the spike in the international price of oil, which affects consumer expenditure. It is, however generally expected that business investment in the United States will pick up strongly in the second half of 2004 and give further impetus to the world economic recovery. The slowdown in the Chinese economy was the result of deliberate policy actions taken by the Chinese authorities to cool down the rapid growth that they have experienced over the past years. Although the slower growth in China will occur from a very high level, it could have a significant impact on other Asian economies. A slowdown in China’s energy, steel and chemical production could also affect demand in international commodity markets, resulting in a decline in international prices. China has become a major player in the world economy and is also now the fifth largest trading partner of South Africa. However, it seems unlikely that this slower growth will be a lasting feature of the world economy and most international organisations such as the International Monetary Fund and the Bank for International Settlements are still projecting a marked recovery in the global economy in the rest of this year and in 2005. Another important risk that the world economy is facing is the substantial increase in international oil prices. Brent crude oil prices have increased from levels around US$24 per barrel in May 2003 to almost US$40 per barrel in May 2004. This rise in international oil prices was mainly related to ongoing geopolitical tensions in the Middle East, together with a strong demand for oil in the United States and China. Although oil prices started to decline somewhat in June 2004 to levels of around US$34 per barrel when the OPEC countries indicated that they would increase their production, this did not last long and at present Brent crude oil prices are fluctuating again at around US$38 per barrel. As one would expect with such a rise in oil prices, consumer price inflation increased in most of the major industrialised economies. For example, overall inflation in the United States accelerated from 1,7 percent in March 2004 to 3,3 percent in June 2004. These increases are, however, coming from low levels. A significant rise in global inflation is therefore not foreseen, particularly in view of continued strong productivity growth in some of these countries combined with a tightening in monetary policy stance. After keeping the federal funds rate unchanged since the middle of 2003, the US Federal Open Market Committee raised this rate by 25 basis points to 1,25 percent on 30 June 2004. As underlying inflation is expected to remain low, the FOMC is of the view that “policy accommodation can be removed at a pace that is likely to be measured”. Such a tightening should therefore not be expected to have a marked impact on global economic growth.