Honoured guests

Ladies and Gentlemen:

1. Introduction

The monetary policy framework in South Africa is facing its most severe challenge since the inception of inflation targeting in the year 2000. Inflation pressures have been building up strongly, and the most recent CPIX figure of 10,1 per cent is significantly above our inflation target and inconsistent with price stability. These pressures originated primarily from exogenous shocks such as oil, food and electricity price developments. However it is clear that inflation pressures have become more generalised, as evidenced by the continuous upward trajectory in the core indicators. For example, in June 2006 CPIX excluding food and energy measured 2,5 per cent. By April this year it had risen to 5,6 per cent, and indications are that this measure could rise further.

Of great concern is the significant deterioration of inflation expectations, which will give further impetus to these inflationary pressures. Over the past year inflation expectations have drifted upwards gradually, but nevertheless appeared to remain anchored within the inflation target range. This picture has changed significantly in the first quarter of this year. We have now observed the biggest increase in inflation expectations since the inception of the inflation expectations survey eight years ago. Reference here is made to the BER inflation expectations survey conducted on behalf of the South African Reserve Bank (SARB). This, together with the possible upward trend in unit labour costs, does not bode well for the inflation outlook going forward.

In response to these developments, and to the robust domestic demand that we have been experiencing, the monetary policy stance of the South African Reserve Bank has been tightened since June 2006 by a cumulative 450 basis points. The SARB, more specifically the Monetary Policy Committee (MPC), has been criticised by some commentators now that inflation has breached the upper limit of the target range, and this is interpreted as a sign of lack of determination, commitment, and the will to achieve and maintain price stability. At the same time, others have suggested that the degree to which the SARB has responded to those inflation developments has been excessive, too strict, dogmatic like inflation targeting “nutters”, insensitive to the plight of the poor, that monetary policy is after-all powerless in the face of supply side shocks, and that these actions have demonstrated a lack of concern for growth and employment in South Africa. Nothing can be further from the truth.  READ MORE