Hawkish South African Monetary Policy Forum Tone

UNCLAS SECTION 01 OF 02 PRETORIA 004601 SIPDIS SENSITIVE SIPDIS DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND TREASURY FOR OAISA/JRALYEA/BCUSHMAN USTR FOR PCOLEMAN E.O. 12958: N/A TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF SUBJECT: Hawkish South African Monetary Policy Forum Tone (U) This cable is Sensitive but Unclassified. Not for Internet Distribution ¶1. (U) Summary. At the November Monetary Policy Forum, South African Reserve Bank's (SARB) officials re-emphasized their continuing focus on ensuring that inflation remains within the 3%-6% targeted range for the foreseeable future.. Since May, however, rising oil costs have fueled inflationary pressures and expectations. Mboweni stated that the Bank would take a forward looking view rather than the kind of reactive stance that put it `behind the curve' during the rand devaluations in 2001 and 2002. In his public comments, Finance Minister Manuel has cautioned against rising debt levels in what may become a high interest rate environment. Current expectations are that the SARB will either maintain or increase interest rates at its next Monetary Policy Committee meeting on December 7.End Summary. Reserve Bank Highlights Inflation Concerns -------------- ¶2. (U) At the semi-annual Monetary Policy Forum, South African Reserve Bank (SARB) Governor Tito Mboweni emphasized heightened inflationary expectations over the past several months and reiterated SARB's intention to be ahead of the curve when it came to managing inflation. He cited higher oil prices as the primary inflationary risk, and added that that second-round inflation stemming from higher oil prices had not yet materialized. If inflationary expectations worsened, then SARB would not hesitate to take appropriate action to ensure that inflation stayed within its 3%-6% range. SARB now expects CPIX inflation (consumer inflation excluding interest costs on mortgages) to reach 5.8% in the second quarter of 2006, easing to 5.3% by the end of 2007. The SARB has managed to keep CPIX inside its target range for 25 consecutive months. Fuel Costs Major Cause of Inflation So Far -------------- ¶3. Since May, rising fuel costs have driven inflationary pressures and expectations.. Standard Bank calculated a CPIX excluding fuel costs that ranged between 3.3% and 3.6% as compared to the reported CPIX of 3.6% to 4.8% between March and September 2005. Note: StatsSA does not release a consumer price index excluding energy prices; its core inflation rate excludes food and housing components. End Note. Public Statements Manage Inflationary Expectations -------------- -------------- ¶4. Both SARB Governor Mboweni and Finance Minister Trevor Manuel continue to warn against building inflation. Mboweni stated that the Bank would take a forward looking view rather than the kind of reactive stance that put it `behind the curve' during the rand devaluations during 2001 and ¶2002. . Finance Minister Manuel has posited that South African interest rates were unlikely to remain low as global interest rates rose. He cautioned against rising consumer and domestic debt levels in the face of a higher interest rate environment. Comment: The aim of the hawkish tenor taken by SARB at the MPF and subsequent comments by South African government financial officials is to dampen the growth in debt for consumption and talk down inflation in as much as possible. Future interest rate increases may largely depend on the SAG's ability to contain domestic expectations as well as manage the impact of fluctuating international oil prices and exchange rates. Robust Economic Growth Still Expected -------------- ¶5. Robust economic growth was expected to continue for the remainder 2005, although high oil prices and softer global growth posed substantial risks. Strong domestic spending has spurred GDP growth to 4.8% in the second quarter 2005 from 3.5% in the first. Growth is expected to average above 4% for 2005, up from 2004's growth of 3.7%. Comment -------------- PRETORIA 00004601 002 OF 002 ¶6. Current expectations are that the SARB will either maintain or increase interest rates at its next Monetary Policy Committee meeting on December 7. Credit growth remains high; retailers continue to expect robust credit use. Manufacturing production is recovering with September growth at 5.9% from August's 4%. Manufacturing expectations and car sales have leveled recently, although both are still at high levels. Strong domestic demand ensures that SARB will be even more vigilant in preventing inflation from getting out of control. HARTLEY