US embassy cable - 05PRETORIA4601

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 
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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