Cablegate: Hawkish South African Monetary Policy Forum Tone

VZCZCXRO1580
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4601/01 3221417
ZNR UUUUU ZZH
R 181417Z NOV 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0083
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

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

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