The South African Reserve Bank (SARB) painted a rosy picture on Wednesday of the economy, but warned of threats to inflation.

"The performance of the South Africa economy in recent times seems to be more solid and consistent than before," the central bank says in its annual economic report, released in Pretoria.

"In fact, the business cycle has been in an upward phase for 71 months since September 1999, making this the longest upswing in the recorded economic history of South Africa."

Real gross domestic product has increased for 23 consecutive quarters, domestic demand and expenditure remain strong, and inflation is at historically low levels.

But while consumer inflation minus mortgage costs (CPIX) remains "comfortably" within the SARB's target range of 3% to 6%, some concerning factors necessitate "continued vigilance in the application of a counter-inflationary policy", the report says.

These include high and volatile international crude oil prices, exchange-rate uncertainty, pay settlements and administered price increases above the inflation target, and fairly high rates of loan financing coupled with continued buoyancy in domestic demand.

SARB Governor Tito Mboweni said increased retail sales, record vehicle sales and rising house prices, reflected in higher money supply and credit extension, contributed to a widening current account deficit.

"There was, on balance, little evidence that this was impacting negatively on inflation," he said in a prepared address to the SARB's 85th ordinary general meeting of shareholders.

The current account deficit is sustainable through capital inflows.

Despite risks to inflation, the decision to drop the repo rate, at which the SARB lends money to commercial banks, by 50 basis points in April was justified, Mboweni said.

The decision was interpreted by some as a change in the objective of the SARB.

"It must, however, be emphasised that changes in the exchange rate are important in the inflation process in South Africa," he said.

"The reduction in the repurchase rate was ... not a result of a focus on the strong rand, but on the favourable inflation outlook."

Mboweni stressed that the consolidation of inflation at lower levels and with less variability was important for the country's economic development. It has enhanced macro-economic stability and contributed to strong growth.

The central bank achieved considerable success in pursuit of its objectives in the past year, the governor said.

Among these were sustained capital inflows allowing for the continued build-up of official foreign reserves. This, in turn, contributed to increased exchange-rate stability.

The SARB's balance sheet increased by "a significant margin" during the 2004/05 financial year.

SARB general manager Monde Mnyande told reporters there are no signs of the economic recovery coming to an end.

"The only blemish on this picture is a paucity of jobs in the formal sector -- but even here there were some improvements," he said.

About 220 000 formal sector jobs were created between June 2003 and March 2005, but a pick-up has not been sustained since the last quarter of last year.

On the positive side, economic growth was buoyed by the services sector, increased mining and manufacturing output, and growth in the construction industry. Labour productivity increased, and household income was boosted.

The real-estate market remained strong, but the rate of price increases was tapering off as the chances of further steep drops in mortgage interest costs waned.

Mboweni said he is not overly concerned about high levels of household debt, currently constituting about 61% of disposable income.

"It is high, but it is not a disaster," he said, urging borrowers to settle their debts while interest rates are low. "One cannot bank on interest rates being too low all the time."

The report states that an annualised economic growth rate of 3,5% has to be realised in the second half of 2005 in order to achieve a figure of 4% for the year as a whole. -- Sapa

Article by: Mariette le Roux - www.mg.co.za