MPC Statement 20 July 2023


PRESS STATEMENT
20 July 2023


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
As we enter the second half of 2023, near term prospects for the global economy are
broadly unchanged, with inflation easing and growth forecasts stable. The longer-term
economic outlook however remains clouded by risks to the inflation trajectory, ongoing
geopolitical tensions and the effects of climate change. China’s growth performance
is expected to remain modest, with little benefit to commodity prices.1 In the
developing world, many economies face high debt levels, weaker economic growth
and prolonged adverse financing conditions. As a result, Sub-Saharan Africa’s growth
prospects remain muted.
While goods price inflation has eased in much of the world, core inflation remains
elevated, keeping consumer price inflation from falling more sharply. Globally,

1 Commodity export prices in USD terms fell by 0.9% in 2022. South Africa’s commodity export index is forecast
to decline by 27.6% this year, a further 11.5% in 2024, and an additional 5.4% in 2025.
MPC Statement 20 July 2023


monetary policy is likely to remain focused on ensuring inflation continues to retreat,
implying policy rates will stay higher. We expect markets in major financial centers to
remain volatile.
Taking these and other factors into account, the SARB’s forecast for global growth in
2023 is revised marginally higher to 2.5% (from 2.4%), and remains unchanged at
2.7% in 2024.2
While South Africa’s economic conditions appear to have improved, the longer-term
outlook mirrors the uncertainty of the global environment. Prices for commodity
exports continue to weaken. In addition, energy supply remains unreliable and
stronger El Nino conditions threaten the agricultural outlook.
For 2023, the Bank’s forecast for South Africa’s GDP growth is slightly higher than in
May, at 0.4% (from 0.3%). Energy and logistical constraints remain binding on the
growth outlook, limiting economic activity and increasing costs.3
From a demand perspective, spending by firms, households, public corporations and
general government remains positive in real terms. Disposable income of households
continues to grow, albeit slowly. Investment by the private and public sectors is
revised up and the terms of trade has remained more beneficial than previously
forecast. Debt service costs of households have increased to 8.4% of disposable

2 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners.
3 The number of days of expected load-shedding is 280 days in 2023, decreasing to 150 days and 100 days,
respectively in 2024, and 2025. Estimates of the average stages of load-shedding is multiplied by the number
of days and then multiplied by the cost to GDP per stage-day. The cost per stage has been revised lower for
stages 1 and 2. In nominal terms, these costs vary between R0-R1.2 million for stages 1 and 2 and up to R204R899 million for stages 3 to 6, when continued on a 24 hour basis on weekdays.
MPC Statement 20 July 2023


income, and now sit at around the average for the past decade.4 Although credit
growth to households and corporates has slowed in recent months, it has increased
in real terms compared to last year.
Our GDP growth forecast for 2024 and 2025 is unchanged from the previous meeting,
at 1.0% and 1.1%, respectively.5
While households and firms exhibit resilience, economic growth has been volatile for
some time and highly sensitive to new shocks. An improvement in logistics and a
sustained reduction in load-shedding, or greater energy supply from alternative
sources, would significantly increase growth.
At present, we assess the risks to the medium-term domestic growth outlook to be
balanced.
Turning to inflation prospects, our current growth forecast leaves the output gap
around zero over the next three years, implying little positive or negative pressure on
inflation from GDP growth.6
South Africa’s external financing needs are expected to rise due to expansion in the
current account deficit. Despite somewhat lower oil prices, falling export commodity
prices are forecast to result in a current account deficit of 1.9% of GDP this year (down
from 2.5%), 2.9% and 3.3% of GDP in 2024 and 2025, respectively.7

4 Debt service costs are the product of prevailing interest rates and debt volumes. The average from 1994 to
2019 was 8.8%. From the beginning of the pandemic until March 2023, the average was 7.4%. In the last
quarter of 2022, the average was 7.9%.
5 The growth forecast includes expected changes in the policy rate as given by the QPM.
6 Potential growth is revised marginally, to -0.1% in 2023 (up from -0.2%), and is unchanged at 0.8% for 2024
and 1.0% for 2025.
7 In May, a current account balance of -2.5% of GDP was expected for the forecast period. Exports are forecast
to grow in real terms by 6.2% this year (from 1.8%) and 3.4% in 2024. Our oil price forecast is also slightly
MPC Statement 20 July 2023


Sharply lower tax revenue, higher employee compensation and ongoing financing
needs of state-owned enterprises are likely to keep the long-term cost of borrowing
elevated. Despite the expected moderation of inflation over the forecast period, longterm bond yields currently trade at about 11.6%.
The rand has generally weakened over the past year, depreciating by about 5% year
to date against the US dollar, and showing high volatility in response to risk-on and
risk-off episodes. The implied starting point for the rand forecast is R18.52 (23q3) to
the US dollar, compared with R18.73 at the time of the previous meeting.
The trajectory of South Africa’s headline inflation rate has been shaped primarily by
fuel, electricity and food price inflation. Compared to the previous meeting, fuel price
inflation is lower at -3.1% in 2023 (from -2.0%). The electricity price forecast is
unchanged at 11.6% this year, 13.4% in 2024, and 10.9% in 2025. Our food price
inflation forecast for 2023 remains high but is revised lower in this meeting to 10.3%
(from 10.8%), and up slightly to 5.2% in 2024 (from 5.0%).
Better monthly outcomes have led to a downward revision in our forecast for core
inflation to 5.2% in 2023 (previously 5.3%), 4.9% (from 5.0%) and 4.5% (from 4.6%)
in 2024 and 2025, respectively. Services price inflation in 2023 is expected to come in
at 4.8% (down from 4.9%). Core goods inflation, while still elevated, is also revised

lower than in May, averaging US$81 per barrel in 2023, and unchanged at US$82 for 2024 and US$80 for
2025.
MPC Statement 20 July 2023


slightly lower for this year at 6.2% (from 6.3%).8 Growth in average salaries and unit
labour costs is lower in 2023 and 2024 and slightly higher in 2025.9
With core goods and food inflation lower in the near term, headline inflation for 2023
is revised down to 6.0% (from 6.2%). The headline inflation forecast for 2024 also
decreases to 5.0%, before stabilising at 4.5% in 2025.
Risks to the inflation outlook are assessed to the upside. Headline inflation at a global
level continues to moderate, but food price inflation remains high and oil markets
remain tight. Despite recent easing in some food price components, domestic food
price inflation is still elevated at 11% in June and the risk of drier weather conditions
in coming months has increased. In the absence of sustained and consistent
increases in energy supply, electricity prices continue to present clear inflation risks.
Load-shedding and logistics constraints may also have broader effects on the cost of
doing business and the cost of living. Given uncertain fuel and food price inflation,
considerable risk still attaches to the forecast for average salaries.
Sticky inflation in major economies suggests that average interest rates in these
economies will remain high.10 As a result, tighter global financial conditions are likely
to persist, raising the risk profile of economies needing foreign capital.
Higher inflation outcomes have generally resulted in elevated inflation expectations
across businesses and households, while market-based expectations have eased

8 Core goods refers to total CPI goods excluding food and NAB, fuel and electricity, whereas services include all
surveyed services within the CPI basket. Core goods inflation is expected to be 5.1% in 2024 and 4.3% in 2025.
9 Average salaries are expected to rise by 6.6% in 2023, 6.1% in 2024, and by 5.2% in 2025, compared to 6.8%,
6.5%, and 4.9%, at the time of the May meeting, respectively. Unit labour costs are forecast to rise by 6.0%,
5.3% and 4.6%, respectively, in 2023, 2024, and 2025.
10 G3 interest rates average 4.0% in 2023, 3.9% in 2024, and 2.6% in 2025.
MPC Statement 20 July 2023


recently.11 The Bureau for Economic Research survey released in July shows average
inflation expectations of 6.5% for 2023 (from 6.3% in the first quarter). Expectations
for inflation in 2023 based on market surveys are currently 5.9%, and near-term breakeven rates have decreased to around 4.5%.12 Longer-term expectations remain
elevated.
Headline inflation returned to the upper end of the inflation target range in June, and
is forecast to sustainably revert to the mid-point of the target range by the third quarter
of 2025. The forecast takes into account the policy rate trajectory indicated by the
Bank’s Quarterly Projection Model (QPM).
Against this backdrop, the MPC decided to keep the repurchase rate at its current level
of 8.25% per year. Three members of the Committee preferred to keep rates on hold
and two preferred an increase of 25 basis points.
At the current repurchase rate level, policy is restrictive, consistent with elevated
inflation expectations and the inflation outlook. Serious upside risks to the inflation
outlook remain. In light of these risks, the Committee remains vigilant and decisions
will continue to be data dependent and sensitive to the balance of risks to the outlook.
The policy stance aims to anchor inflation expectations more firmly around the midpoint of the target band and to increase confidence of attaining the inflation target
sustainably over time.13 The MPC will seek to look through temporary price shocks

11 The BER Q2 2023 survey of inflation expectations indicated inflation at 6.5% in 2023 (up from 6.3% in Q1)
and 5.9% for 2024 (up from 5.8% in Q1) and 5.6% in 2025.
12 At the median, market analysts (Reuters Econometer) in July expect inflation to remain at 5.9% in 2023,
4.9% in 2024 and 4.4% in 2025 (from 4.6%). Market-based rates are calculated from the break-even inflation
rate, which is the yield differential between conventional and inflation-linked bonds. The 10-year breakeven
now sits at about 6.1%. The 15-year break-even inflation rate sits at 7.3%.
13 The forecasted trajectory for the repurchase rate implies a rise in the inflation-adjusted repo rate from -1.4%
in 2022, to 2.7% in 2023, and 3.0% in 2024. The real repo level for 2025 is expected to be 2.7%. The real
MPC Statement 20 July 2023


and focus on potential second round effects and the risks of de-anchoring inflation
expectations.
Guiding inflation back towards the mid-point of the target band reduces the economic
costs of high inflation and will achieve lower interest rates in the future. Since early
2020, the Committee has recommended additional and indirect means of lowering
inflation that are within the reach of the public sector, including achieving a prudent
public debt level, increasing the supply of energy, moderating administered price
inflation and keeping wage growth in line with productivity gains. Such steps would
strengthen monetary policy effectiveness and its transmission to the broader
economy.
The repo rate projection from the updated QPM remains a broad policy guide,
changing from meeting to meeting in response to new data and risks.

Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be released on 21
September 2023.

Contact person:
Thoraya Pandy
0824168416


repurchase rates calculated here are based on the 3-quarter ahead inflation forecast and are annual average
rates.