MPC Statement January 17th, 2019


South African Reserve Bank

PRESS STATEMENT
EMBARGO DELIVERY
17 January 2019


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since November 2018, international developments have been the major contributor to
an improved inflation outlook. Significant declines in international oil prices and a less
depreciated exchange rate have been key drivers of this improved outlook. Domestic
petrol prices decreased by a cumulative R3.07 per litre (for 95 unleaded in Gauteng)
in December and January. Lower food price inflation also contributed to lower
consumer price inflation. The economy’s recovery from the technical recession in the
first half of 2018 is welcomed, but it remains modest, with growth constrained by
subdued demand as a result of weaker levels of consumer and business confidence.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas was 5.2% in November (up from 5.1% in October). Goods price inflation
was 5.3% (up from 5.1% in October), while services price inflation was unchanged at
5.1%. The Bank’s measure of core inflation, which excludes food, fuel and electricity
MPC Statement January 17th, 2019


was 4.4% in November compared to 4.2% in October. Producer price inflation for final
manufactured goods slowed marginally to 6.8% in November from 6.9% in October.
The near-term inflation forecast generated by the SARB’s Quarterly Projection Model
(QPM) has improved significantly since the previous MPC. Headline inflation is now
expected to average 4.6% in 2018 (down from 4.7%) and 4.8% in 2019 (down from
5.5%), before increasing to 5.3% in 2020 (down from 5.4%) and moderating to 4.8%
in 2021. Headline CPI inflation is now expected to peak at around 5.6%, in the first
quarter of 2020. Core inflation is expected remain unchanged at 4.3% in 2018 and
forecast to average 5.0% in 2019 (down from 5.3%), 5.1% in 2020 (down from 5.5%)
and 4.8% in 2021. These inflation projections are based on an interest rate path
generated by the QPM.
Following a significant decline in oil prices since November, the assumptions for Brent
crude oil in the QPM were revised down by around US$10 per barrel from US$73 to
US$62 for 2019 and US$65 for 2020 and 2021. Food price inflation is expected to
have bottomed out in the fourth quarter of 2018 and to rise to 4.6% in 2021.
Average inflation expectations for both 2019 and 2020, as reflected in the survey
conducted by the Bureau for Economic Research (BER) in the fourth quarter of 2018,
declined from 5.6% to 5.4%. Average five-year expectations also came down from
5.5% in the previous survey to 5.3%.
The inflation expectations of market analysts in the January 2019 Reuters Econometer
survey are also lower at 5.2% in 2019 (down from 5.5%) and remained unchanged at
5.3% for 2020. Expectations implicit in the break-even inflation rates (i.e. the yield
differential between conventional and inflation-linked government bonds) remain
MPC Statement January 17th, 2019


sensitive to exchange rate movements. While five-year break-even rates remain within
the inflation target range, the longer-term break-even rates remain above 6%.
Global growth is expected to remain broadly favourable over the near term, but to
moderate over the medium term while risks are tilted to the downside. The negative
effects of tariff increases are becoming more visible in economic data and uncertainty
arising from trade tensions remains. Other risks include geo-political developments
and excessive financial market volatility.
Recent communication from major central banks suggests a slower pace of monetary
policy normalisation in advanced economies. In December, the US Fed signalled a
more gradual pace of rate hikes. Although the European Central Bank (ECB) ended
its asset purchase programme in December, it has indicated that monetary policy
would remain largely accommodative.
Since the November MPC, the rand has appreciated by 1.4% against the US dollar,
by 1.5% against the euro, and by 0.5% on a trade-weighted basis. The implied starting
point for the rand is R14.30 against the US dollar, compared with R14.50 at the time
of the previous meeting. At these levels, the QPM assesses the rand to be less
undervalued.
Emerging market currencies, including the rand, have recently benefited from a
weaker US dollar and indications of continued accommodative monetary policy in
advanced economies, but they remain vulnerable to changes in investor sentiment.
The rand also remains sensitive to domestic growth prospects, political developments
and policy settings.
MPC Statement January 17th, 2019


The domestic growth outlook remains sluggish. Although, GDP increased by 2.2% in
the third quarter of 2018, private sector fixed investment remains weak and production
in key sectors is volatile. The SARB now expects growth in 2018 to have averaged
0.7% (up from 0.6% in November). The growth forecast for 2019 is 1.7% (down from
1.9%), it is unchanged at 2.0% for 2020 and increases to 2.2% in 2021. At these
growth rates, the negative output gap is expected to close in the first quarter of 2021.
The Absa Purchasing Managers’ Index reached 50.7 index points in December driven
by improved expectations about new sales orders and business activity, however the
employment sub-index receded to its lowest levels since 2014. Although the SARB’s
composite leading business cycle indicator increased somewhat in October, it has
been trending lower since early 2018. The RMB/BER Business Confidence Index also
remains significantly below the neutral level of 50 index points, broadly aligned with
weakness in gross fixed capital formation. Sustained growth in fixed capital formation
is needed to raise potential growth and to make in-roads into unemployment.
Household consumption expenditure remains constrained by weak employment
growth. Over the forecast period, consumption expenditure growth is expected to
remain around 2%, on the back of moderate increases in real wages and household
disposable income.
The MPC assesses the risks to the growth forecast to be on the downside. Weak
business and consumer confidence continue to weigh on fixed capital formation. This
could be exacerbated by the possibility of protracted electricity supply constraints.
Prudent macroeconomic policies are essential to ensuring that growth is sustainable
and the economy is more resilient to shocks. Furthermore, the Committee remains of
the view that current challenges facing the economy are primarily structural in nature.
MPC Statement January 17th, 2019


The implementation of credible structural policy initiatives that make a marked impact
on potential output and employment and lower the cost structure of the economy
should be prioritised.
The MPC has taken note of the improved inflation outlook, especially in the near-term.
Over the forecast period, inflation is expected to remain within the inflation target
range, averaging 5.3% in 2020 and 4.8% in 2021.
The overall risks to the inflation outlook are assessed to be moderately on the upside.
The risks include administered prices such as electricity and water tariffs, rising
domestic food prices in the outer years, changing investor sentiment towards
emerging markets, moderation in global growth and volatile international oil prices.
Against this backdrop, the MPC unanimously decided to keep the repurchase rate
unchanged at 6,75% per year.
The Committee continues to assess the stance of monetary policy to be broadly
accommodative. Monetary policy actions will continue to focus on anchoring inflation
expectations closer to the mid-point of the inflation target, in the interest of balanced
and sustainable growth. The approach of the MPC is to look through the first-round
effects and focus on the possible second-round effects of supply side shocks. As
previously indicated, any future policy adjustments will be data dependent.
The implied path of policy rates generated by the Quarterly Projection Model is for one
hike of 25 basis points, reaching 7.0% by the end of 2021. The forecasted endogenous
interest rate path is built into our growth and inflation outlook. As emphasised
previously, the implied path remains a broad policy guide which can and does change
MPC Statement January 17th, 2019


in either direction between meetings in response to new developments and changing
risks.
Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be released on
28 March 2019.

Contact person:
Ziyanda Mtshali
012 399 7966