MPC Statement November 22nd, 2018


South African Reserve Bank

PRESS STATEMENT
EMBARGO DELIVERY
22 November 2018


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since the previous meeting of the Monetary Policy Committee (MPC), the near-term
inflation outlook has improved, however, the longer term risks to the inflation outlook
remain elevated. The weaker exchange rate and the impact of higher oil prices have
contributed to increasing inflation since March 2018. At the same time, domestic
growth remains weak.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas was 5.1% in October (up from 4.9% in September). Goods price inflation
was 5.1% (up from 4.8% in September), while services price inflation decreased
slightly from 5.2% in September to 5.1% in October. The Bank’s measure of core
inflation, which excludes food, fuel and electricity was 4.2% in October. Producer price
inflation for final manufactured goods slowed to 6.2% in September from 6.3% in
August.
MPC Statement November 22nd, 2018


The inflation forecast has improved marginally since the previous MPC. While
remaining within the inflation target range throughout the forecast period, the SARB’s
model projects an increase in headline inflation, albeit slightly lower than the
September projection. Headline inflation is now expected to average 4.7% in 2018
(down from 4.8%), before increasing to 5.5% in 2019 (down from 5.7%) and
moderating to an unchanged 5.4% in 2020. Headline CPI inflation is now expected to
peak at around 5.6%, in the third quarter of 2019. The forecast for core inflation is
4.3% in 2018 (down from 4.4%), 5.3% in 2019 (down from 5.6%) and 5.5% in 2020.
These inflation projections are based on an interest rate path generated by the SARB’s
Quarterly Projection Model (QPM).
Following persistent increases in oil prices since February, the assumptions for Brent
crude oil in the QPM were revised upwards by US$3 per barrel to US$73 for 2019 and
2020. Administered prices, including fuel, electricity and water tariffs, are expected to
increase at rates above the upper end of the inflation target range.
The inflation expectations of market analysts in the November Reuters Econometer
survey are lower at 4.7% in 2018 (down from 4.8%), rising to 5.5% in 2019 (up from
5.3%) and remaining unchanged at 5.3% in 2020. Expectations implicit in the breakeven inflation rates (i.e. the yield differential between conventional and inflation-linked
government bonds) remain sensitive to exchange rate movements. While five-year
break-even rates remains within the inflation target range, the longer-term break-even
rates remain above 6%.
The global economic outlook is expected to remain broadly favourable over the short
term. However, medium term risks are tilted to the downside due to less synchronised
global growth. This is amplified by elevated policy uncertainty emanating from
MPC Statement November 22nd, 2018


escalating trade tensions, tightening global financial conditions and rising geo-political
risks. The global inflation trajectory remains on a moderate upward path as key
advanced economies continue to grow above their potential.
Since the September MPC, the rand has appreciated by 3.8% against the US dollar,
by 6.6% against the euro, and by 5.2% on a trade-weighted basis. The implied starting
point for the rand is R14.50 against the US dollar, compared with R14.20 at the time
of the previous meeting. At these levels, the QPM assesses the rand to still be
undervalued.
Tighter global financial conditions, financial market volatility and the change in investor
sentiment towards emerging markets remain key external risks to the rand. Over the
medium term, it is likely that the rand, along with other emerging market currencies,
will remain volatile. However, the pace of monetary policy normalisation in the
advanced economies continues to be gradual. Policy tightening by the US Fed is
expected to follow a measured path in the absence of significant inflation or growth
surprises, while the European Central Bank (ECB) is expected to start a rate hiking
cycle in late-2019. This means that monetary policies in some advanced economies
will likely be tightening throughout the forecast period.
The domestic growth outlook remains challenging. Recent monthly data on economic
performance in key sectors suggests a more moderate recovery in growth in the third
quarter than expected in September. The SARB now forecasts growth in 2018 to
average 0.6% (down from 0.7% in September). The forecast for 2019 and 2020 is
unchanged at 1.9% and 2.0% respectively. At these growth rates, the negative output
gap is wider than at the time of the previous MPC meeting. The output gap will narrow
but will not close by the end of 2020, as previously expected.
MPC Statement November 22nd, 2018


The SARB’s composite leading business cycle indicator has been trending lower since
February, reflecting the extent of weakness in the economy. The year-on-year
decrease in September was the largest since July 2016 and mainly reflected a
significant decline in the number of building plans approved and a reduction in job
advertisement space. The RMB/BER Business Confidence Index remains significantly
below the neutral level of 50 index points, broadly aligned with weakness in gross fixed
capital formation. Efforts by the government to encourage private sector investment
could support longer term growth.
While the FNB/BER Consumer Confidence Index remains high, household
consumption expenditure has been constrained by recent tax changes, weak
employment growth as well as low growth in credit extension to households. Over the
forecast period, consumption expenditure growth is expected to remain below 2% in
2018 and 2019, and to reach 2.3% in 2020, on the back of increases in real wages
and household disposable income.
The MPC assesses the risks to the growth forecast to be moderately on the downside.
As previously highlighted the Committee remains of the view that current challenges
facing the economy are primarily structural in nature and cannot be solved by
monetary policy alone. Prudent macroeconomic policies are essential to ensuring that
growth is sustainable and that the economy is more resilient to shocks. These should
be complemented by implementation of credible structural policy initiatives that make
a marked impact on the cost structure of the economy, potential output and
employment.
The MPC noted the rising inflation trajectory which, while remaining within the target
range, continues to deviate from the mid-point of the target range.
MPC Statement November 22nd, 2018


The MPC continues to assess the risks to the longer-term inflation outlook to be on
the upside. These risks include tighter global financial conditions, a weaker exchange
rate, higher wage growth, international oil prices and rising electricity and water tariffs.
However, demand pressures are still not assessed to pose a significant risk to the
inflation outlook.
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. However, shocks of a persistent
nature such as extended periods of currency depreciation, elevated oil prices and
multi-year electricity price increases make it difficult to disentangle these first and
second round effects.
The MPC had to decide whether to act now or later. Given the relative stability in the
underlying core inflation measure, delaying the adjustment could give the MPC room
to re-assess these unfolding developments in subsequent meetings. However,
delaying the adjustment could cause inflation expectations to become entrenched at
higher levels and thus contribute to second round effects, which would require an even
stronger monetary policy response in the future.
Against this backdrop, the MPC has decided to increase the repurchase rate by
25 basis points to 6,75% per year, effective from 23 November 2018. Three members
preferred an increase and three members preferred an unchanged stance.
The Committee continues to assess the stance of monetary policy to be
accommodative. Monetary policy actions will continue to focus on anchoring inflation
expectations near the mid-point of the inflation target range in the interest of balanced
and sustainable growth. As previously indicated, any future policy adjustments will be
data dependent.
MPC Statement November 22nd, 2018


The implied path of policy rates generated by the Quarterly Projection Model is for four
rate hikes of 25 basis points, reaching 7.5% by the end of 2020. 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 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 17 January
2019.

Contact person:
ZamaNdlovu Ndlovu
012 399 7118