MPC Statement November 21st, 2019


South African Reserve Bank
PRESS STATEMENT
EMBARGO DELIVERY
21 November 2019


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since the September meeting of the Monetary Policy Committee (MPC), global
economic indicators have remained weak and global inflation low. Central banks in
advanced economies provided more monetary accommodation, helping to ease global
financing conditions, but further easing appears less likely. Downside risks from
heightened trade tensions and geo-political developments remain.
Despite a rebound in local GDP in the second quarter of this year, indicators suggest
that economic activity will remain weak for the rest of the year. Recent monthly inflation
has been lower than the mid-point of the inflation target range, as owners’ equivalent
rent, food and services inflation remain subdued.
The year-on-year inflation rate, as measured by the consumer price index (CPI) for all
urban areas, was 3.7% in October (down from 4.1% in September). Goods price
inflation in October was 3.1% (down from 4.0% in September), while services price
inflation remained at 4.2%. Food and non-alcoholic beverage price inflation slowed to
3.6% (down from 3.9%). The Bank’s measure of core inflation, which excludes food,
MPC Statement November 21st, 2019


fuel and electricity, remains unchanged at 4.0%. Producer price inflation for final
manufactured goods decreased to 4.1% in September (compared to 4.5% in
August).
The medium-term inflation outlook is largely unchanged since September. The
inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) is
unchanged compared to September, averaging 4.2% in 2019, 5.1% for 2020 and 4.7%
for 2021. Headline CPI inflation is expected to peak at 5.3% in the first quarter of 2020
and settle at 4.5% in the last quarter of 2021. The forecast for core inflation is lower at
4.2% in 2019 (down from 4.3%), at 4.5% in 2020 (down from 4.7%) and remains
steady at 4.6% in 2021. Food price inflation continues to surprise to the downside on
a monthly basis, and is expected to peak at about 6.1% in the third quarter of 2020.
Inflation expectations have continued to moderate gradually. According to the Bureau
for Economic Research (BER) third quarter survey, expectations for headline inflation
are down slightly for 2019 to 4.6% (from 4.8%). Expectations for 2020 remain
unchanged at 5.0% and eased from 5.2% to 5.1% for 2021, reaching the lowest levels
since 2007. Five-year-ahead inflation expectations also declined to 5.0% (from 5.1%).
The inflation expectations of market analysts in the November 2019 Reuters
Econometer survey remain unchanged at 4.3% for 2019, revised lower to 4.7% (from
4.9%) for 2020 and are unchanged at 4.8% in 2021.
Market based expectations implicit in the break-even inflation rates (the yield
differential between conventional and inflation-linked bonds) have moderated
somewhat since the previous MPC. Five-year break-even inflation rates are currently
about 4.5% and ten-year break-even rates are at 5.4%.
MPC Statement November 21st, 2019


Global GDP is expected to average 3.0% in 2019, rising to about 3.4% in 2020. While
trade and manufacturing indicators continue to be weak, services have remained more
resilient, keeping overall global growth rates up. However, services have shown
weakness in some regions and a range of downside risks to growth remain. These
include geo-political developments, trade tensions, further oil price shocks, and high
levels of corporate and sovereign debt. Across most countries, there is limited policy
space to respond to shocks.
Inflation outcomes and inflation expectations in most advanced economies remain
below targeted levels. Barring significant shocks, monetary policy in major advanced
economies will remain accommodative over the medium term. While global financial
market sentiment has turned more positive in recent weeks, the risk of renewed market
volatility remains high.
Since the September MPC, the rand has depreciated slightly by 0.6% against the US
dollar, and by 0.8% against the euro. The implied starting point for the rand is
R14.94 against the US dollar, compared with R14.88 at the time of the previous
meeting. While the rand has benefited from improvements in global sentiment,
investors remain concerned about domestic growth prospects and fiscal risks.
Although GDP growth rebounded to 3.1% in the second quarter, longer term weakness
in most sectors remains a serious concern. Based on recent short term economic
indicators for the mining and manufacturing sectors, the third quarter GDP outcome is
expected to be weak. Public sector investment has declined, export growth remains
low, whereas government and household consumption continue to grow, albeit
modestly.
MPC Statement November 21st, 2019


Business confidence remains weak. The RMB/BER Business Confidence Index fell to
21 points (from 28), while the Absa Purchasing Managers’ Index rose to 48.1 points in
October (from 45.1). The SARB’s composite leading business cycle indicator also
continued to trend lower, and the coincident indicator decreased month-on-month
while remaining positive on a year on year basis.
The forecast of GDP growth for 2019 is revised lower at 0.5% (from 0.6%). The
forecasts for 2020 and 2021 have decreased to 1.4% (from 1.5%) and 1.7% (from
1.8%), respectively, due to lower growth than previously expected in the third and
fourth quarters and downward revisions to global growth.
The MPC assesses the risks to the growth forecast to be to the downside. Escalation
in global trade tensions, geo-political risks, further domestic supply constraints and/or
sustained higher oil prices could generate headwinds to growth. Public sector
financing needs have risen, raising the prospect of further pressure on the currency
and pushing borrowing costs for the broader economy higher. Implementation of
prudent macroeconomic policies and structural reforms that lower costs and increase
investment, potential growth and job creation, remains urgent.
The overall risks to the inflation outlook are assessed to be balanced, but uncertainty
about inflation risks is unusually high. Demand side pressures remain subdued and
house rental prices are expected to increase at only moderate rates. Global inflation
should also remain low. Food price inflation has continued to surprise to the downside,
but rising imported food prices and uncertain domestic weather patterns raise
uncertainty about the future price trajectory. Further upside risks to the inflation
outlook include wage growth and fuel, electricity and water prices. The risk of further
MPC Statement November 21st, 2019


capital flow volatility has also increased, which could put pressure on the exchange
rate.
The MPC welcomes the sustained moderation in inflation outcomes and inflation
expectations and would like to see inflation expectations anchored closer to the midpoint of the inflation target range on a sustained basis.
Against this backdrop, the MPC decided to keep the repurchase rate unchanged at
6.5% per annum. Three members preferred to keep interest rates on hold and two
members preferred a cut of 25 basis points.
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. In this persistently uncertain environment, future policy decisions will continue
to be highly data-dependent, sensitive to the balance of risks to the outlook, and will
seek to look-through temporary price shocks.
The implied path of policy rates over the forecast period generated by the Quarterly
Projection Model indicated one repo cut of 25 basis points in the third quarter of 2020.
This remains a broad policy guide which could change in either direction from meeting
to meeting in response to new developments and changing data and risks.
Lesetja Kganyago
GOVERNOR

The next statement of the Monetary Policy Committee will be released on
16 January 2020.

MPC Statement November 21st, 2019


Monetary Committee Meetings dates for 2020:
14 – 16 January
17 – 19 March
19 – 21 May
21 – 23 July
15 – 17 September
17 – 19 November

SARB media contact:
Ziyanda Mtshali
012 399 7966