MPC Statement 23 September 2021


PRESS STATEMENT
23 September 2021


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
A steady improvement in vaccination rates will sustain confidence and global
economic growth, even with expected further waves of the Covid-19 virus. However
vaccination rates are lagging in many emerging market and developing economies.
Until populations develop sufficient immunity to curb virus transmission, waves of
infection are likely to continue, with ongoing poor economic outcomes. At this time,
the third wave of the virus infection has peaked in South Africa. The virus however is
only one of a series of current risks to the economic recovery that include rising
inflation, weaker commodity export prices, and the longer term impact of scarring from
the pandemic and the July unrest.
The International Monetary Fund’s (IMF) forecast for global gross domestic product
(GDP) for 2021 is 6.0%, and will be updated again in early October. The SARB’s

MPC Statement 23 September 2021


forecast for global growth in 2021 now sits at 6.2% (up from 6.1%).1 For 2022 and
2023, we still expect global growth of 4.4%, and 3.4%, respectively. Recoveries in
emerging market and developing economies are expected to lag those in advanced
economies, in large part due to a slower pace of vaccinations.
Although policy settings in advanced economies remain accommodative, the spread
of the Delta variant, higher global inflation, and uncertainty about the normalisation
path for interest rates continue to cause financial market turmoil and capital flow
volatility. Risk aversion persists where economies fail to take advantage of improved
global prospects or to reduce large macroeconomic imbalances.
The domestic economy grew by 4.2% in the first quarter of 2021 and by 4.7% in the
second quarter. These outcomes reflect better sectoral growth performances and
robust terms of trade. Commodity prices have been extraordinarily high, sustaining
income gains despite somewhat higher oil prices. While more South Africans have
re-entered the jobs market as economic activity resumed, the loss of jobs suggests
persistent adjustment and sustained weakness in some sectors. Household
spending remains healthy, however, in line with better than expected salaries and
wages, rising asset prices and low interest rates.
The Bank’s forecast for fixed investment was revised up for this year but remains
constrained, and, as a result of the GDP revisions by Stats SA, is lower as a share of
economic activity.2

1 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners. The IMF’s
July World Economic Outlook global forecast for 2022 sits at 4.9%.
2 Statistics South Africa released its revision on 25th August 2021. The main effect of the revisions is to the
aggregate level of output in the economy, which was revised up significantly.

MPC Statement 23 September 2021


We expect the economy to grow by an upwardly revised 5.3% this year (from 4.2%),
despite the much larger negative effect on output than was previously estimated from
the July unrest. Our revised estimate for third quarter economic growth is -1.2%,
compared to the previous -0.5%. Output in the manufacturing sector fell by 8.0% in
July alone. Mining was up 4.1%, while land freight transport fell by 5.0% and retail
output was down by 11.2%.
The July events and the pandemic are likely to have lasting effects on investor
confidence and job creation, impeding recovery in labour-intensive sectors hardest hit
by the lockdowns. GDP is expected to grow by 1.7% in 2022, (down from 2.3%) and
by 1.8% in 2023 (down from 2.4%).
Overall, and after revisions, the risks to the medium-term domestic growth outlook are
assessed to be balanced, as most of the bounceback from the recovery is now in the
past. High export prices are expected to fade, while very weak job creation will slow
household consumption. Investment will remain constrained by the still limited energy
supply and ongoing policy uncertainty. The faster vaccine rollout presents upside risks
to the growth outlook.
The current account surplus remains large, at 5.6% of GDP, reflecting high prices for
mining and agricultural exports, still gradually rising oil prices, and slowly reviving
demand for imported consumer and investment goods. The surplus is expected to
shrink to about 0.7% of GDP for next year (2022), as exports slow and imports
accelerate.3

3 The current account is expected to be in surplus of 4.7% of GDP in 2021, shifting to a deficit of -0.3% in 2023.

MPC Statement 23 September 2021


Long bond yields have returned to pre-pandemic levels of around 9.0% on 10-year
bonds. Although financing conditions have improved and fiscal risk has eased, the
yield curve for rand-denominated bonds remains steep.
The generally favourable global conditions and strong commodity export prices have
strengthened the currency above its long-run equilibrium level, with a year to date
appreciation of 1.5% on a trade-weighted basis. Since the July meeting, the rand has
depreciated by 1%. The implied starting point for the rand forecast is R14.47 to the US
dollar, compared with R14.40 at the time of the previous meeting.
At a global level, a wide range of prices is accelerating, including raw materials,
intermediate inputs and food. This reflects both global supply shortages and strong
demand. This has passed-through to consumer prices in some major economies. Our
estimate for inflation in the G3 was revised higher for 2021 to 2.4% (from 2.2%) and
remains the same in the outer years.4
Oil prices are revised up for this year, and petrol price inflation is higher at 16.1% (up
from 15.3%).5 Local electricity prices are lower at 10.1% (down from 10.5%).
Headline consumer price inflation for 2021 is revised slightly higher to 4.4% (up from
4.3%), and remains unchanged at 4.2% in 2022 and 4.5% in 2023.
The forecast for core inflation is revised higher to 3.0% in 2021 (up from 2.9%) and to
3.8% in 2022 (up from 3.7%). Core inflation is expected to be 4.3% in 2023,
unchanged from the July forecast.

4 The G3 comprises the United States, the Eurozone, and Japan. G3 inflation for 2022 is 2.0% and 1.8% for
2023.
5 The forecast for petrol prices in 2022 are revised down from 5.5% in July to 3.7% currently. Our assumptions
are now for oil prices to average $69 per barrel in 2021 and $67 per barrel in 2022 and $65 in 2023.

MPC Statement 23 September 2021


The Bank’s forecast reflects higher headline inflation for the rest of this year, before
moderating in 2022. Compared to the July meeting, and taking into account higher
household consumption and less investment from the recent GDP revisions, the output
gap is narrower historically and over the forecast period.6
While economic activity continues to expand over the forecast period, a rise in core
inflation is moderated by the current strength of the exchange rate and modest unit
labour costs.
The risks to the short-term inflation outlook are assessed to the upside. Rapid global
producer price and food price inflation have surprised to the upside in recent months
and could do so again. Oil prices have become more volatile in recent weeks and
could rise beyond our expectations. Electricity and other administered prices also
continue to present short-term risks. Given the medium and long-term projections set
out above, a weaker currency, higher domestic import tariffs, and escalating wage
demands present further longer-term upside risks to the inflation forecast.
Average surveyed expectations of future inflation remain unchanged at 4.2% for 2021
and 4.4% for 2022. Market-based expectations for inflation are slightly higher for 2021
at 4.4% (up from 4.3%) and stable over longer horizons.7

6 The GDP revisions resulted in a higher level of output, consumption and lower investment, among other
changes. Upward revisions to potential growth were not as large as the GDP level revisions, implying
somewhat higher demand and therefore a smaller output gap than estimated pre-revision. For 2020, the
output revisions also implied more of a negative supply shock than previously estimated, which then reversed
in 2021, resulting in re-estimates of the output gap for each of these years.
7 The (Q3) Bureau for Economic Research (BER) survey expectations remain unchanged at 4.2%, 4.4% and to
4.5% for the three years. Market analysts (Reuters Econometer) in September expect inflation to be higher at
4.4% (from 4.3%) in 2021, and unchanged at 4.4% in 2022, and lower at 4.2% in 2023. Market-based rates
are calculated from the break-even inflation rate, which is the yield differential between conventional and
inflation-linked bonds. These now sit at 4.79% for the 5-year and 5.98% on the 10-year breakeven. 15-year
breakeven inflation sits at 6.31%.

MPC Statement 23 September 2021


With largely unchanged inflation expectations and even with continued upside risks,
the Committee expects inflation to stay close to the mid-point over the forecast period.
Against this backdrop, the MPC decided to keep rates unchanged at 3.5% per annum.
The decision was unanimous.
The implied policy rate path of the Quarterly Projection Model (QPM) indicates an
increase of 25 basis points in the fourth quarter of 2021 and further increases in each
quarter of 2022 and 2023.
These repurchase rate levels reflect a highly accommodative policy stance through
the end of the forecast, keeping financial conditions supportive of credit demand as
the economy continues to recover.8 The Bank has ensured adequate liquidity in
domestic markets and will continue to closely monitor funding markets for stress. In
addition, regulatory relief provided to banks continues to support lending to
households and firms.
Better anchored expectations of future inflation could keep interest rates lower for
longer, and can be realised by achieving a stable public debt level, increasing the
supply of energy, moderating administered price inflation and keeping wage inflation
low into the recovery. Such steps will enhance the effectiveness of monetary policy
and its transmission to the broader economy.
Economic and financial conditions are expected to remain volatile for the foreseeable
future. In this uncertain environment, policy decisions will continue to be data
dependent and sensitive to the balance of risks to the outlook. The MPC will seek to

8 This implies a rise in the inflation-adjusted repo rate from -1.0% for 2021 to about 0.6% for 2022 and 1.5% for
2023. The real repurchase rate calculation here is based on the 1-quarter ahead inflation forecast.

MPC Statement 23 September 2021


look through temporary price shocks and focus on second round effects. As usual,
the repo rate projection from the 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 18
November 2021.

Contact person:
Thoraya Pandy
0824168416