MPC Statement 19 November 2020


PRESS STATEMENT
EMBARGO DELIVERY
19 November 2020


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), it has become
clear that Covid-19 infections will occur in waves of higher and lower intensity, caused
in large part by pandemic fatigue and lapses in safety protocols. The virus is spreading
rapidly in parts of North America and Europe and hotspots have emerged in some
parts of South Africa. While we have learned how to better manage the risks of
transmission and the design of lockdowns, these waves of infection will continue for
some time. Fresh spread of the virus and reimposed lockdowns will extend the time
needed for economies to get back to pre-pandemic activity levels. Despite the
welcome development in November of successful vaccine trials, global distribution of
vaccines is likely to be slow, resulting in a modest pace of global economic growth into
2021.
As expected, second quarter GDP outcomes for most economies were massively
negative. Third quarter recoveries have generally been robust and economies will
continue to recover in the fourth quarter. The International Monetary Fund (IMF) now
expects global gross domestic product (GDP) to contract by about 4.4% this year.
MPC Statement 19 November 2020


Although global GDP forecasts improved from September, it is probable that global
growth will be revised somewhat in coming months.1
While financial asset prices have been volatile for much of the year due to pandemicrelated developments and geopolitical events, recent weeks have seen markets
strengthen. Capital flows to emerging markets have generally picked up when
compared to the outflows experienced in March and April, and global policy rates look
set to remain accommodative. Nonetheless, pronounced levels of risk aversion are
likely to persist through 2021, particularly where economies fail to grow or run large
external imbalances, fiscal deficits and high debt levels.
Locally, further easing of lockdown restrictions has supported economic growth, with
high frequency indicators continuing to show a pickup in economic activity during
August and September. The Bank’s forecast of third quarter GDP growth has been
revised up to 50.3% quarter on quarter, seasonally adjusted and annualised. The
growth rate for the full year is now expected to be -8.0%, compared to the contraction
of 8.2% expected at the time of the September. South Africa’s terms of trade remain
robust. Commodity export prices are high, while oil prices remain generally low.
Getting back to pre-pandemic output levels, however, will take time. Sharply lower
investment this year by both public and private sectors will weigh on growth prospects
in coming years. GDP is now expected to grow by 3.5% in 2021 and by 2.4% in 2022.2
Overall, risks to the growth outlook are assessed to be balanced, but this is tentative
and open to adjustment given the wide range of shocks hitting the economy,

1 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners. For 2020 this
is now at -3.9% (up from -4.2% in September) and revised down to 4.5% for 2021. Based on the October 2020
World Economic Outlook, the IMF expects global growth of 5.2% in 2021.
2 Compared to 3.9% and 2.6%, respectively, in September.
MPC Statement 19 November 2020


uncertainties involving the effectiveness of policy, and the sensitivity of sentiment to
news flow. The somewhat stronger growth in 2020 and a small downward revision to
growth in 2021 implies little change in the size of the output gap over the forecast
period, compared to the September meeting.
The accommodative policies in many advanced economies and the improved
economic outlook have supported a partial recovery in global financial markets. But
this has so far resulted in only a trickle of fresh capital flows to emerging markets, and
financing conditions remain uncertain. South Africa’s high public financing needs have
been met instead by local private sector savings and borrowing from international
financial institutions. Yields have eased in recent months due to higher purchases of
sovereign bonds by resident investors, including banks, alongside SARB liquiditymanagement operations. However, the yield curve remains exceptionally steep,
reflecting elevated levels of risk associated with high public borrowing needs.3
Better global economic and financial conditions saw the rand appreciate by 6.9% since
the September meeting. The rand has, however, depreciated by 8.7% against the
USD since January and remains below its estimated long-run equilibrium value. The
implied starting point for the rand forecast is R16.50 to the US dollar, compared with
R16.90 at the time of the previous meeting.
The Bank’s headline consumer price inflation forecast averages 3.2% in 2020 and is
slightly lower than previously forecast at 3.9% in 2021 and remains at 4.4% in 2022.
The forecast for core inflation is lower at 3.3% in 2020, at 3.4% in 2021, and remains
stable at 4.0% in 2022.

3 Measured by the EMBI+ premium over emerging market averages and as an absolute value over time.
MPC Statement 19 November 2020


The overall risks to the inflation outlook appear to be to the downside in the near term
and balanced over the medium term. Global producer price inflation and oil prices
remain low.4 Local food price inflation is expected to remain contained. The
Committee additionally notes the significant but likely temporary reduction in medical
insurance price inflation for next year. Given low pass-through, risks to inflation from
currency depreciation are expected to stay muted. However, additional exchange rate
pressures could result from heightened fiscal risks. While there are no demand side
pressures evident, electricity and other administered prices remain a concern.
Importantly, expectations of future inflation continued to moderate this year and have
shifted slightly below the mid-point of the band for 2021. Market-based expectations
for short and medium-term inflation have eased slightly, while longer-term inflation
expectations remain higher.5
The Committee notes that the slow recovery will keep inflation below the midpoint of
the target range for this year and next. Unless risks outlined earlier materialise,
inflation is expected to be well contained over the medium-term, remaining below but
close to the midpoint in 2021 and 2022.
Against this backdrop, the MPC decided to keep rates unchanged at 3.5% per annum.
Two members of the committee preferred a 25 basis point cut and three preferred to
hold rates at the current level.

4 Our assumptions are now for oil prices to average about $40 per barrel in 2020, rising to $45 per barrel in
2021 and $50 per barrel in 2022.
5 The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.3 ppts to 3.6%
and to 4.2% (from 3.9 and 4.5%) for 2021. Five-year-ahead inflation expectations eased from 4.7% to 4.5%.
Household inflation expectations down from 6.2% to 5.9%. Market analysts (Reuters Econometer) expect
inflation to remain unchanged at 3.3% for 2020, lower at 3.9% in 2021 and unchanged at 4.4% in 2022.
Market-based rates are calculated from the break-even inflation rate, which is the yield differential between
conventional and inflation-linked bonds. These sit at 3.15% for the 5-year and 4.91% on the 10-year breakeven.
15-year breakeven inflation sits at 6.1%.
MPC Statement 19 November 2020


The implied policy rate path of the Quarterly Projection Model (QPM) indicates no
further repo rate cuts in the near term, and two increases of 25 basis points in the third
and fourth quarters of 2021.
Monetary policy has eased financial conditions and improved the resilience of
households and firms to the economic implications of Covid-19 and continues to be
accommodative. The Bank has taken important steps to ensure adequate liquidity in
domestic markets. Regulatory capital relief has also been provided, sustaining lending
by financial institutions to households and firms.
Monetary policy however cannot on its own improve the potential growth rate of the
economy or reduce fiscal risks. These should be addressed by implementing prudent
macroeconomic policies and structural reforms that lower costs generally, and
increase investment opportunities, potential growth and job creation. Consistently
aligning administered prices and productivity-adjusted wage setting with projected
inflation would generate important macroeconomic gains. 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 highly 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
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
MPC Statement 19 November 2020


The next statement of the Monetary Policy Committee will be released on 21 January

Monetary Committee Meetings dates for 2021:
19 – 21 January
23 – 25 March
18 – 20 May
20 – 22 July
21 – 23 September
16 – 18 November

Contact person:
Thoraya Pandy
0824168416