MPC Statement 14 April 2020


South African Reserve Bank

PRESS STATEMENT
EMBARGO DELIVERY
14 April 2020


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since the March meeting of the Monetary Policy Committee (MPC), the Covid-19
pandemic has spread globally and its impact is being felt through all economies.
Current estimates from the IMF show global growth contracting this year by about
2.9%.1 Economic contractions are expected to be deepest in the second quarter of
2020, with some recovery expected in the third quarter of the year. The strength of
the recovery into the fourth quarter and 2021 will depend on how quickly countries are
able to open up for economic activity safely, requiring sustainable social distancing
rules, safety processes put in place by businesses and public institutions, and capacity
of hospitals to accommodate those in need. Current indications from the World health

1 Global growth in the QPM model is a trade-weighted average. For 2020 this is now at -2.6% and 4% for 2021.
MPC Statement 14 April 2020


Organisation are that the pandemic is unlikely to end quickly, with shorter, less virulent
waves hitting over time.
The uncertainties of the crisis have led to extremely high volatility in financial asset
prices, with sharp and deep market sell-offs followed by a partial recovery. At this
stage, the sustainability of that recovery remains uncertain, and global markets remain
in risk-off mode. This has implications for emerging markets and South Africa in
particular, as investor appetite for rand-denominated equities and bonds is expected
to remain weak.
Policy responses to the crisis have generally been robust, with the magnitudes
dependent on the degree of policy space available to countries. The US Federal
Reserve has taken further steps to expand its balance sheet. The European Central
Bank (ECB) has made similar commitments. Emerging and developing economies
generally have less policy space available and credit is more expensive, and for this
reason, the International Financial Institutions (the IMF, the World Bank) and others
have made available extraordinary levels of emergency financial support.
The Covid-19 outbreak will have a major health and social impact, and forecasting
domestic economic activity presents unprecedented uncertainty. With that in mind,
the Bank expects GDP in 2020 to contract by 6.1%, compared to the -0.2% expected
just three weeks ago. GDP is expected to grow by 2.2% in 2021 and by 2.7% in 2022.
South Africa’s lockdown has been extended by an additional 14 days, bringing the
total lockdown period to 35 days. Both the supply and demand effects of this extension
reduce growth and deepen it in the short-term, as businesses stay shut for longer and
households with income spend less. This will likely also increase job losses, with
MPC Statement 14 April 2020


further consequences for aggregate demand. The impacts will be particularly severe
for small businesses, and individuals with earnings in the informal sector.
Some factors will support growth, including where businesses are able to open under
the current rules, new jobs being created to service more needs under the lockdown,
and sustained government spending, both through normal operations and crisisrelated spending and programmes. The faster the global economy recovers from the
crisis, as China appears to be gradually doing now, the more positive growth spillovers
will strengthen for South Africa, including healthy price levels for commodity exports.
Nonetheless, prices for many commodities have fallen as a result of weaker demand
globally. The spot price for Brent crude oil is currently around $31 per barrel, despite
a new agreement reached by Opec and other producers to make large oil production
cuts. For our forecast, the Brent crude oil price is expected to average $42 per barrel
in 2020 and $45 per barrel in 2021, very close to the March forecast.
As noted earlier, while advanced economies conduct exceptionally accommodative
policies, global financing conditions are no longer supportive of emerging market
currency and asset values. Credit risk has risen back to 2008 levels and about R100
billion of local assets have been sold by non-resident investors. The rand has
depreciated by 22.6% against the USD since January and by 17.3% since the March
meeting of the MPC. The implied starting point for the rand forecast is R17.80 to the
US dollar, compared with R15.40 at the time of the previous meeting.
Slightly lower oil prices and sharply lower domestic growth pulls down on the inflation
forecast, while negative global sentiment and fiscal risks have led to equally
aggressive currency depreciation and upside pressure on inflation. The timing and
size of these contradictory impulses suggests that they are not perfectly offsetting,
MPC Statement 14 April 2020


with weaker inflation in the near term likely giving way to higher inflation later in the
forecast period.
The Bank’ s headline consumer price inflation forecast averages 3.6% for 2020, 4.5%
for 2021, and 4. 4% in 2022. The forecast for core inflation is lower at 3.8% in 2020,
4.0% in 2021, and 4.2% in 2022.
The overall risks to the inflation outlook at this time appear to be to the downside.
Electricity pricing remains a concern but has moderated somewhat. Risks to inflation
from recent currency depreciation are expected to be muted as pass-through is slow.
Global producer price inflation has decelerated. Lower oil prices will reduce petrol
prices in the near term. International food prices have eased and local food price
inflation is expected to remain low, in part due to higher domestic production levels.
Expectations of future inflation broadly remain around the mid-point of the band,
although market-based expectations have recently ticked up in response to the
depreciation of the currency.2
Weaker domestic growth and greater fiscal risks have resulted in a downgrade by
Moody’s credit rating agency and confirmation of a negative outlook by Fitch, a weaker
currency and higher borrowing costs for government, banks and firms. South Africa’s
risk profile has increased.
Despite this rise in country risk, the Committee notes that the more prolonged
lockdown and slower recovery creates downside risk to inflation and allows further

2 The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.4ppts to 4.4% and to .4.6% (from 5.0%) for
2021. Five-year-ahead inflation expectations also eased to 4.7% (from 4.9%). Market analysts (Reuters Econometer) expect inflation to be,
4.2% (from 4.4%) for 2020, 4.6% (from 4.7%) in 2021 and 4.5% (from 4.6%) for 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 4.7% for the 5-year and well over
6% on the 10-year breakeven.
MPC Statement 14 April 2020


space for monetary policy to respond to the virus-induced demand shock to the
economy. Barring severe and persistent currency and oil shocks, inflation is expected
to be well contained, remaining below the midpoint of the target in 2020 and close to
the midpoint in 2021.
Against this backdrop, the MPC decided to cut the repo rate by 100 basis points. This
takes the repo rate to 4.25% per annum, with effect from 15 April 2020. The decision
was unanimous.
The implied path of policy rates over the forecast period generated by the Quarterly
Projection Model indicates five repo rate cuts of 25 basis points extending into the first
quarter of 2021.
Monetary policy can ease financial conditions and improve the resilience of
households and firms to the economic implications of Covid-19. In addition to
continued easing of interest rates, the Bank has taken steps to ensure adequate
liquidity in money and government bond markets and to ease capital requirements to
free capital for onlending by financial institutions. Each of these steps make more
capital available 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. Such steps will
further reduce existing constraints on monetary policy and its transmission to lending.
Global economic and financial conditions are expected to remain highly volatile for the
foreseeable future. In this highly uncertain environment, future decisions will continue
MPC Statement 14 April 2020


to be highly data dependent, sensitive to the balance of risks to the outlook and will
seeks to look through temporary price shocks. As usual, the repo rate projection from
the QPM remains a broad policy guide which can change from meeting to meeting in
response to changing data and risks.
Lesetja Kganyago
GOVERNOR

The next statement of the Monetary Policy Committee will be released on 21 May
2020.

Contact person:
Thoraya Pandy
012 313 3066/ 082 416 8416