MPC Statement September 19th, 2019


South African Reserve Bank
PRESS STATEMENT
EMBARGO DELIVERY
19 September 2019


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since the July meeting of the Monetary Policy Committee (MPC), economic indicators
confirm weaker global economic conditions and low inflation. Central banks in
advanced economies have provided more monetary accommodation, helping to ease
global financial conditions. Downside risks from escalating trade and geo-political
tensions remain pronounced.
In the second quarter of this year, South Africa’s GDP rebounded from the contraction
experienced in the first quarter, but economic activity levels still remain weak. Monthly
inflation has been around the mid-point of the inflation target range, as food and
services inflation remains subdued.
The year-on-year inflation rate, as measured by the consumer price index (CPI) for all
urban areas, was 4.3% in August (up from 4.0% in July). Goods price inflation in
August was 3.9% (up from 3.4% in July), while services price inflation remained at
4.7%. Food price inflation rose to 3.9% (up from 3.4%), due to rising cereal and bread
MPC Statement September 19th, 2019


prices. The Bank’s measure of core inflation, which excludes food, fuel and electricity,
rose slightly to 4.3%. Producer price inflation for final manufactured goods decreased
to 4.9% in July (compared to 5.8% in June).
The
medium-term
inflation
outlook
is
largely
unchanged.
The
inflation
forecast generated by the SARB’s Quarterly Projection Model (QPM) is for headline
inflation to average 4.2% in 2019 (down from 4.4%). The projection for 2020 is
unchanged at 5.1%, and for 2021 slightly up to 4.7% (from 4.6%). 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 4.3% in 2019 (down
from 4.4%), is unchanged at 4.7% in 2020 and is slightly higher at 4.6% in 2021 (up
from 4.5%).
Electricity, food and fuel price inflation continue to shape the near and medium-term
trajectory of headline inflation. Fuel price inflation is expected to average 2.4% in 2019
and to peak at 11.8% in the first quarter of 2020. While food price inflation has
generally surprised on the downside, it is expected to peak at about 6.0% in the third
quarter of 2020. Electricity prices came out higher than expected in August, at 11.8%,
but remain in line with the forecast.
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%).
MPC Statement September 19th, 2019


The inflation expectations of market analysts in the September 2019 Reuters
Econometer survey have been revised lower to 4.3% (from 4.4%) for 2019 and remain
unchanged at 4.9% and 4.8% in 2020 and 2021, respectively.
Market based expectations implicit in the break-even inflation rate (the yield differential
between conventional and inflation-linked bonds) have remained stable since the
previous MPC. Five-year break-even rates are currently about 4.6% and ten-year
break-even rates at 5.4%.
Global GDP is expected to slow to 3.2% in 2019 and rise to around 3.5% in 2020.
While global growth remains resilient, recent indicators on trade and manufacturing
have deteriorated and a range of downside risks to growth remain. Growth in world
trade volumes has continued to decline, with trade tensions weighing on market
confidence and lowering investment. Other downside risks include geo-political
developments, 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. However, market
expectations of further accommodation appear high, creating ongoing risk of market
volatility should these not materialise.
Since the July MPC, the rand has depreciated by 4.6% against the US dollar, and by
3.0% against the euro. The implied starting point for the rand is R14.88 against the US
dollar, compared with R14.40 at the time of the previous meeting. At these levels, the
QPM assesses the rand to remain slightly undervalued. While the rand has benefited
MPC Statement September 19th, 2019


from improvements in global sentiment, investors remain concerned about domestic
growth prospects and fiscal risks.
GDP rebounded to 3.1% in the second quarter, following a decline of 3.1% in the first
quarter. The sharp quarterly rebound was caused by stronger output in nearly all
sectors, including investment and government consumption spending. However,
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 muted.
Business confidence has declined further. The Absa Purchasing Managers’ Index
came out at 45.7 points in August (from 46.3), and the RMB/BER Business Confidence
Index fell to 21 points (from 28). The SARB’s composite leading business cycle
indicator also continued to trend lower, although the coincident indicator remains
positive.
The forecast of GDP growth for 2019 remains unchanged at 0.6%. The forecasts for
2020 and 2021 have decreased to 1.5% (from 1.8%) and 1.8% (from 2.0%),
respectively, due to revisions to global growth and domestic potential growth.
The MPC assesses the risks to the growth forecast to be balanced in the near term,
but remains concerned about medium term growth and weak employment prospects.
Escalation in global trade tensions, further domestic supply constraints and/or
sustained higher oil prices could generate headwinds to growth. Public sector
financing needs remain high, exerting pressure on the currency and pushing local
bond yields higher relative to country peers. Implementation of prudent
macroeconomic policies and structural reforms that lower costs, and raise investment
and potential growth, remains urgent.
MPC Statement September 19th, 2019


The overall risks to the inflation outlook are assessed to be largely balanced. Demand
side pressures remain subdued and food, wages and rental prices are expected to
increase at moderate rates. Global inflation should remain low. In the absence of
shocks, relative exchange rate stability is expected to continue. Some upside risks to
the inflation outlook remain, in particular from fuel, electricity and water prices.
The MPC welcomes the sustained moderation in inflation outcomes and the fall in
inflation expectations of about one percent since 2016. The Committee would like to
see inflation expectations also anchored closer to the mid-point of the inflation target
range on a sustained basis.
Against this backdrop, the MPC unanimously decided to keep the repurchase rate
unchanged at 6.5% per annum.
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 assessment of 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 no changes to the repo rate. 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
MPC Statement September 19th, 2019


The next statement of the Monetary Policy Committee will be released on
21 November 2019.
Contact person:
Ziyanda Mtshali
012 399 7966