MPC Statement 17 September 2020


South African Reserve Bank
PRESS STATEMENT
EMBARGO DELIVERY
17 September 2020

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), the Covid-19
pandemic has abated in South Africa. A range of other countries however continue to
experience a rapid spread of the virus. The economic effects of the crisis have been
extensive and a recovery to pre-pandemic levels will take several years. Current
forecasts from the IMF show global gross domestic product (GDP) contracting by
about 4.9% this year, although the general economic outlook has improved
somewhat.1 Second quarter GDP outcomes for most economies have been massively
negative, as expected. At this stage, third and fourth quarter recoveries for 2020 are
expected to be robust. However, the pace of growth into 2021 could be modest,

1 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners. For 2020
this is now at -4.2% (up from -4.7% in July) and revised up to 4.7% for 2021. Based on the June update of the
World Economic Outlook, the IMF expects global growth of 5.4% in 2021.
MPC Statement 17 September 2020


depending on control of new virus outbreaks, the extent of supply and demand losses,
and future growth in investment and productivity.
Volatility in financial asset prices remains high, as virus developments and geopolitical
events continue to impact heavily on market sentiment. While capital flows to
emerging markets have generally picked up compared to the outflows experienced in
March and April, the global environment continues to reflect pronounced levels of risk
aversion.
Policy responses to the crisis have generally been robust across countries. In recent
months, many fiscal and monetary authorities have opted to wait for new data to gauge
conditions and assess the speed of economic recovery before making further
adjustments.
The Covid-19 outbreak has had major health, social and economic impacts, presenting
difficulties in forecasting domestic and global economic activity. The compilation of
accurate economic statistics has and will remain severely challenged. On 8th
September, Statistics SA released their estimate of second quarter growth in GDP and
revised the first quarter figure slightly. As expected, output was severely negative,
with seasonally adjusted and annualised quarterly GDP contracting by 51%, across
all sectors except agriculture which expanded.
The Bank now forecasts a GDP contraction of 8.2% in 2020, compared to the 7.3%
contraction forecast in July. The lower second quarter is followed by revised
projections of a stronger expansion in the third and fourth quarters of 2020.
Further easing of the lockdown has supported economic growth. High frequency
indicators generally show a pickup in economic activity from extremely low levels in
MPC Statement 17 September 2020


April and May. However, getting back to pre-pandemic output levels will take time.
With a sharp decline in investment, potential growth estimates have been lowered,
resulting in a smaller output gap over the forecast period. GDP is expected to grow
by 3.9% in 2021 and by 2.6% in 2022.2
South Africa’s terms of trade remain robust. Commodity export prices are high, while
oil prices remain generally low. The Brent crude oil price increased between July and
September, and is expected to average about $42 per barrel in 2020, rising to
$47 per barrel in 2021 and $52 per barrel in 2022.
The rand has depreciated by 14.5% against the USD since January and remains
below its estimated long-run equilibrium value, despite considerable appreciation
since June. The implied starting point for the rand forecast is R17.07 to the US dollar,
compared with R17.93 at the time of the previous meeting.
Risks to the growth outlook are assessed to be balanced, but this is tentative and open
to adjustments given the wide range of shocks hitting the economy, uncertainties
involving the effectiveness of policy, and the sensitivity of sentiment to news flow.
The exceptionally accommodative policies in many advanced economies and
improved economic outlooks 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.
The sharp rise in South Africa’s public financing needs arising from falling tax revenue
and higher spending has been financed by higher private sector savings and
borrowing from international financial institutions. Alongside SARB liquidity-

2 Compared to -7.0%, 3.8% and 2.9%, respectively, in July.
MPC Statement 17 September 2020


management operations, resident investors, including banks, have increased
purchases of sovereign bonds, helping to ease yields in recent weeks. However, the
yield curve remains exceptionally steep, reflecting ongoing credit risk associated with
high public borrowing needs.3
The Bank’s headline consumer price inflation forecast averages 3.3% in 2020 and is
lower than previously forecast at 4.0% in 2021 and at 4.4% in 2022. The forecast for
core inflation is lower at 3.4% in 2020, and remains broadly stable at 3.7% in 2021,
and 4.0% in 2022.
The overall risks to the inflation outlook at this time appear to be balanced. Global
producer price and food inflation have bottomed out. Oil prices remain low. Local
food price inflation is expected to remain contained. Risks to inflation from currency
depreciation are expected to stay muted while pass-through remains low. While there
are no demand side pressures evident, electricity and other administered prices
remain a concern. Additional exchange rate pressures could result from heightened
fiscal risks.
Importantly, expectations of future inflation continued to soften 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.4

3 Measured by the spread between the R2036 and R2048 to the R186 bonds.
4 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 be 3.3% (from 3.1%) for 2020, 4.2% (from 4.0.%) in 2021 and at 4.4% (from
4.3%) 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 3.3% for the 5-year and 5.5% on the 10-year breakeven. 15-year breakeven inflation sits at 6.4 %.
MPC Statement 17 September 2020


Despite a higher than expected inflation outcome in July and elevated levels of country
financing risk, the Committee notes that the economic contraction and slow recovery
will keep inflation below the midpoint of the target range for this year. Barring risks
outlined earlier, 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.
The implied policy rate path of the Quarterly Projection Model indicates no further repo
rate cuts in the near term, and two rate increases 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. 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. Such steps will
enhance the effectiveness of monetary policy and its transmission to the broader
economy.
MPC Statement 17 September 2020


Global economic and financial conditions are expected to remain volatile for the
foreseeable future. In this highly uncertain environment, future 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
The next statement of the Monetary Policy Committee will be released on 19
November 2020.
Contact person:
Ziyanda Mtshali
078 143 0553