MPC Statement July 18th, 2019


South African Reserve Bank

PRESS STATEMENT
EMBARGO DELIVERY
18 July 2019


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since the May meeting of the Monetary Policy Committee (MPC), near-term indicators
point to weaker-than-anticipated global economic activity. Global financial conditions
have eased, as central banks in advanced economies signaled a move towards
monetary accommodation. However, downside risks remain and are dominated by
escalating trade and geo-political tensions.
In the domestic economy, GDP contracted in the first quarter due to a combination of
supply-side and demand-side factors. Monthly inflation outcomes have stayed around
the mid-point of the inflation target range, as food and services price inflation remain
subdued. The medium-term inflation outlook is unchanged.
The year-on-year inflation rate, as measured by the consumer price index (CPI) for all
urban areas, was 4.5% in May (up from 4.4% in April). Goods price inflation was 4.2%,
while services price inflation was 4.6%. The Bank’s measure of core inflation, which
MPC Statement July 18th, 2019


excludes food, fuel and electricity, was 4.1%. Producer price inflation for final
manufactured goods decreased to 6.4% (compared to 6.5% in April).
The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) is
for headline inflation to average 4.4% in 2019 (down from 4.5%). The projections for
2020 and 2021 remain unchanged at 5.1% and 4.6%, respectively. Headline CPI
inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in
the last two quarters of 2021. The forecast for core inflation is lower at 4.4% in 2019
(down from 4.5%), 4.7% in 2020 (down from 4.8%) and is unchanged at 4.5% in 2021.
Electricity, food and fuel price inflation have shaped the trend in headline inflation. The
assumptions for Brent crude oil in the QPM have been revised down from US$69.50
to US$67 for 2019. The assumptions for 2020 and 2021 are unchanged at US$68.
Fuel price inflation is expected to average 3.2% in 2019 and to peak at 13.1% in the
first quarter of 2020. Although food price inflation has continued to surprise on the
downside, it is expected to start rising from the end of 2019 and to peak at 5.6% in the
second and third quarters of 2020.
Inflation expectations have continued to moderate. According to the Bureau for
Economic Research (BER) second quarter survey, expectations are for headline
inflation of 4.8% in 2019. Inflation expectations for 2020 and 2021 eased to 5.0% and
5.2%, respectively. Five-year-ahead inflation expectations remain unchanged at a
historic low of 5.1%.
The inflation expectations of market analysts in the July 2019 Reuters Econometer
survey have been revised lower to 4.5% (from 4.7%) in 2019 and 5.0% (from 5.2%) in
2020 and remain unchanged at 5.0% in 2021.
MPC Statement July 18th, 2019


Market-based expectations implicit in the break-even inflation rates (i.e. the yield
differential between conventional and inflation-linked government bonds) have
declined significantly since our last meeting, reflecting a firmer exchange rate and
subdued domestic and global inflation pressures. Five-year break-even rates
decreased to 4.5% and ten-year break-even rates decreased to 5.3%, the lowest level
since January 2015.
Global GDP is expected to average 3.3% in 2019 and stabilise around 3.5% from
2020. While global growth remains relatively healthy overall, recent indicators on trade
and manufacturing have deteriorated sharply and a range of downside risks to growth
remain. Growth in world trade volumes contracted for the fifth consecutive month,
declining by 2.1% in April 2019. Trade tensions remain heightened, weighing on
market confidence and lowering investment. Other downside risks include geo-political
developments 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. Recent communication by the Federal Reserve Bank and the
European Central Bank indicate that in the absence of significant shocks, monetary
policy will remain accommodative over the medium term. However, market
expectations of the extent of future central bank actions appear high, creating the risk
of significant market volatility should these not materialise.
Emerging market currencies are firmer, reflecting a combination of US dollar
weakness and shifting market sentiment. However, country specific factors remain
important, with currencies of countries with stronger macroeconomic fundamentals
having fared better.
MPC Statement July 18th, 2019


Since the May MPC, the rand has appreciated by 3.3% against the US dollar, by 2.4%
against the euro, and by 2.3% on a trade-weighted basis. The implied starting point
for the rand is R14.30 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 from improved sentiment towards riskier
assets, it underperformed its emerging market peers due to idiosyncratic factors.
Domestic growth prospects and fiscal risks rate high among investor concerns.
GDP contracted by 3.2% in the first quarter, reflecting weakness in most sectors of the
economy. The sharp quarterly decline was primarily caused by electricity shortages
and strikes that fed into broader weakness in investment, household consumption and
employment growth. Based on recent short term indicators for the mining and
manufacturing sectors, a rebound in GDP is expected in the second quarter of 2019.
Continued low business confidence remains a concern for the MPC. The Absa
Purchasing Managers’ Index averaged 46.3 points in the second quarter, remaining
below the neutral level. The RMB/BER Business Confidence Index remains
unchanged at 28 points. The SARB’s composite leading business cycle indicator
continued to trend lower.
The SARB now expects GDP growth for 2019 to average 0.6% (down from 1.0% in
May). The forecast for 2020 and 2021 is unchanged at 1.8% and 2.0% respectively.
The MPC assesses the risks to the growth forecast to be balanced in the near term
but remains concerned about longer term risks. Investment prospects will continue to
be limited in the absence of structural reforms. The escalation of trade tensions could
have further negative impacts.
MPC Statement July 18th, 2019


While some cyclical factors constrained recent GDP growth outcomes, the Committee
remains of the view that current challenges facing the economy are primarily structural
in nature and cannot be resolved by monetary policy alone. Implementation of prudent
macroeconomic policies together with structural reforms that raise potential growth
and lower the cost structure of the economy remains urgent.
The MPC welcomes the continued downward trend in recent inflation outcomes and
the moderation in inflation expectations of about one percentage point since 2016. The
Committee would like to see inflation remain close to the mid-point of the inflation
target range on a more sustained basis, with inflation expectations also anchored
around these levels.
The overall risks to the inflation outlook are assessed to be largely balanced. Demand
side pressures are subdued, wages and rental prices are expected to increase at
moderate rates and global inflation should remain low. In the absence of shocks,
relative exchange rate stability is expected to continue.
However, the impact of upside risks to the inflation outlook could be significant. Global
financial conditions can abruptly tighten due to small shifts in inflation outlooks in
advanced economies and changing market sentiment. Domestically, the financing
needs of State-Owned Enterprises (SOE) could place further upward pressure on the
currency and long-term market interest rates for all borrowers. Food, electricity and
water prices also remain important risks to the inflation outlook.
Against this backdrop, the MPC unanimously decided to reduce the repurchase rate
by 25 basis points to 6.5% per annum with effect from 19 July 2019.
MPC Statement July 18th, 2019


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 generated by the Quarterly Projection Model was for
one cut of 25 basis points to the repo rate by the end of fourth quarter of 2019. The
endogenous interest rate path is built into the growth and inflation forecast. The implied
path remains a broad policy guide which could change in either direction from meeting
to meeting in response to new developments and changing risks.
Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be released on
19 September 2019.

Contact person:
Ziyanda Mtshali
012 399 7966