MONETARY POLICY
REVIEW
OCTOBER 2023
OCTOBER 2023
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ISSN: 1609-3194
Printed by the Publishing Section of the South African Reserve Bank
OCTOBER 2023
Preface
The primary mandate of the South African Reserve Bank (SARB) is to achieve and maintain price stability in the interest of
balanced and sustainable economic growth. In addition, the SARB has a complementary mandate to oversee and maintain
financial stability.
Price stability helps to protect the purchasing power and living standards of all South Africans. It provides a favourable
environment for investment and job creation and supports international competitiveness. The goal of price stability is quantified
through an inflation target, which is set in consultation with government. The target is a range of 3–6%, which has been in
place since 2000.
The SARB has full operational independence. Monetary policy decisions are made by the SARB’s Monetary Policy Committee
(MPC), which is chaired by the Governor and includes the deputy governors and other senior officials of the SARB.
The inflation-targeting framework is flexible, meaning that policymakers will seek to look through temporary shocks, thereby
avoiding excessive volatility in interest rates and economic output. The MPC takes a forward-looking approach to account for
the time lags between policy adjustments and economic effects. MPC decisions are communicated at a press conference at
the end of each meeting, accompanied by a comprehensive statement.
The Monetary Policy Review (MPR) is published twice a year and is aimed at broadening the public’s understanding of
the objectives and conduct of monetary policy. The MPR covers domestic and international developments that affect the
monetary policy stance.
The MPR is presented by senior officials of the SARB at Monetary Policy Forum meetings held at major centres across South
Africa in an effort to develop a better understanding of monetary policy through direct interactions with stakeholders.
Questions about the publication may be directed to Marlene Hugo at
OCTOBER 2023
Contents
A bumpy road to target

Boxes

Statements issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee

OCTOBER 2023
A bumpy road to target
Executive summary and
overview of the policy stance
Following a 13-month breach, headline inflation eased back
into the 3–6% target range in June 2023, and dropped to just
above the target midpoint in August. Core inflation, however,
remains high relative to the pre-pandemic trend and risks to both
headline and core inflation are elevated. The Monetary Policy
Committee (MPC) raised the repurchase (repo) rate by 50 basis
points at the May MPC meeting, taking the nominal repo rate
to 8.25%, with decisions in July and September to hold rates
steady. Despite global headline inflation slowing significantly
over the period under review, risks linger, in particular from
oil and weather-related food price developments. The
enduring stickiness in core inflation, alongside the gradual
fragmenting of global trade and finance networks, suggests
upward revisions to global neutral interest rates. Monetary
policy will remain focused on returning inflation to targeted
levels across most economies. The South African economy is
now forecast to grow by 0.7% in 2023 due to stronger than
expected investment and continued spending. Higher growth
and permanently lower inflation could be achieved sooner by
implementing energy and logistics sectors reforms, achieving
public debt sustainability and aligning administered prices with
the inflation target.
Persistent global inflation
The world economy continues its recovery from the pandemic.
Supply pressures have subsided and global inflation eased
significantly. Declining food and energy price inflation, with
some contribution from cooling demand, has helped bring
headline inflation down over the past year.1 Nevertheless,
global inflation remains uncomfortably high at a projected
6.9% in 2023, down from 8.7% in 2022. Forecasts for global
inflation in 2024 are improved, at 5.8%.2 The South African
Reserve Bank (SARB) projects inflation in the Group of Three
(G3) economies, which soared to a multi-decade high of 7.4%
in 2022, to stay elevated at 4.5% in 2023 before softening to
2.4% in 2024.3
The monetary policy response to high inflation has been
robust. As inflation outcomes exceeded forecasts in 2021, a
synchronised global monetary policy hiking cycle materialised
and strengthened through 2022, with advanced economies
1 Oil prices, however, have risen strongly over the past few
months, averaging above US$90 per barrel in September.
2 International Monetary Fund (IMF), World Economic
Outlook (WEO), October 2023.
3 The G3 comprises the United States (US), eurozone and Japan.
Percentage change over four quarters

Targeted inflation forecast*

* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%.
Sources: Stats SA and SARB
3–6% inflation target range

Midpoint

Percentage change over 12 months

Global inflation
Source: Haver

US

Eurozone

Japan

G3 policy rates

Per cent
-1

G3 policy rates*
Sources: Central banks and SARB

* Dotted lines indicate forecasts

OCTOBER 2023
aggressively tightening policy. The United States (US) Federal
Reserve (Fed) raised its policy rate sharply in 2022, hiking
in successive 75-basis-point steps four times between May
and November, contributing to a cumulative 525 basis points
increase in the Fed funds rate over the past 18 months.
The European Central Bank (ECB) raised its policy rate by a
cumulative 450 basis points up to September 2023, marking
the highest level of the policy rate since the global financial
crisis (GFC). Meanwhile, emerging markets responded early
and faster to remove monetary accomodation given relatively
less anchored inflation expectations and weaker credibility.
Brazil and Chile, for instance, raised their policy rates by
a cumulative 1 175 basis points and 1 075 basis points
respectively since early 2021 before pausing rate hikes towards
the end of 2022. South Africa’s policy rate, on the other hand,
saw a more modest cumulative 475 basis point increase since
normalisation began in November 2021.
Despite the significant moderation in headline inflation, the
pace of disinflation has been far slower than anticipated
earlier in the hiking cycle, largely because of the challenge of
balancing demand with supply. The exceptionally large and
sustained aggregate demand responses to the pandemic have
only slowly wound down, resulting in sustained high demand
for goods and services in advanced economies. Together
with low labour force participation rates, labour demand has
remained strong. With services price inflation rising, wage
growth robust and second-round effects from high energy
costs, core inflation in turn accelerated and remained elevated
(see Box 1).
Emerging markets’ inflation experiences have been similar in
terms of persistence, but with some differences in sources.
Although fiscal policies were extended aggressively in the
pandemic, transfers to households were more modest and
the build-up of savings buffers was accordingly limited, while
the post-pandemic labour markets have exhibited less strong
wage growth. Consequently, the rise in core inflation in these
economies was relatively muted, pushed along more by
imported goods prices and currency depreciation than by unit
labour costs (ULCs). Taking a wider perspective, the challenge
to inflation control in many emerging market economies
derives from the much more adverse global environment that
puts currencies and borrowing costs under prolonged and
sustained pressure.
Disinflation has proceeded at different speeds and central bank
policy decisions have consequently become less synchronised
this year. Some central banks have paused rate hikes to assess
the incoming data and fine-tune policy while those that moved
early and more aggressively to hike rates have since been
able to ease policy. Less policy synchronisation and changing
interest rate differentials between economies are perhaps
most evident in the considerable volatility in exchange rates
this year.

Eurozone

UK

US

Japan


Percentage change over 12 months

Core inflation in major advanced economies
Source: Haver
-2
-1

Brazil

Chile

India

South Africa

Hungary (rhs)
Percentage change over 12 months (both scales)

Core inflation in selected emerging markets
Sources: Central Statistical Offices

-4
-2

Per cent
Real policy rates (ex ante)*
Sources: Central banks and Consensus Economics
* Based on 2024 CPI projections
Brazil
Colombia
Russia
Hungary
Mexico
Chile
Peru
Czech Rep.
South Africa
Indonesia
Philippines
US
UK
Eurozone
India
China
Malaysia
Thailand
Poland
Japan

OCTOBER 2023
As policy tightened through 2022 and into 2023, markets
came to expect a sharp slowdown in economic activity and
a possible recession. Instead, global economic activity has
turned out stronger this year, growth forecasts are revised
higher and the probability of a recession has receded. Easing
global supply chain pressures and the resilience in services
demand, large COVID-era savings buffers, still extended
fiscal positions and falling inflation together provided a
boost to global economic momentum, in particular in the
US economy. Helped by a warmer winter and reduced gas
demand, the eurozone economy also performed much
better than initially expected. This resilience contrasts
sharply with the apparent fragility in the Chinese economy,
where growth slowed markedly in the second quarter of this
year, after a strong rebound in the first quarter.4
Despite such divergent growth trends, on balance the world
economy is stronger than was anticipated only a few quarters
ago. Accordingly, the SARB has revised higher its tradingpartner growth to 2.6% in 2023, up from the 2.0% growth
projected at the time of the April 2023 Monetary Policy Review
(MPR), with modest growth gains over the medium term.
These growth rates, nevertheless, remain well below the prepandemic trend and reflect a slow recovery in investment
and weak potential growth.5 This is likely to have far-reaching
implications for monetary policy. With low potential, even
relatively modest demand growth risks tipping output gaps into
positions of excess. While this underscores the importance of
complementary fiscal and monetary policy actions to reduce
inflation, these complementarities remain under-exploited in
most countries, leaving monetary policy to carry most of the
burden to lower inflation. As a result, more direct monetary
policy communication has had to play an important role in
lowering inflation expectations, in large part by committing to
do what it takes to hit policy targets over the medium term.
Low growth and extended fiscal positions, rising core inflation
and greater currency volatility increase uncertainty about
a global economic outlook already stretched by trade and
financial fragmentation, El Niño’s re-emergence and climate
change. Materialisation of the risks carried in these trends can
de-anchor expectations and jeopardise the ongoing global
disinflation. From a policy perspective, these developments,
alongside the stickiness of core inflation, suggest that global
neutral interest rates have risen, or will have to rise, above the
low levels of the ‘great moderation’ period. In this context,
keeping policy calibrated to low pre-pandemic global neutral
interest rate levels increases the possibility of policy error,
raising the long-run economic cost of reducing inflation.
Accordingly, global policy rates are expected to remain higher
for longer, at least until inflation and inflation expectations
return sustainably to target.
4 Slower growth in China has material knock-on effects for developing
economies, particularly commodity exporters such as South Africa.
5 Slowing investment growth is associated with weaker total factor
productivity and subdued labour productivity growth. See World
Bank, Global Economic Prospects, January 2023, pp 109–112.


SARB*

IMF

Percentage change
Global growth
* Real GDP growth in SA's major trading-partner countries
Sources: IMF WEO (Oct 2023) and SARB

2010–19 average

OCTOBER 2023
Domestic economic developments
and outlook
South Africa has grappled with persistently high inflation and
subdued growth over the review period, mirroring experiences
of much of the rest of the world. The headline inflation target
breach has been prolonged, remaining above the midpoint of
the target range from May 2021, and outside the target range
altogether for 13 consecutive months from May 2022 until
June 2023. Headline inflation subsequently eased markedly in
recent months – back into the 3–6% target range – as fuel
and food price inflation slowed and core inflation remained
contained.
Over the past year the trajectory of headline inflation was
shaped primarily by fuel, food and electricity price inflation,
with the former two largely reflecting global developments
and currency movements. Headline inflation reached a low of
4.7% year on year in July 2023 before lifting slightly to 4.8% in
August. In line with the resurgence in Brent crude oil prices,
headline inflation is expected to trend broadly sideways into
early 2024 before declining towards the midpoint of the target
range as fuel price inflation stabilises. The current forecast is for
headline inflation to average 5.9% this year, and to decline to
5.1% in 2024 before settling at the midpoint in 2025.
For much of the period under review, underlying inflation as
measured by core and trimmed mean inflation, was wedged
in the 5–6% range, primarily reflecting markedly higher global
goods inflation, exacerbated in part by the weaker rand
exchange rate. Inflationary pressures have also broadened
within the core basket, reflecting spillover and second-round
effects as well as the pass-through of costs associated with
electricity self-generation.6
Despite higher core goods price inflation, growth in the overall
core measure was softened by subdued housing inflation
and a sharp, but likely temporary, dip in transport inflation
caused by the earlier decline in fuel prices. This, alongside
more muted wage growth, helped keep services inflation
lower than expected and slowed the rise in core inflation.
Meanwhile, the output gap remained mostly neutral over the
review period but has recently shifted from being somewhat
disinflationary to modestly inflationary, consistent with the
quarter-on-quarter upside surprise in second-quarter gross
domestic product (GDP). Although core inflation may have
peaked, it is nevertheless expected to remain elevated at
4.9% this year, reflecting still rising underlying components,
and to only anchor at the midpoint of the target range by the
first quarter of 2025.
6 Evidence suggests that movements in non-core (food, fuel and electricity)
inflation cause core inflation to drift towards headline inflation, implying
that the effects of changes in non-core inflation are not temporary.
See W Simbanegavi and A Palazzi, ‘Mind second-round effects! The
effects of food and energy inflation on core inflation in South Africa’,
South African Reserve Bank Occasional Bulletin of Economic Notes
No. OBEN/23/01, Pretoria: South African Reserve Bank, June 2023.


Electricity

Fuel

Food

Core

Headline*
-2

Percentage points
Contributions to headline inflation
Sources: Stats SA and SARB

Forecasts
* Percentage change over four quarters
Percentage change over 12 months
Underlying inflation*
Sources: Stats SA and SARB
* Three-months moving average
Trimmed mean
Core

3–6% inflation target range
Midpoint

Services

Core goods

Core

Percentage change over four quarters

Core inflation components*
Sources: Stats SA and SARB

* Dotted lines indicate forecasts

OCTOBER 2023
Confidence in the projection for core inflation rests heavily
on the post-GFC experience of a more muted exchange rate
pass-through to domestic prices. More recent evidence from
the post-pandemic period, however, suggests stronger passthrough effects.7 This rise in pass-through may reflect the
sustained weakness of the rand that incentivises importers
to anticipate further depreciations and mark up prices faster
and more fully. This mark-up behaviour is given further impetus
by similar actions by competing firms, particularly in a high
inflation environment. In this context, spillovers into core prices
are likely.
Several other upside risks have strengthened in recent
months, heightening uncertainty about the precise path for
inflation. Oil prices have risen sharply recently, jumping from
an average of US$80 per barrel in the first half of the year to
above US$90 in September. Equally, inflation expectations,
although moderating, remain elevated and together with the
increased intensity of load-shedding, could feed into wages
and prices. South Africa is also likely to experience drier
weather conditions this year which could adversely impact
domestic food production, particularly the 2023–24 summer
harvest, with the effects likely exacerbated by the risks
associated with global food markets.
Turning to economic activity and output, the domestic
economy has turned out to be relatively resilient over the
past three years. After contracting by 6.0% in 2020, output
rebounded, growing by 4.7% and 1.9% in 2021 and 2022
respectively. These growth rates were stronger than projected
and meant that the return to the pre-pandemic output level
was achieved sooner, with the recovery taking the form of a
V-shape as opposed to the widely anticipated U-shape.
Despite the healthy rebound in activity levels, South
Africa’s near- and medium-term economic outlook already
deteriorated sharply in 2022 as energy availability fell and
extensive load-shedding resumed. As power rationing
escalated to unprecedented levels in the first half of this year,
forecasts for domestic growth in 2023 plummeted to near zero
and projections for growth in 2024 were also scaled back.

However, higher spending on investment and better sectoral
outcomes, especially in the second quarter, have boosted
the outlook for the year somewhat. Annual growth this year
was revised up to 0.7% as of the September MPC meeting.
While better, this growth remains well below the 1.7% achieved
over the pre-COVID-19 decade and compares poorly to the
projected current year average growth of 4.0% for emerging
markets and developing economies.
7 Pass-through has risen slightly to about 14.0% over the past few
quarters, compared with the 11.0% average over the past decade. See
J Rakgalakane and R Steinbach, ‘Has exchange rate pass-through
picked up?’ South African Reserve Bank Economic Note, forthcoming.
Per cent

Exchange rate pass-through estimates
Source: SARB

R billions

Real GDP*
Sources: Stats SA and SARB

* Dotted line indicates forecast


Percentage change
South Africa versus emerging market GDP growth*

Sources: Haver and IMF

Emerging market and

developing economies

South Africa
* Dotted lines indicate forecasts

OCTOBER 2023
The energy crisis has provided impetus to public sector
reform efforts, opening space for large-scale private sector
investment in alternative energy generation.8 While the full
benefits of these reforms are likely to materialise over a threeto-five-year time horizon, there has been significant movement
in the year to date. Embedded generation projects registered
with the National Energy Regulator of South Africa (NERSA)
have increased markedly in the first eight months of this year,
rising to 3 685 megawatts (MW) compared with 1 646 MW in
the whole of 2022.
Such primarily private sector efforts to mitigate load-shedding
have provided a boost to fixed capital formation and cushioned
business operations from the full impact of power rationing,
supporting the resilience of the economy. Household spending
also held up, expanding by 0.9% in the first half of the year,
despite the elevated inflation and high interest rates. However,
its contribution to overall economic growth has moderated
and is forecast to remain subdued over the medium term,
consistent with a slower rise in household real disposable
income amid weak productivity gains, low job creation and a
sluggish return of inflation to the midpoint.
Slower domestic growth, alongside the reversal in commodity
revenue windfalls, has, however, worsened South Africa’s
budget deficit and debt-to-GDP ratio. Spending pressures
are evident in the larger-than-budgeted wage growth this year
and the financial needs of struggling state-owned enterprises,
among other factors. Alongside higher investment and
sustained spending, the fall in South Africa’s terms of trade
back to around pre-pandemic levels is reflected in a broad
deterioration in the current account, which has now moved
firmly back into deficit. The return to twin deficits implies an
increased demand for foreign savings in a much more adverse
domestic and international environment (Box 5). Global interest
rates today are much higher than they were for many years,
highlighting the vulnerability of the currency to risk-off episodes
and the need to attract foreign savings.
In these conditions, a more rapid return to lower inflation and
interest rates would be helpful to growth. With slender margins
between sustainable supply and demand caused by weak
growth and diminished potential output, fiscal and growth
outcomes become more important in achieving lower inflation
rates. Sustainable fiscal positions would help to reduce the high
interest burdens many economies face, lowering sovereign
credit default risk and term premiums. Lower risk premiums,
in turn, support continued capital flows into savings-deficit
economies, supporting domestic currencies and reducing
exchange rate pass-through and inflation.
8 The reforms also touch other areas, including logistics.
Megawatts
Self-generation capacity registered with NERSA
* July–August
Source: NERSA


134 MW
Q1
Q2

Q3
Q4
Q1
Q2
Licensing threshold
lifted from 1 MW
to 100 MW
Licensing
threshold
removed
1 646 MW
3 685 MW
Q1
Q2
Q3
Q3*
Q4

Current account

Main Budget

Percentage of GDP


Macro balances*
Sources: National Treasury and SARB

* Dotted lines indicate forecasts

Advanced economies

Emerging markets

Fiscal balance as percentage of GDP


Fiscal developments
Source: IMF
* Dotted lines indicate averages between 2010 and 2019

OCTOBER 2023
Overview of the policy stance
Over the six-month period covered by this MPR (April–
September 2023), the MPC raised the repo rate by 50 basis
points to 8.25%. The repo rate increase occurred at the
May meeting, with the MPC opting to pause at the July and
September meetings.
Despite a cumulative 475 basis point repo rate increase since
November 2021, for most of the period inflation remained
above the policy rate, implying a broadly accommodative
stance through the normalisation phase.9 Policy only moved
into clearly restrictive territory following the May 2023 hike.
The Quarterly Projection Model (QPM) forecasts indicate that
the current level of interest rates will be sufficient to steer
inflation back to the midpoint of the 3–6% target range over
the medium term. The MPC sets its stance based on the
guidance provided by the QPM, the economic assessment of
its members, and a robust perspective of current and future
risks to the outlook and inflation trajectory. As monetary
policy operates with a long and variable lag of between three
and eight quarters, incoming data can be assessed and the
stance fine-tuned as needed to manage risks and ensure
inflation stabilises at the target.
Over the past six months, the outlook for headline inflation
shifted on the margin, with non-core (food, fuel and
electricity price) inflation underpinning much of the dynamics
and the influence of core inflation growing over time. The
core inflation trajectory remained broadly unchanged from
April 2023, except in the past few months where movements
in the core inflation basket became more pronounced.10 In
particular, core goods price inflation increased significantly,
reflecting slower deceleration in global goods inflation and
more rand depreciation.
9 The sharp reductions in interest rates in early 2020 saw household
debt-service costs fall to a record low of 6.7% in the fourth quarter
of 2021 compared with the 8.2% average of the past decade,
supporting credit extension and consumption demand. These,
however, have risen over the past few months in tandem with
interest rates and, at 8.8% of real disposable income in the second
quarter of this year, are now back to the pre-pandemic averages.
10 For 2023, core inflation was forecast at 5.1% at the time of the April MPR,
higher at 5.3% in the May MPC meeting, slightly lower at 5.2% in the
July meeting and even lower at 4.9% in the September meeting.
Per cent

Repo rate

Source: SARB

Nominal repo rate

Steady-state neutral repo


Per cent
Real and neutral real repo rates*

Source: SARB

Real repo rate

Neutral real repo rate
* Dotted line indicates forecast

Actual

Mar 2023

May 2023

Jul 2023

Sep 2023

Percentage change over four quarters

Core inflation*
Sources: Stats SA and SARB

* Dotted lines indicate forecasts

OCTOBER 2023
Services inflation, on the other hand, came out lower than
expected, mostly because of subdued housing inflation and
stronger disinflation in some services components, such as
restaurants and hotels, and transport. Meanwhile, ULC growth
came out lower than projected as nominal wage growth has
remained close to headline inflation thus far, implying a less
pronounced impact on services inflation. In part because of
a lower starting point, the near-term projection for services
inflation, at 4.4% in 2023, is substantially below the 4.9%
forecast at the time of the April 2023 MPR.
Considering non-core components, both food and fuel
inflation are seen higher while electricity inflation is projected
lower relative to the forecasts at the time of the April 2023
MPR. Food inflation took longer to peak and upon peaking,
disinflated at a slower pace than initially expected. The QPM
projects somewhat higher fuel inflation over the forecast
horizon, reflecting elevated Brent crude oil prices and a
depreciated rand exchange rate. Electricity inflation, at 15.3%
in August 2023, is marginally lower than the March projection
of 17.5%.
Taken together, these shifts resulted in a broadly unchanged
trajectory for headline inflation over consecutive MPC meetings.
This relative stability in the forecasts and the normalisation
of policy up to this point, was reflected in the broadly
unchanged QPM-implied repo rate trajectory across the three
MPC meetings.
At the May 2023 MPC meeting, the trajectories for both core
and headline inflation shifted slightly higher, while food inflation
was assessed to be sticky. Risks to domestic inflation were
assessed to the upside, with inflation expectations elevated
and load-shedding intensified. The rand exchange rate was
seen weaker over the forecast period while the pass-through
rate was assessed to have risen. The MPC also expressed
concern about spillover and second-round effects embedding
in core inflation, especially given sticky food inflation and the
broader failure to disinflate more fully. Meanwhile, global
financial conditions remained tight, presenting depreciation
risk for currencies of economies needing foreign capital, such
as South Africa. Accordingly, the MPC unanimously raised
the repo rate by 50 basis points at this meeting.
Percentage change over four quarters

Services inflation*
Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2023

Sep 2023

Percentage change over four quarters
-30
-20
-10

Fuel inflation*
Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2023

Sep 2023

Percentage change over four quarters
Evolution of inflation forecasts*

Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2023

May 2023

Jul 2023

Sep 2023

OCTOBER 2023
The backdrop to the July and September 2023 MPC meetings
included headline inflation easing back into the target range
and downward revisions to core, fuel and food price inflation
projections relative to May, reflecting better monthly inflation
outcomes. Headline inflation eased further in July, while
inflation expectations slowed somewhat in the third quarter,
suggesting that the disinflation could progress. The implied
starting point for the rand exchange rate to the US dollar at
the July and September meetings was slightly better than at
the May meeting, but nonetheless remained undervalued.
At the global level, headline inflation continued to moderate,
although core inflation showed persistence. With the other
risk factors largely unchanged relative to the May meeting, the
MPC left the repo rate unchanged at the July and September
meetings, with a split decision reflecting the high uncertainty
associated with the still-elevated upside inflation risks.
Conclusion
Despite a reduction in the initial post-pandemic inflation
surge, the global economic environment has become more
adverse. Core inflation is exhibiting unexpected persistence
and in tandem with increasing geopolitical transitions,
financial fragmentation may generate a prolonged increase
in global neutral real interest rates. Capital flows to emerging
economies, especially those running current account deficits
and expansionary policies, are at risk, potentially leading to
unusually weak and volatile currencies.
Although domestic headline inflation has returned to within the
target range over the past three months, its stabilisation at the
target midpoint is not an accomplished fact. A number of global
and domestic risks to the inflation outlook remain elevated and
few appear likely to unwind in the near future. The MPC will
continue to monitor incoming data and act appropriately to
steer inflation back to the midpoint of the 3–6% target over the
medium term.
In this context, greater policy complementarities and the
speedy implementation of structural reforms to ensure an
adequate supply of energy, solve logistics challenges and
reduce the impact of administered prices on inflation, would
provide significant economic benefits, including a further
deceleration of inflation.

Per cent
Evolution of nominal repo rate forecasts*
Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2023

May 2023

Jul 2023

Sep 2023

Per cent
Two-years-ahead inflation expectations

Source: BER

Businesses

Trade unions

All surveyed participants

Analysts
Midpoint
3–6% inflation target range

OCTOBER 2023
Box 1 From extrinsic to intrinsic inflation persistence
1 Inflation persistence as measured by the time-varying first-order
autocorrelation coefficient of the headline and core inflation series
respectively, has edged upwards in recent months, particularly for
core inflation.
2 Under the assumptions that inflation is a stationary time series process,
which is generally the case for South Africa under inflation targeting, and
that it is a first-order autoregressive process, the estimated regression
coefficient approximates the first-order autocorrelation coefficient and
can serve as a simple measure of inflation persistence. See J C Fuhrer,
‘Inflation persistence’, Federal Reserve Bank of Boston Working Papers
No. 09-14, Boston: Federal Reserve Bank of Boston, November 2009,
for more details on different measures of persistence.
3 H Pill, ‘Inflation persistence and monetary policy’, Bank of England:
ICMB Lecture, Graduate Institute, Geneva, April 2023.
4 Reasons for staggered price setting can range from such considerations
as the timing of restocking, contractual obligations, or strategic behaviour.
See for instance W De Vijlder, ‘Why inflation persistence matters’. Eco
week 22–17, 25 April 2022. BNP Paribas; and G A Calvo, ‘Staggered
prices in a utility-maximizing framework’, Journal of Monetary Economics
12(3), 1983, pp 383–398.
5 Momentum here is measured by the percentage change over three
months, seasonally adjusted and annualised, which shows the pace
at which prices are rising over the most recent three months. A key
advantage is that this method strips out base effects likely to be reflected
in year-on-year numbers. Diffusion indices show the proportion of items
in a given inflation basket (e.g. services inflation) with prices rising above
a predetermined inflation threshold (e.g. 4.5%). Considering a threshold
of 4.5%, a diffusion index above 50.0% indicates more broad-based
inflationary pressures and vice versa.
Despite headline inflation moderating from its peak of 7.8% in
July 2022, South Africa’s inflation shows signs of persistence.1, 2
Inflation persistence can be the outcome of two different dynamics,
one extrinsic and the other intrinsic.3 Persistence is extrinsic when a
succession of individually transitory inflationary shocks drives inflation
away from the target for a sustained period. This form of persistence
is, all else being equal, self-correcting: as the sequential shocks
disappear, inflation eases. Intrinsic persistence is when changes in
underlying economic behaviour generate long-lasting inflationary
impacts even after the initial impulse has subsided. Reasons for the
change in underlying behaviour can vary, from a slow transmission
of upstream supply shocks to prices, to price adjustments driven
by idiosyncratic factors.4 While monetary policy can look through
the first-round impact of supply shocks, ignoring the second-round
effects from intrinsic persistence leads to policy errors.
As in most other economies, the succession of large global and
idiosyncratic inflationary supply shocks since 2021 has generated
large spillover and second-round effects, including higher inflation
expectations.
Evaluating intrinsic inflation persistence in real time is challenging. In
the absence of real-time survey data on firms’ near- and medium-term
pricing behaviours and strategies, inflation momentum and diffusion
indices help gauge underlying inflationary pressures, particularly for
core inflation and its components.5
Services and core inflation momentum rose sharply in 2022 as
headline inflation surged during that period, and again picked up
pace in the second quarter of this year. Core inflation momentum
remains elevated above the midpoint of the target range, pointing to
persistent core price pressures. Services inflation momentum is a key
indicator to monitor over the coming months given its outsized share
in the core inflation basket (69.0%). While momentum is presently
muted, risks to services inflation remain given the high inflation
expectations and increased intensity of load-shedding.
Percentage change
Services inflation momentum
Sources: Stats SA and SARB

Over 3 months*
Over 12 months

Midpoint
3–6% inflation target range
* Seasonally adjusted and annualised


Core inflation

Headline inflation


Correlation coefficient

2015 2016
2020 2021 2022 2023
First-order autocorrelation coefficient*

Sources: Stats SA and SARB
* Five-year rolling window
Percentage change
Core inflation momentum
Sources: Stats SA and SARB

Over 3 months*
Over 12 months

Midpoint
3–6% inflation target range
* Seasonally adjusted and annualised

OCTOBER 2023
Box 2 Enhancing time consistency in monetary policy
1 See E Pirozhkova, G Ricco, C van Schoor and N Viegi, ‘Trouble every day:
monetary policy in emerging economies, a study of South Africa’, South
African Reserve Bank Working Paper Series, forthcoming.
2 In the context of this box, long-term macroeconomic stability refers to
monetary conditions that underpin stable economic growth (for example, the
MPC’s commitment to keep inflation at its target level in the long run).
3 This may be due to a change in the communication of the SARB, possibly
related to the introduction of the QPM (and the publication of the projected
repurchase (repo) rate path) in 2017 as well as the MPC’s stated preference
for inflation to stabilise closer to the midpoint of the target range.
In theory, monetary policy is measured by its ability to smooth
business cycle fluctuations and the inflation associated with them.
The conventional interest rate channel of monetary policy in South Africa
operates as effectively as it does in developed economies. Adjustments
of the short-term interest rate lead to changes in the supply of credit,
asset prices, economic activity and ultimately inflation.
In the real world, policy also needs to address a range of shocks and
uncertainties that impact on long-term economic stability and which
play themselves out over long time frames.1, 2 Hence, complexity
arises where local and international economic shocks are frequent and
significant and the policy framework is less clear. In such conditions,
markets are less able to predict changes in the policy rate, in part due
to uncertainty about the state of the economy and the role of external
shocks in the inflation forecast and policy response. From 2014, median
forecast errors in the market and a measure of short-term policy surprise
decreased, suggesting that the market better understood the Monetary
Policy Committee’s (MPC) interest rate decisions.3
What kind of information is conveyed by monetary policy decisions and
its clarity are important for market responses. Where policy decisions
emphasise long-run macroeconomic stability, favourable adjustments
in the country risk premium that reinforce the workings of the interest
rate channel of monetary policy ensue. Thus, while South African
monetary policy has never formally used ‘forward guidance’ in its
formulation, policy decisions have influenced the economy through a
more accurate expected future path of the policy rate and changes in
the country risk premium.
To sum up, communication that clarifies how monetary policy responds
to global and domestic events and promotes long-term macroeconomic
stability helps to ensure that policy is effective in reaching its objectives.
Forecast uncertainty, forecast errors
and short-term policy surprises
Sources: Bloomberg, Pirozhkova et al. (forthcoming) and SARB

Forecast disagreement

Short-term policy surprise component

Median forecast error
2015 2017 2019

2007 2009

Percentage points


OCTOBER 2023
Resilience and divergence
in the global economy
Global economic activity remained resilient in the first half of
2023, while inflation fell off its 2022 highs, raising the odds of a
soft landing for the global economy. Across countries, growth
has become increasingly divergent, with the US economy
showing significant strength, and economic activity slowing
in the eurozone and China. The outlook for global growth,
however, is laden with risks. Stubbornly high core inflation in
major advanced economies driven by services prices, together
with tight labour markets and the recent surge in Brent crude
oil prices, could keep inflation and ultimately interest rates
higher for longer. Meanwhile, the ongoing challenges in China’s
property sector, alongside weakening consumption trends,
weigh on global sentiment.
Diverging growth trends
The world economy has remained resilient amid sharply higher
global interest rates and elevated inflation, defying expectations
of more subdued growth this year. Forecasts for real global
growth this year were revised somewhat higher, and the world
economy looks set to achieve 3.0% growth in 2023.11 World
growth is projected to trough at 2.9% in 2024, before edging
up slightly over the medium term. Strong household demand,
underpinned by large savings buffers and pent-up demand
from the pandemic era buttressed the global economic
strength. Resilience has been further supported by the rotation
of demand from goods back to services, shown in more robust
services activity and considerably weaker manufacturing
activity and global trade in goods.
The outlook for global economic activity, however, has become
more uncertain as countries put in place restrictions to crossborder finance and trade. Reshoring and friend-shoring are
likely to lower productivity growth and raise the costs of supply,
slowing both economic growth and the global disinflation
currently underway.
Advanced economies are expected to grow by 1.5% this year
and by 1.4% next year, slower than last year’s robust 2.6%
expansion. Real GDP growth forecasts for the G3 economies
were revised higher for this year, but economic performance
looks increasingly divergent across countries.12 While a US
recession in 2023 now looks less likely, whether a soft landing
(an appreciable fall in inflation without a marked increase in
unemployment) can be achieved remains unclear. Much of
the resilience in the US economy can be attributed to robust
consumer demand supported by the still strong household
11 All forecasts are based on the IMF’s WEO, October 2023.
12 Between the April and October 2023 WEO, the 2023 real GDP
growth forecasts were revised higher by 0.5 percentage points for the
US, -0.1 percentage points for the eurozone and 0.7 percentage points
for Japan.

Percentage change
Jan

Mar
May
Jul
Sep
Evolution of 2023 global growth forecasts
Source: Bloomberg

Percentage of disposable income
Household savings
Sources: Haver and OECD
Advanced
economies
Emerging markets
UK
Japan
US
Eurozone
Brazil*
Colombia
Mexico
India*
South Africa
Thailand
Poland
Chile
-6
-4
-2

* Data for Brazil and India show gross savings
as a percentage of gross disposable income

Index
Global PMIs
Sources: JPMorgan and S&P Global

Services

Manufacturing
Neutral level

OCTOBER 2023
balance sheets and firm labour markets as well as strong
fiscal stimulus.13
Alongside the US, Japan’s economy also recorded strong
growth in the first half of this year, with growth for the
year projected at 2.0%, up from 1.0% in 2022. Domestic
consumption, however, contracted in the second quarter,
suggesting that pent-up demand has peaked. Growth
momentum has faded in the eurozone, with the IMF
projecting growth to be only 0.7% this year. Country
experiences have also diverged somewhat across the
eurozone. Countries with larger services sectors, such as
France and Spain, continued to expand at a healthier pace,
while economies more exposed to manufacturing and trade
activities, such as Germany, experienced sharply weaker
growth, if not outright contractions.
At a projected 4.0% growth this year, emerging market
economies will expand at a rate significantly below the
pre-COVID-19 average. This subdued growth reflects both
slower projected growth for China this year and the resulting
diminished spillover benefits to the rest of the world,
especially commodity exporters. The apparent slowdown
in China’s economy, following a brief acceleration of 9.1%
quarter-on-quarter, seasonally adjusted and annualised
rate in the first quarter of this year, suggests the boost from
the country’s reopening was short-lived.14 The softer-thanexpected economic data prompted Chinese authorities
to provide some modest monetary stimulus to boost
consumption and investment, with its main refinancing
interest rate lowered by 20 basis points since the start of the
year. However, the stimuli have yet to reflect in aggregate
consumption demand. China’s property sector remains a
drag on economic activity, with home sales falling sharply
this year. Financial stress also continues to build in the
sector, following defaults by two large property developers,
namely Evergrande and Country Garden.
Emerging market Asian economies (excluding China) are
expected to grow more strongly this year and the next.
Among the larger emerging market economies, India shows
the most resilience, with growth projected at 6.3% this year,
after expanding by 7.2% in 2022. Meanwhile, many Latin
American and emerging Europe economies are forecast to
slow sharply this year as higher interest rates take their toll on
household spending.15 Growth in sub-Saharan Africa is seen
moderating slightly this year due to a combination of tighter
domestic financial conditions, less favourable terms of trade
13 The US Inflation Reduction Act of 2022 and the US$1.2 trillion
Infrastructure Investment and Jobs Act have boosted corporate
investment spending in the US.
14 Real GDP growth slowed to 3.2% in the second quarter. Consensus
Economics projects the economy to grow at 5.0% this year and 4.5%
in 2024.
15 Fiscal transfers were limited in emerging markets and thus households
did not accumulate large savings buffers, while the labour market
recovery has not been as strong as in advanced economies.
Percentage change from quarter to quarter
2023Q3 real GDP growth forecasts

US
Canada
Eurozone
Japan
UK
Source: Bloomberg

Jul 2023

Sep 2023

Percentage change
-6
-4
-2

Real GDP growth in advanced economies
and emerging markets*
Source: IMF
Pre-COVID-19 GDP growth average (2010–19)
Advanced economies
Emerging markets
* Shaded bars indicate forecasts
Percentage change
Real GDP growth in selected emerging
markets (2023–24)*
Source: IMF
Fast growers
Slow growers
India
Philippines
Indonesia
China
Malaysia
Thailand
Mexico
Peru
Brazil
Colombia
Russia
Poland
Hungary
South Africa
Chile

EM median

Pre-pandemic average
(2010–19)

* Bars show 2023–24 average forecasts

OCTOBER 2023
and elevated inflation.16 The region’s two largest economies,
Nigeria and South Africa, are forecast to grow at 2.9% and 0.9%
respectively this year, leaving the smaller, non-commoditydependent economies to underpin the region’s growth.
While fears of a global recession have receded (for the moment),
risks to the global growth outlook remain to the downside.
Elevated interest rates could weigh on household consumption
spending as savings buffers decline or trigger financial stress.
Meanwhile, high debt levels and tighter global financing
conditions could create serious balance of payments and
debt distress challenges for emerging market and developing
economies, with the effects exacerbated by the financial and
trade fragmentations currently underway. Geopolitical tensions
and natural disasters stemming from climate change present
further downside risks.
Inflation declines steadily,
but risks remain
Inflation has slowed significantly over the past year but
remains well above central bank targets in most economies.
Global headline inflation has fallen from a peak of 9.2% in the
third quarter of 2022 to 6.2% in the second quarter of 2023,
reflecting a combination of base effects, easing supply chain
pressures, lower commodity prices and tighter monetary
policy.17 The IMF projects global inflation to fall to 6.9% in
2023 from last year’s 8.7%, and to decline to 5.8% in 2024.18
However, the recent sharp rise in Brent crude oil prices, where
prices touched US$97 per barrel around late September 2023,
up from the mid-US$70s per barrel in early July, pose a grave
risk to the current disinflation process.
While headline inflation eased appreciably over the past year
in advanced economies, underlying inflation as measured
by core inflation, remained persistently high. High and sticky
services price inflation largely explains the inflation persistence
in these economies, reflecting strong services demand and the
large weight of services in inflation baskets. Housing inflation,
for instance, has been a major contributor to the persistence in
US core inflation and continuing pressures in this market could
further slow the disinflationary trend across major economies
(Box 3). Unusually tight labour markets in advanced economies
will keep core inflation elevated through their effects on ULCs.
Meanwhile, core inflation has fallen relatively faster in emerging
markets, mostly due to the earlier and stronger tightening of
monetary policy, fewer excess savings to support demand and
(in some cases) a recovery of currencies against the US dollar.
16 The region is now projected to grow at 3.3% this year, compared with
3.6% at the time of the April 2023 MPR, before accelerating to
4.0% in 2024.
17 Average global inflation is based on a measure from Haver.
18 Concensus forecasts, however, see global inflation averaging 6.0%
this year and slowing to 4.3% in 2024.
Percentage change over 12 months

Core inflation
Sources: Haver and SARB

Advanced economies
Emerging economies (excluding China)
Emerging economies
Percentage change over 12 months

Headline inflation*
Source: IMF

* Dotted lines indicate forecasts
Emerging markets
Advanced economies
Percentage change over 12 months

Rental inflation in major advanced economies
Source: Haver

Eurozone
UK
US

OCTOBER 2023
With inflation elevated and more persistent, major global
central banks have remained steadfast in their determination
to rein inflation in. Central banks have adopted a more datadependent approach, raising interest rates (at times with large
steps) as incoming data pointed to inflation becoming more
entrenched. Communications by global central banks have
emphasised the need to stay the course, implying policy
rates could remain higher for longer. Meanwhile, the era of
synchronised monetary policy has ended, with some emerging
markets such as Brazil and Chile easing policy to stem further
rises in real rates amid faster declines in inflation. Nonetheless,
this is unlikely to change the theme of ‘higher for longer’ policy
rates in emerging markets.
The broad consensus that global neutral rates would remain
around their pre-COVID-19 levels appears to have shifted.
Instead, elevated uncertainty regarding the path for neutral
rates, especially in the short to medium term, has emerged,
in part spurred by the ongoing fragmentation in global finance
and trade as well as the many upside risks to inflation that
characterise the global economy, as discussed in the
Executive Summary.19 A rise in the global neutral rates would
require policy rates to either increase further or remain higher
for longer, particularly in emerging markets.
Conclusion
The world economy looks set to achieve moderate growth and
somewhat lower inflation in 2023. While the odds of a global
recession have diminished somewhat, diverging economic
outcomes contribute to uncertainty and market volatility.
Inflation remains a major policy concern globally. Although
goods price inflation has eased in much of the world, services
inflation remains elevated, keeping core inflation and ultimately
headline inflation from falling more sharply and threatening
to de-anchor inflation expectations. Persistent inflation and
elevated inflation risks will keep global interest rates higher for
longer, presenting challenges to emerging markets that require
global savings inflows and threatening currency stability, with
knock-on effects to domestic inflation.
19 Whereas some institutions (authors) contend that neutral rates will return
to their pre-pandemic levels once the multiple shocks of the past three
years have washed off, others argue that the new equilibriums
would require a higher r-star. See for instance, IMF WEO, Chapter 2,
April 2023: The natural rate of interest – drivers and implications for
policy; Riksbank, ‘Are low global real interest rates set to continue?’,
25 November 2021; Megan Green, ‘Central banks shouldn’t
relax about R-star just yet’, Financial Times, 3 July 2023.
Percentage change over four quarters

Inflation in advanced economies*
Source: Bloomberg Consensus

US
Eurozone
* Dotted lines indicate forecasts
UK

OCTOBER 2023
Box 3 A sticky services story
1 Housing inflation in advanced economies forms a large part of the inflation
basket. In the US it is about 35.0% of the consumer price index (CPI)
basket. In the eurozone and the UK housing inflation accounts for 15.0%
and 12.9% respectively.
2 D A Dias and J B Duarte, ‘Monetary policy, housing rents and inflation
dynamics’, International Finance Discussion Papers No. 1248, May 2019.
3 See ‘Why rent prices dropped for the third straight month’ by Creconsult,
28 March 2023. The CPI rent component lags measures of market rents
by approximately a year, according to the Federal Reserve Bank of Dallas.
4 Zillow has been consistently raising its projections for the national Zillow
Home Value Index (ZHVI) in recent months, now projecting a 5.5%
increase over the next year. The number of available listings for sale has
fallen notably. The main factor behind this upward adjustment was the
constrained inventory conditions.
5 E Zentner and J Egan, ‘Navigating a different housing cycle: housing
market summary – US & Canada’, Morgan Stanley Research: Global
Insight, 17 July 2023.
6 J Eisenschmidt, J-F Ouvrard and B Skarica, ‘Navigating a different housing
cycle: housing market summary – Europe’. Morgan Stanley Research:
Global Insight, 17 July 2023.
Core inflation, which excludes the volatile components of food and
fuel, has generally remained sticky across advanced economies.
Core goods inflation has eased markedly in the United States (US) but
remains high in Europe from the pass-through of higher energy prices.
Services inflation, in contrast, remains acutely elevated, with housing
inflation especially shaping the trajectory of core inflation.
Housing/rental inflation1
Sharply higher housing inflation is an outcome of the interplay between
property market conditions and contractionary monetary policy that
influences housing prices, home ownership costs and rental prices.2
In the US, rental inflation surged to 8.3% in March 2023 before easing
slightly to 7.3% in August. Owners’ equivalent rent (OER), which
gauges the implicit rental payments for owner-occupied houses,
shows a similar trend. The slight moderation in rental inflation in recent
months is due to the increased supply of rental properties over the
past year and is expected to persist over the next few quarters.3
The US housing market, however, remains relatively tight, with
house prices showing strong gains lately and construction slowing
as reflected in falling housing permits and completions.4 This
combination presents upside risks to rental inflation as rising house
prices and interest rates push more people to rent while the supply of
rental properties is slow to increase.5
In contrast to the US, house prices in the eurozone and United
Kingdom (UK) are projected to continue lower and weaken further
in accordance with a sharp decline in household demand for loans.
Recent research suggests that Europe’s housing market trough might
not be reached until at least mid-2024, which should favour a sharper
moderation in housing inflation.6
Percentage points
Contributions to US core inflation
Source: Bureau of Labor Statistics

-1

* Percentage change over 12 months
Core goods
Services
Core*
Percentage points
Contributions to eurozone core inflation
Source: Eurostat

-1

* Percentage change over 12 months
Core goods
Services
Core*
Index: Jan 2018 = 100
US house prices
Source: Haver

FHFA House Price Index (purchase only)
Freddie Mac House Price Index
Case-Shiller Home Price Index

OCTOBER 2023
Non-housing services inflation
Excluding housing, services inflation also remains high in advanced
economies, underpinned by strong activity in recreation, travel,
transportation and restaurants. The release of pent-up consumer
demand when businesses have struggled with labour shortages, has
driven and sustained inflation for this category.7 Real wage growth in
the non-housing sector has remained elevated and above productivity
growth in the US.8 Europe exhibits similar labour market dynamics,
with wage growth picking up significantly in recent quarters and
correlating highly with non-housing services inflation.
High services inflation and tight labour markets in most advanced
economies present ongoing risks to core inflation.
7 Non-housing services (NHS) inflation is more important to core inflation in
the eurozone and UK than in the US. NHS inflation in the US contributed
1.2% to core inflation in July (compared to 3.2% from housing). It is more
pronounced in the euro area and UK, contributing 5.2% and 5.8% to core
inflation respectively.
8 The Federal Reserve Bank of Chicago shows that unit labour cost (ULC)
growth in the NHS has exceeded pre-pandemic levels over the past year.
See G Barlevy and L Hu, ‘Unit labour costs and inflation in the nonhousing service sector’, Federal Reserve Bank of Chicago, March 2023.
Percentage change over four quarters
Wages and non-housing services inflation
Sources: Haver and OECD

US wages
Eurozone wages
UK wages
Q1
Q2

Q3
Q4
Q1
Q2
UK NHS
US NHS

OCTOBER 2023
Global financial markets
developments: higher, longer
While synchronised policy rate increases by central banks
appear to have ended, market attention has turned to longterm rates and their prospects. In the US, long-term rates
are at 16-year highs. The US dollar has gained against most
currencies recently, after trending weaker for much of the
past year; the Chinese yuan has depreciated markedly. In
South Africa, markets anticipate the policy rate to be near its
peak, with cuts likely late in 2024. Meanwhile, fiscal dynamics
have exerted further upward pressure on the longer end of
the yield curve.
The past six months have seen two remarkable shifts in global
financial markets. Returns on 10-year US government bonds
have climbed to around 4.6%, yields last seen in 2007. At the
same time, the renminbi exchange rate has weakened past
7 to the US dollar, also the highest rate since 2007. Both events
point to deep structural changes.
In the US, higher long-term borrowing costs reflect greater
demands on resources – not least through large fiscal deficits
and elevated debt levels – as well as modestly higher inflation
expectations.20 The prospect of ‘secular stagnation’, which
shaped interest rates over much of the past 10 years, now
appears remote.
Despite higher longer-term rates, the US yield curve remains
inverted, reflecting cyclically high policy rates aimed at
stabilising inflation. This inversion has now also lasted longer
than any previous such episode. Markets assess that the
Fed’s hiking cycle is complete or nearly complete, with the Fed
Funds rate likely to be somewhat lower next year. A resilient
US economy has nonetheless supported a consensus that
rates will remain at relatively high levels for an extended period.
In turn, this has helped the dollar strengthen again recently,
after weakening over much of the past 12 months.
To some extent, developments in China are the mirror image
of those in the US. COVID-19 restrictions were lifted later in
China than in most other economies, and the growth rebound
from reopening has been weaker than expected. While
much of the world has been struggling with high inflation, in
China inflation is sharply lower, with consumer prices falling
in July. Policymakers have implemented moderate rate
cuts and a gradual, controlled depreciation of the renminbi.
The structural shift is nonetheless clear, with the onshore
exchange rate about 15.0% weaker in September 2023 than it
was at the start of 2022.
20 S Arslanalp and B Eichengreen, ‘Living with high public debt’.
August 2023. p 25.
documents/9749/Living_With_High_Public_SA_Sep_2_2023.pdf

Per cent
US government bond 10-year yield
2007 2009

2013 2015

Source: Bloomberg


RMB per US$
Chinese renminbi exchange rate

Source: Bloomberg

OCTOBER 2023
For emerging markets, a general implication of these
developments is likely to be higher average interest rates
for many countries. The upward shift in the US yield curve
obliges other borrowers to pay more for funding as they must
compete with this global benchmark rate. At the same time,
slower growth in China weakens a source of export demand,
with consequences for exchange rates as well as risk
premiums – particularly in commodity exporters. This helps
explain the ‘higher for longer’ theme for emerging market
rates, even as central banks with high real rates adjust rates
down where possible.
South African financial
market developments
South Africa experienced heavy non-resident capital outflows
during the first half of the year, resulting in the rand reaching
its lowest-ever nominal exchange rate to the US dollar, at
R19.80, on 25 May. The drivers of these outflows were
primarily local, including geopolitical factors (particularly the
Lady R controversy) and intensified load-shedding. The broad
emerging market grouping saw better performances. Around
the middle of the year, inflows to South Africa resumed, bringing
the year-to-date experience more in line with recent averages.
Despite sustained outflows, South African equities have largely
tracked the performance of peer markets during the year. The
MSCI South Africa Index nonetheless dipped sharply in the
third quarter of 2023, losing close to 5.0% compared with
losses of just under 2.0% for the broad MSCI Emerging Market
(EM) benchmark.
The government bond yield curve has steepened further during
the year, despite higher short-term rates. Typically, curves
are flattest (or even inverted) at the peak of a hiking cycle as
markets expect short rates to be lower, on average, in future,
with those lower rates then factored into longer-term yields.
Market expectations currently indicate that the repo rate is near
its peak, at 8.25%, with one more 25-basis-point hike possible
and rates then somewhat lower by late 2024. Nonetheless,
the longer end of the curve has risen further during 2023.
For instance, the R2030 yield has gained over 100 basis points
to 11.0%, while the R2044 has climbed around 170 basis
points to 13.1%.
Cumulative portfolio flows
Jan
Mar
May
Jul
Sep
Nov
Source: SARB


R billions
Per cent
Years to maturity
Government bond yield curve
Source: Bloomberg

2 Jan 2023
28 Apr 2023
31 Aug 2023
29 Sep 2023
Per cent
Forward rate agreements

Source: Bloomberg
1X4
2X5
3X6
4X7
5X8
6X9
7X10
8X11
9X12
12X15
15X18
18X21
21X24


31 Jul 2023

31 Aug 2023

29 Sep 2023

OCTOBER 2023
These pressures mainly reflect fiscal strains. Tax revenues
have disappointed, in line with declining commodity prices,
while an uptake of floating-rate notes and non-competitive
tenders (non-comps) has also fallen short.21 To help meet
funding needs, issuance of Treasury bills was increased in
August, from R12.45 billion to R14.8 billion.
Since late July, there has also been a marked decline
in spread of the benchmark 3-month Johannesburg
Interbank Average Rate (Jibar) rate over the policy rate.
For the first six months of 2023, this rate averaged 25 basis
points above repo; that spread has subsequently narrowed to
around 9 basis points.
This compression commenced with the ‘unchanged’ decision
at the July MPC meeting. In part, the compression in the
spread is consistent with the market conviction that the repo
rate will not rise much further, if at all.
A smaller Jibar-repo spread is also likely related to the new
surplus-based monetary policy implementation framework
(MPIF). In theory, short-term rates should be nearly flat at the
policy rate, out to the next MPC meeting.22 This reflects low
risk in money markets as well as minimal term premiums over
short durations.
Domestic monetary operations
The surplus-based MPIF has now been in operation for just
over a year. As discussed in the previous MPR, the liquidity
surplus has been built up to around R80 billion, from an initial
average surplus of about R50 billion, following the drawdown
of the National Treasury Sterilisation Deposit Account (NTSDA).
This process was completed in March 2023. Subsequently,
the supply of excess reserves has been permitted to fluctuate
in a wide range – between R60 billion and R100 billion – with
the liquidity position on any given day mainly determined by
routine monthly fluctuations in demand for notes and coin.
In the interbank market, a gap has developed between
unsecured and secured rates, with unsecured rates below
secured rates. Although secured borrowing is typically cheaper,
given that the borrower provides security and is therefore less
risky, the large exposures framework (LEX) introduced shortly
before the MPIF reform, has increased banks’ demand for
21 Non-comps provide primary dealers with an option to acquire bonds,
on Thursdays, at the yields from the Tuesday auctions. If prices rise
between Tuesday and Thursday, the option is in the money and primary
dealers will generally exercise it. The opposite is true if prices fall between
Tuesday and Thursday. This system provides an incentive for banks to
function as primary dealers, making a market in government bonds.
22 For example, see Bank of England, ‘The Bank of England’s Sterling
Monetary Framework’, June 2015. p 4.
media/boe/files/freedom-of-information/2016/sterling%
20monetary%20framework%20june%202015.pdf
Offer
Allocated

Under-allocation
R millions

Monthly bond issuance
30 Jun
31 May
30 Apr
31 Aug
30 Sep
31 Jul
Source: SARB
-40 000
-20 000


R billions

Mar May Jul Sep Nov
Liquidity requirement
Source: SARB


Jan

NTSDA
drawdown
Shortage system
MPIF
transition
Mar May Jul Sep Nov
Jan

OCTOBER 2023
secured lending.23 Unsecured trading volumes, which were
approximately equal to secured volumes during 2022, have
declined to just under a third of secured trading volumes. Rates
on unsecured overnight lending have averaged around repo
less 10 basis points. By contrast, secured rates appear to have
settled closer to repo – averaging repo less 2 basis points,
for instance, in recent months. These outcomes are consistent
with prior expectations, before the MPIF reform, that a tieredfloor system would see interbank rates at modestly negative
margins to repo.24
One year since the reform, there is now adequate data to
consider the distribution of reserves. In choosing a new MPIF,
the SARB opted for a tiered-floor system where banks can
earn the policy rate on deposits at the SARB up to certain
limits, instead of a pure floor without such limits. The tiered
system was chosen to prevent excess reserves from becoming
concentrated in a few banks, by incentivising those with large
reserve surpluses to lend those in the interbank market. This
incentive is created through the SARB paying a lower rate
(repo less 100 basis points) on reserves in excess of quotas.
The data show the distribution of reserves has become less
concentrated since the MPIF reform. The share of reserves
held by the big five banks has moderated slightly, and that
of smaller banks, including both domestic and international
banks, has risen.
Overall, beyond enhancing the transmission of monetary
policy, the new MPIF has allowed the SARB to manage its
liabilities more effectively: the stock of foreign exchange
(FX) swaps accumulated in 2020 has been matured and the
FX-implied rates have converged on the policy rate, as have
general repo rates. The NTSDA drawdown was also completed
without disrupting markets.
23 The LEX limits exposures of banks to any individual counterparty
to a fixed percentage of capital. The Prudential Authority (PA)
directive introducing LEX, published in April 2022 specifically
identified South Africa’s concentrated interbank market as a risk.
See Prudential Authority, Direct 3/2022, especially section 2,
available at:
publication-detail-pages/prudential-authority/pa-deposit-takers/banksdirectives/2022/D3-2022-Directive-Large-exposure-requirements
24 Banks with spare quota capacity were expected to require an
incentive to take funds from banks with excess liquidity. Given
that SARB quotas pay repo, a bank paying repo on the interbank
market and receiving repo on quota would make no profit for its
trouble. In the secured market, most trades have occurred at
repo recently, with some trades at repo less 10 basis points.

Secured

Unsecured

Weighted average


Per cent (spread to repo)

Jan
Mar
May
Jun
Jul
Aug
Interbank rates*
Sources: Strate and SARB

Nov Dec
Feb
Apr
* 20-day moving average

Per cent
Distribution of reserves

Source: SARB

Big five banks

Other banks

OCTOBER 2023
Box 4 Sovereign bond markets: more supply
than demand
1 The takeup of non-comps, at 40.0% average of available non-comps
in the current fiscal year, is broadly in line with the pattern observed
in the past two years but remains below the averages for 2019
and 2020.
Over the past six months, capital flows to emerging markets
have dried up in response to heightened risk aversion linked
to geopolitical concerns, financial and trade fragmentation
and generally weak economic growth. Funding conditions
for sovereign borrowers have deteriorated. In South Africa
idiosyncratic factors such as declining terms of trade and tax
revenue under-shooting, the greylisting by the Financial Action
Task Force (FATF) and aggravated load-shedding have made
funding conditions even more challenging. This is evidenced by
South Africa’s elevated long-term bond yields as well as by the
underperformance of some debt financing instruments.
Public borrowing requirements are mostly met through South
African government bond (SAGB) issuances to resident and nonresident investors. South Africa’s funding costs rose sharply in
recent times and the sovereign yield curve steepened, as shown
in the 10-year and 25-year SAGB yields rising by 57 basis points
and 121 basis points respectively. New bonds (R2053 and I2031)
have also been issued at higher coupon rates compared with
previous years, reflecting a rising supply and softening demand.
In addition, less cash is raised from issuances compared to prior
year averages.
In the current fiscal year, cash raised at the weekly fixed-rate
bond auction is equivalent to about 84.0% of the auction size,
compared with an average of 95.0% in prior years. Although
inflation-linked bonds have performed relatively well so far this
year, non-competitive tenders (non-comps) and the floating rate
note (FRN) have fallen short.1 Appetite for the FRN appears to
have waned, with allocations reaching only 48.0% of what was
targeted in the auctions. About 90.0% of the funding raised
through government bonds in the 2022/23 fiscal year was used
to cover debt-service cost, estimated in the 2023 Budget to
reach R397 billion in the 2025/26 fiscal year (and almost double
the R204 billion incurred in the 2019/20 fiscal year).
In the wake of the pandemic, the small underperformance in
bond issuance of the past two fiscal years was easily made up
in revenue overruns. In an environment where capital flows are
harder to attract and greater discrimination among sovereigns
is in play, the ‘higher for longer’ theme for global interest rates
and the increased sensitivity of portfolio flows to risk-adjusted
real interest rate differentials present challenges to policymaking
in emerging markets.
Percentage of SAGB issuance
Debt-service cost*
Sources: National Treasury and SARB

* Dotted line indicates forecast


Auction size

Actual cash raised per auction
R billions
Funding raised in weekly auctions
Source: SARB

Per cent
Emerging market yield curves
Years to maturity
Source: Bloomberg

South Africa
Mexico
Poland
Romania
Brazil
Colombia
Hungary

1 2

5 6 7 8 9 10 15 20 25 30

OCTOBER 2023
Real economy: a modest upside
surprise, challenges remain
The first half of 2023 saw real GDP growth outpace very low
expectations. The modest upside surprise reflects higher
investment and a somewhat better-than-anticipated response
to load-shedding. Nevertheless, growth remains very weak,
with the economy expected to expand by just 0.7% this year
and rising to 1.1% over the medium term, significantly less
than the pre-COVID-19 decade’s average rate of 1.7%. These
subdued growth rates indicate the ongoing constraints such
as inadequate electricity and logistics supply that have eroded
the economy’s productive potential.
Recent economic developments
Despite unprecedented rolling blackouts in the first half of this
year, the domestic economy grew by 0.9% year on year in the
first six months of 2023. The first quarter outcome of 0.4%
quarter on quarter was slightly better than the SARB projection
and Reuters’ median forecast.25 This was followed by another
above-expectation outturn of 0.6% in the second quarter.
The rebound in activity in the first quarter of 2023 was more
broad-based than in the second quarter, when four out of 10
sectors subtracted from total output. The better performance
in the first two quarters saw the SARB revise higher its growth
forecast for the year to 0.7%, from 0.2% at the time of the April
2023 MPR.
Strong performances by the agriculture, transport and
construction sectors, that advanced at 8.2%, 5.9% and 4.0%
respectively on a year-on-year basis in the first half of 2023,
underpinned growth.26 As in the past two years, agriculture
benefitted from yet another favourable rain season, with 2023
marking the second-highest crop harvest in recorded history.
Domestic travel and freight transport expanded over the
period, while the construction sector received a boost from
the energy-related investments by firms and households.
25 The SARB expected growth of 0.2% and the Reuters median -0.2%
in the first quarter.
26 Growth has been volatile on a quarter-on-quarter basis. Agriculture
contracted by 11.9% in the first quarter of this year but expanded
by 4.2% in the second quarter. The transport and construction
sectors both posted positive growth of 1.1% in the first quarter but
contracted by 1.9% and by 0.4% respectively in the second quarter.

2022 level exceeded by May 2023
Cumulative load-shedding
Jan
Mar
May
Jul
Sep
Nov
Sources: ESP (app), Eskom X (formerly Twitter) account and SARB


Gigawatt hours
Percentage change from quarter to quarter
Q1
Q2
Q3
Q4

Gross domestic product*
Source: Stats SA
* Seasonally adjusted

Q1
Q2

Mining
Agriculture
Electricity
Percentage points
Contributions to GVA
Q1

Q3
Q2
Q4
Q1

Q2
Source: Stats SA
Trade
Transport
Total*
* Percentage change from quarter to quarter

Other
Finance
Manufacturing

OCTOBER 2023
The modest growth in manufacturing (0.9% year on year)
reflects the combination of declining energy supply and base
effects from the flood-afflicted performance of the sector in
2022.27 Mining also disappointed, contracting by 1.0% in the
first half of the year, weighed down by the ongoing electricity
supply challenges, the sharp moderation in commodity prices
as well as sharply weakened logistics capacity.28 Unsurprisingly,
the electricity sector performed the worst (-6.6% year on year),
in line with the record-high load-shedding over the period.
While mining and manufacturing are energy intensive and were
hard hit in the plunge into heavy load-shedding late in 2022 and
the first two quarters of this year, they may nonetheless have
become somewhat more resilient to load-shedding, especially
during the lower stages. Load curtailment for some highintensity energy users, which is predictable for users, could
also help explain their better performance over the past six
months.29 It is notable, however, that much of the surprise GDP
performance in the first half of this year reflects stronger growth
in the less-energy-intensive services sectors such as finance
and community services. These sectors, alongside agriculture,
have also underpinned the faster return of aggregate output to
its pre-pandemic level. However, with six of the 10 sectors still
below their pre-pandemic activity levels, held back largely by
the energy and logistics supply constraints, GDP has struggled
to rise much above the 2019 output level.
Despite growth remaining subdued, the labour market has
realised job gains, with over a million additional people
employed in the first half of 2023 compared with the same
period in 2022.30 Employment now has, by and large, recovered
to pre-crisis levels.31 The utilities and construction sectors
have experienced relatively stronger employment gains,
rising by 30.9% and 9.3% year on year respectively in the first
half of this year, likely reflecting the increased activity in the
alternative energy space. Although it ticked slightly lower, the
unemployment rate remains elevated at 32.6% in the second
quarter of 2023.

27 The sector has performed significantly better on a quarter-on-
quarter basis, with growth rates of 1.5% in the first quarter and of 2.2%
in the second quarter.
28 On a quarter-on-quarter basis, mining expanded by 1.4% and by 1.3%
in the first and second quarter respectively. Nonetheless, mining
remains 9.0% below its 2019 output level.
29 Load curtailment is load reduction obtained from customers on instruction
from the Eskom System Operator. Most of the customers on curtailment
are classified as Key Industrial Customers (>100GWh/annum) and fall within
the industrial (40.0%) and mining (50.0%) sectors. They constitute
30–40% of Eskom sales.
30 On a quarter-on-quarter basis, employment increased by 1.6% in the first
quarter and by 1.0% in the second quarter.
31 According to the Quarterly Labour Force Survey, as of the second quarter
of this year, employment has recovered to the level achieved in the first
quarter of 2020. The Quarterly Employment Statistics data suggest
formal employment is still about 2.0% below pre-pandemic levels.
2023H1 as a percentage of 2019 average level*
Gross value added by industry
* Weights in brackets
Source: Stats SA

Agriculture
Mining
Manufacturing
Electricity
Construction
Trade
Transport
Finance
Community and
social services
GVA

Number of people (millions)
Working-age population
Source: Stats SA

Not economically active
Unemployed
Employed

Working-age population
Labour force

OCTOBER 2023
Even with the job gains, real total compensation declined by
1.8% year on year in the first half of 2023 as high inflation
eroded the compensation gains.32 Similarly, real disposable
income declined slightly in both the first and second quarters of
this year. Nevertheless, household consumption expenditure,
spurred by credit demand and savings drawdowns, expanded
by 0.9%.
On a quarter-on-quarter basis, household consumption
declined in the second quarter, with contractions in all
spending categories except for services. The decline was led
by lower spending on food, beverages and tobacco, followed
by fuel and power, reflecting the pressure on households from
elevated food and energy prices. Low-income households, for
whom these two categories constitute the bulk of their total
outlay, remain particularly vulnerable. Meanwhile, spending
on services, which comprise more than 50.0% of total outlays
by households, was fuelled in part by higher domestic travel
and tourism. This, in turn, has supported spending in the
restaurants and hotels subcategory, which recorded consistent
positive growth over the past four quarters. Further impetus
has come as an unintended consequence of load-shedding,
where restaurant dining and take-aways serve as convenient
substitutes to home-cooked meals during power outages.
Turning to investment, gross fixed capital formation grew at
a robust 6.0% year on year in the first half of 2023, driven
by private sector spending on machinery and equipment.
Investments in energy self-generation have helped to mitigate
production losses from power outages. Alongside private
investment, public sector capital spending has also supported
gross fixed capital formation in recent quarters. This trend
is expected to continue, as reflected in the Nedbank capital
expenditure report for the first half of 2023 that shows that
the community, social and personal services sector holds the
lion’s share (R45.3 billion of the total R86.58 billion, annualised)
of the announced investment projects so far this year.33
32 Nominal total compensation grew by 4.6% in the first half of the year.
On a quarter-on-quarter basis, it grew by 3.7% in the first quarter
and by 0.6% in the second quarter.
33 The Nedbank Capital Expenditure Project Listing H1 2023.
Percentage change over 12 months
Jan

Mar May Jul
Real credit extended to households
Source: SARB

Sep Nov Jan Mar May Jul Sep Nov

* Weights in brackets
** Percentage change from quarter to quarter
Percentage points
Contributions to personal consumption expenditure*
Q3
Q4
Q1
Q2
Source: Stats SA
Services (51.5%)
Durables (9.8%)
Non-durables (30.0%)
Semi-durables (8.7%)
Total**


Percentage points
Contributions to gross fixed capital formation
Q3
Q1
Q1
* Percentage change from quarter to quarter
Sources: Stats SA and SARB
Private
Public
General government
Total*
Q3
Q1

OCTOBER 2023
Growth outlook
Shifts in the intensity of load-shedding present one major risk
to the growth outlook, but there are others. Beyond electricity
outages, economic activity will continue to be underpinned by
household consumption spending – the largest component
of gross domestic expenditure (GDE) – as well as investment.
Although household spending is likely to remain subdued
due to higher economic uncertainty, continued moderation
in inflation should lift real disposable income and, alongside
credit extension, aid household consumption.34 Accordingly,
real spending by households is forecast to grow by 0.7% and
by 1.0% in 2024 and 2025 respectively.
Investment growth over the medium term will be supported by
both the private and public sectors. In the private sector, much
of the boost to investment is expected to come through the
renewable energy investment activities. The cumulative capacity
of projects registered with Operation Vulindlela has risen from
around 4 000 MW in March 2022 to over 10 000 MW so far
this year. These projects are at various stages of development,
implying a sustained flow of investment spending over the
coming years. With respect to the public sector, the 2023
Budget allocated R903 billion for infrastructure investment,
with more than 70.0% of this amount earmarked for transport
and logistics, energy as well as water and sanitation. However,
the historical trend of the public sector underspending on
capital budgets remains a key downside risk, while rising debtservice costs could reduce resources available for government
infrastructure projects.35
The SARB projects total investment to rise by 7.7% in the
current year and to average 4.8% over the medium term,
contributing 1.1 percentage points to GDP growth in 2023 and
an average of 0.7 percentage points in the outer years of the
forecast horizon.
While much focus has been directed at electricity supply
inadequacies, logistical bottlenecks are also a serious drag on
growth. Logistical challenges continue to strain the country’s
export performance, especially for mining, and potentially raise
the cost of imports, adding to domestic inflation and reducing
export competitiveness for manufactured goods. Increased
investment, more competition and improved security for
the sector can enhance efficiencies and raise productivity.
In this regard, the recent constitution of a National Logistics
Crisis Committee is a welcome first step.
34 Consumers have the capacity to absorb more credit as household
debt as a proportion of disposable income, at 62.1% in the second
quarter of 2023, remains below its long-term average of 68.3%.
35 Underspending on government capital budgets is approximately
R184 billion over the past five fiscal years. See 2023 Budget Review.
Total investment
Inventories
Residual
Total exports
Percentage points
Contributions to GDE


* Percentage change
Sources: Stats SA and SARB
Total imports
GDP*
Household consumption
Government consumption
Forecasts
Megawatts
Embedded generation projects
Source: Operation Vulindlela


No
date
Index 2021Q1 = 100
GDP and structural constraints
Sources: Stats SA and Transnet National Port Authority

GDP
Electricity produced
Total cargo handled at SA ports
Q1
Q2

Q3
Q4
Q1
Q1
Q2
Q3
Q4
Q2

OCTOBER 2023
At a more fundamental level, growth over the medium term
will be determined by the extent to which the electricity supply
constraint is relaxed. This, in turn, will depend on the speed with
which Eskom can sustainably improve the energy availability
factor (EAF) from its own plants, the pace at which renewable
energy projects are connected onto the national grid as well as
the uptake of smaller-scale self-generation from households
and businesses. As and when more of these structural energy
solutions materialise, South Africa’s energy supply constraint
will progressively become less of an obstacle to economic
activity. In the meantime, the SARB’s assumptions on loadshedding over the medium term remain unchanged relative to
the April 2023 MPR. Accordingly, the projected growth in GDP
and potential output remain unchanged at 1.0% and 1.1% in
2024 and 2025 respectively for the former and 0.8% and 1.0%
respectively for the latter.
Meanwhile, the contribution of growth to inflation has
increased, albeit marginally, with the output gap shifting
from being neutral to being slightly inflationary over the
forecast horizon. That demand has become inflationary at
growth rates around 1.0% starkly shows the extent to which
structural bottlenecks are constraining monetary policy’s role
in the economy.
Macro balances
Current account and its drivers
South Africa’s current account balance is now firmly within prepandemic norms, with the second quarter of 2023 marking five
consecutive quarters of deficit. The current account balance
averaged -1.6% of GDP in the first half of this year, compared
with 0.4% in the same period last year. The deterioration in the
current account balance mostly reflects the weakening in the
trade balance on the back of falling commodity export prices,
and is despite the marked improvement in the services,
income and transfer (SIT) account, which has normalised
closer to its longer-term average of around -3.4% of GDP in
the first half of 2023.36 The current account deficit is expected
to widen to 2.0% of GDP this year and to deteriorate further
to 3.4% by 2025.
The trade balance recorded an average surplus of 1.0% of
GDP in the first half of 2023, a sharp decrease from the 4.8%
surplus of the same period in 2022. The decline reflects smaller
surpluses in the mining sector and wider manufacturing sector
trade deficits. The continued normalisation of South Africa’s
36 The improvements recorded in the first half of 2023 compared
with the first half of 2022 reflect an improvement in net
income receipts from -2.7% of GDP to -1.2% of GDP, due
mainly to an improvement in net dividend receipts.
Megawatts
Installed rooftop solar*
Source: Eskom
* Estimated maximum


Mar
May
May
Jul
Sep
Nov
Jan
Mar

Percentage of GDP
Index: 2015 = 100
Current account and terms of trade*
Source: SARB

-6
-4
-2

Terms of trade (rhs)
Current account balance

* Dotted lines indicate forecasts
R billions
Trade account
Source: SARB


Total imports

Total exports

OCTOBER 2023
commodity export prices, alongside logistical constraints that
limit export volumes, has reduced the net export receipts for
the sector, while the manufacturing sector trade deficit has
been driven by net imports of machinery and equipment as
well as vehicles. The result has been a marked deterioration in
the terms of trade over the past eight quarters.37
Fiscal balances
While tax revenues have come under strain due to the reversal
in the commodity revenue windfalls of the past two fiscal
years, spending has been maintained.38 Additional spending
pressures have strengthened as public sector compensation
increased more than expected and debt-service costs jumped
by 19.3% year on year in the first four months of the fiscal year.
These revenue and spending dynamics have resulted in a main
budget balance of -2.7% and a primary balance of -0.1% for
the first quarter of the 2023/24 fiscal year, a turnaround from
the primary budget surplus recorded in the first quarter of
2022/23. For the full fiscal year, the SARB projects the primary
balance to deteriorate to -0.7% of GDP before improving
slightly to -0.3% in 2024/25 and further to 0.3% in 2025/26.
While the 2023 Budget projected debt to stabilise at 73.6%
of GDP in 2024/25, several risks have materialised since the
tabling of the Budget. An additional R37.4 billion is required to
finance the new wage agreement in 2023/24, and this will form
part of the baseline to be caried forward in subsequent years
of the medium term and beyond. Other risks include weaker
GDP growth than was expected at the time of the Budget
and commodity prices that have fallen more steeply than was
anticipated, both of which adversely impact revenues.
Conclusion
While domestic economic growth has been better than
expected, confidence and output in the economy remain
anaemic, with the economy expected to expand by just
0.7% in 2023, rising to 1.1% by 2025. The trajectory of GDP
growth (and potential growth) going forward will be determined
largely by the pace at which structural reforms in the energy
and logistics sectors materialise. Reforms in other sectors,
including product and labour markets, would further buoy
potential growth, bringing South Africa in line with peers.
37 The slight improvement in the first quarter of 2023 happened
on the back of declining oil prices and deflationary international
wholesale prices, but this reprieve was short-lived.
38 The SARB Index of Commodity Prices fell for the seventh consecutive
month in July (-36.0% year on year) reflecting the persistent
global economic uncertainty, sufficient coal stockpiles in Europe
and slower-than-expected economic recovery in China.
Percentage change from previous year
Tax revenue 2023/24 (Q1)*
-40
-20

PIT (38.8%)
CIT (18.2%)
VAT (27.1%)
Fuel levy
(net) (6.0%)
Other (9.0%)
Total
* Relative weights in brackets
Source: SARS
Percentage of GDP
Budget balances
Source: National Treasury


Main Budget Q1
Primary Budget Q1

OCTOBER 2023
Box 5 The slope fails to yield
1 See J W Fedderke, ‘The South African-United
States sovereign bond spread and its association
with macroeconomic fundamentals’, South African
Reserve Bank Working Paper Series No. WP/20/09,
Pretoria: South African Reserve Bank, July 2020.
2 Fiscal dynamics affect long-term interest rates through
their impacts on expected future short-term rates, inflation
expectations and risk premiums. See V Tanzi and M Lutz,
1991. ‘Interest rates and government debt’, Finance
and Development, December 1991 and L Soobyah and
D Steenkamp, ‘Term premium and rate expectation
estimates from the South African yield curve’, South
African Reserve Bank Working Paper Series No. WP/20/03,
Pretoria: South African Reserve Bank, June 2020.
3 Simple regressions reveal that a one percentage point
deterioration in fiscal balances or increase in the debt
ratio pushes yields up by around 6 to 10 basis points.
These estimates are in the same range as those found
for emerging economies. See, for instance, S Ardagna,
F Caselli and T Lane, ‘Fiscal discipline and the cost
of public debt service: some estimates for OECD
countries’, The BE Journal of Macroeconomics, 2007;
S Zhou and D McMillan, ‘Macroeconomic determinants
of long-term sovereign bond yields in South Africa’,
Cogent Economics and Finance 9(1), January 2021.
4 The rise in bond yields varies from the 10-year bond to
the 30-year bond, within the 9 to 12 basis point range.
South Africa’s sovereign yield curve has steepened sharply over
the past decade, with medium- to longer-term bond yields on
average rising from 8.0% to 11.0%, despite lower inflation. This
atypical outcome can be attributed to a public debt level that has
increased steadily in a deteriorating global environment for capital.
The ratio of debt to gross domestic product (GDP) reached
71.4% in fiscal year 2022/23, from just 26.0% in 2008/09.1, 2
The marked rise in South Africa’s debt has seen debt-service
costs soar to 15.4% of total government spending in 2022/23,
from just 8.6% in 2008/09. Debt sustainability concerns have
manifested in lenders demanding increased risk compensation
(i.e. higher risk premiums) for holding long maturity sovereign
bonds. In 2023 alone, South Africa’s debt has increased by
about 11 percentage points, while long bond yields have risen
by 100 basis points, consistent with the empirical evidence from
simple regressions of yields on fiscal metrics.3
Further evidence on the cost-raising effect of worsening fiscal
metrics is provided by Bayesian vector autoregression (BVAR)
estimates that show long-term bond yields rising by between
9 and 12 basis points for every percentage point increase in
fiscal deficits.4 The impulse response functions from the BVAR
show that an increase in the debt-to-GDP ratio results in an
initial slowdown in growth that worsens the fiscal position further.
The rand depreciates because growth weakens and as the
risk premium and inflation expectations rise. These dynamics
highlight the way in which fiscal policy can impact negatively on
price stability.
As long bond yields increase and become more sensitive to
fiscal developments, they become less responsive to monetary
policy. Rising short-term interest rates and declining inflation
should flatten the yield curve by lowering the long end, reflecting
the expected lower short-term interest rates in the future.
This, however, has not been the experience for South Africa.5
Reducing public debt to sustainable levels can deliver a triple
dividend, namely lower cost of capital, reduced debt-service
costs and lower inflation.

5 See L Soobyah and N Viegi, ‘Can National Treasury
do contractionary monetary policy?’, South African
Reserve Bank Working Paper Series No. WP/22/10,
Pretoria: South African Reserve Bank, August 2022.

OCTOBER 2023
Basis points

Response of bond yields to a fiscal shock*
Source: SARB
Quarters
-10
-5

* The upper and lower dashed lines indicate
the confidence intervals
Per cent

Response of inflation expectations to a fiscal shock*
Source: SARB
Quarters
* The upper and lower dashed lines indicate
the confidence intervals


Yields (per cent)
Long-bond yield and debt
Gross debt as percentage of GDP

Sources: Bloomberg and SARB

Yields (per cent)
Long-bond yield and fiscal balance
Budget balance as percentage of GDP
Sources: Bloomberg and SARB
-15
-10
-5

-20

OCTOBER 2023
Price developments:
a trickier landing
Headline inflation returned to the SARB’s 3–6% target range in
June 2023 before easing further to 4.7% in July 2023, its lowest
level in two years. Deflating fuel and decelerating food price
inflation, together with the cumulative repo rate increases, have
underpinned the decline in headline inflation. Despite the strong
disinflation over the past few months, stabilisation at the midpoint
of the target range will likely be slower due to relatively sticky core
inflation, elevated inflation expectations and emerging inertia in
non-core inflation. Headline inflation is forecast to average 5.9%
in 2023 and to settle at the 4.5% midpoint from the second
quarter of 2025. Risks, however, remain tilted to the upside amid
rising Brent crude oil prices, a weaker rand exchange rate and
drier weather conditions this year.
Domestic headline inflation improved over the past six months.
In June 2023, headline inflation fell below 6.0% for the first time
since April 2022, and declined further to 4.7% in July before
edging slightly higher to 4.8% in August 2023. The deceleration
in headline inflation was due mainly to a marked slowdown in
goods price inflation which was supported by lower outcomes
in fuel-, and more recently, food inflation. Goods inflation, which
averaged 9.9% in 2022, slowed from the second quarter of the
past year, and is now forecast to average 7.3% in 2023. Within
the goods basket, fuel has been in deflation since June 2023,
reflecting a combination of lower Brent crude oil prices in the
first half of the year and base effects, while food inflation has
also moderated markedly, benefitting from softer global food
prices as well as base effects. However, oil prices have climbed
strongly in recent months, slowing the fuel price deflation.
Meanwhile, food inflation is forecast to remain elevated at
10.4% this year, adding to the expectation of headline inflation’s
gradual return to the 4.5% midpoint.
Core inflation has remained generally sticky, hovering around
5.0% for several months before easing slightly in recent
months. While it is projected to peak this year, consistent with
the decline in the percentage of core items inflating at rates
above the 4.5% midpoint, core inflation is expected to disinflate
rather slowly, with the trajectory mostly shaped by core goods
inflation. As a result, headline inflation’s sustained return to the
midpoint of the target range is projected to take some time.
Oil prices and fuel inflation
Oil price dynamics over the past few quarters explain most
of the disinflation in headline inflation thus far. The moderation
in Brent crude oil prices, which started from the second half
of 2022, continued into 2023, albeit at a slower pace. Brent
crude oil prices averaged around US$80 per barrel in the
first half of this year but have paced higher in recent months,
averaging above US$90 per barrel in September. The SARB
expects oil prices to average US$82 per barrel in both 2023

Percentage change over 12 months (both scales)

Components of headline inflation
Source: Stats SA

Food and NAB

Headline

Fuel (rhs)


Percentage points
Contributions to change in headline inflation
Jul
Sep
Nov
Jan
Mar
May
Jul
Sources: Stats SA and SARB
Electricity
Fuel
Food and NAB
Core
Headline inflation*
* Percentage change from month to month


US$ per barrel

Evolution of oil price forecasts
Source: SARB
MPC meetings

Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
Apr
May
Jul
Sep
Nov

Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
May
Jul
Sep
Nov

OCTOBER 2023
and 2024, mostly on tighter supply amid output cuts by the
Organization of the Petroleum Exporting Countries (OPEC) and
its allies. Rising global oil prices feed directly into domestic fuel
inflation, with the impact intermediated by movements in the
rand exchange rate. With the global economy more resilient
than previously forecast and geopolitical tensions persisting,
risks to oil prices are assessed to the upside.
Administered price inflation
Administered price inflation averaged below the midpoint of
the target range at 3.9% year to date, down from 14.0% in
2022. However, this marked slowdown in administered price
inflation does not represent a structural shift in its drivers, but
rather is mostly due to sharply lower fuel inflation (currently in
deflation). After peaking at 56.2% in July 2022 and contributing
14.8 percentage points to administered price inflation in that
month, fuel inflation has decelerated acutely, reaching -11.7%
in August 2023. Administered price inflation is expected to
average 4.6% and 4.2% in 2023 and 2024 respectively.
The headline administered price inflation measure is distorted
by the fuel component which incorporates the impact of global
oil prices as well as movements in the rand exchange rate, both
of which are volatile and not regulated. A better measure of
administered fuel inflation should strip out the basic fuel price
(BFP) – the component directly impacted by global oil prices
and the rand exchange rate. SARB computations suggest
that administered price inflation excluding the BFP (i.e. the
regulated components, namely fuel taxes, levies and margins)
has averaged 5.9% year to date and is forecast to average
6.5% over the medium term.
An important component of administered prices, electricity
price inflation, about doubled this year, increasing to 15.3%
in August 2023, from 7.9% in August 2022. This continues
a trend where the electricity price index has more than
quadrupled since 2009 compared with a doubling in the
headline consumer price index (CPI) over the same period.39
Part of the sharp increases reflects the attempt to move to
a more cost-reflective electricity tariff regime after decades
of uneconomically low electricity prices. The trend of aboveinflation electricity price rises is expected to continue over the
medium term. The SARB projects increases of 13.4% and
10.9% in 2024 and 2025 respectively. Risks to electricity price
inflation are to the upside, particularly considering that Eskom
has been running its diesel generators well above the NERSAapproved load factor.
39 See Box 2 in the April 2023 MPR.


Assessment rates

Water

Electricity

Education


Petrol

Diesel

Other

Administered prices*


Percentage points
Contributions to administered price inflation

* Percentage change over 12 months
Sources: Stats SA and SARB

Administered price inflation (excluding fuel)

Administered price inflation
-10
-5

Percentage change over 12 months
Administered price inflation
Sources: Stats SA and SARB

Percentage change over 12 months

Electricity prices*
Sources: Stats SA and SARB

Actual

Mar 2023

Sep 2023
* Dotted lines indicate forecasts

OCTOBER 2023
Inflation for other administered components, including water
tariffs and property rates, also increased at rates above the
upper limit of the inflation target range, coming in at respectively
9.6% and 8.4% in August 2023 (from respectively 8.1% and
4.3% a year earlier) as higher electricity price increases have
spilled over, increasing the costs of some municipal services.
High wage costs may also explain the sharp increase in
administered prices. The inflation rates for electricity and water
will remain in force until June 2024.
Food and non-alcoholic
beverages inflation
After peaking in March 2023, food and non-alcoholic
beverages (NAB) price inflation moderated to below double
digits in July 2023, the first time since July 2022. Food and NAB
inflation eased to 9.9% in July before slowing further to 8.0%
in August, marking five consecutive months of deceleration
in inflation for this component. The slowdown in domestic
food price increases is due to favourable global and domestic
factors. Global agricultural commodity prices have softened
markedly, reflecting lower fertilizer prices and improved supply,
along with base effects. On the domestic front, lower input
costs and more favourable weather conditions have helped
to ease price pressures, particularly for vegetables and root
crops. Although the expectation is for food and NAB inflation
to continue to moderate through the second half of 2023, it
will likely remain elevated due to domestic idiosyncrasies such
as load-shedding and rand weakness as well as the recent
pickup in global oil prices.
The recent easing in food price pressures has generally
been broad-based, but the slowdown stemmed largely from
softer bread and cereals as well as meat inflation.40 Although
still elevated closer to 10.0%, bread and cereals inflation has
moderated strongly since the start of the year, declining from
21.8% in January 2023 to 9.9% in August as base effects and
the lagged impact of softer global commodity prices started
to filter through to the domestic market. Favourable domestic
production conditions have contributed to a bumper crop,
easing price pressures somewhat. The domestic price impacts
of bumper harvests, however, tend to be tempered by the
shifts from import parity to export parity pricing and vice versa,
given South Africa’s strong integration into global agricultural
markets. Meanwhile, geopolitical tensions, the increasing
likelihood of drier, El Niño-induced weather conditions and
grains export restrictions by major producers such as India
could see bread and cereal inflation remain higher for longer or
even rise further. The SARB’s forecast is for bread and cereals
inflation to average at 14.0% in 2023 and to ease into the target
range in the first quarter of 2024.
40 These two components have a collective weight of 50.1% in the
food and NAB basket.

Actual

Mar 2022

Sep 2022

Mar 2023

Sep 2023
Percentage change over four quarters

Food and NAB inflation*

* Dotted lines indicate forecasts
Sources: Stats SA and SARB
-5

Large-weight food components

Source: Stats SA

Vegetables

Milk, cheese and eggs

Bread and cereals

Meat

Food and NAB
Percentage change over 12 months
-8
-4

Percentage change over four quarters
Bread and cereals inflation*
Sources: Stats SA and SARB

* Dotted lines indicate forecasts

Actual

Mar 2022

Sep 2022

Mar 2023

Sep 2023

OCTOBER 2023
Price inflation for meat has slowed markedly since it peaked
at 11.4% in February 2023. Meat inflation eased back into
the target range in July before declining sharply to 3.6%
in August, underpinned by beef and poultry disinflation,
reflecting somewhat softer farm-level price increases as
well as reduced demand for prime cuts of meat in colder
months. Beef inflation has moderated more than poultry
inflation, indicating the differing price drivers across these
subsectors. For instance, consumption patterns vary
across the subsectors, and so do production systems
and processes as well as the impact of trade policies.41
Meat inflation is expected to average 6.5% in 2023.
Vegetables inflation rose sharply over the past year as excessive
rains and load-shedding adversely impacted yields. After
peaking at 23.1% in April this year, inflation for this category
remains elevated at 16.6% in August and is projected to average
16.7% this year. Risks at the farm level, including the impact
of load-shedding on irrigation and refrigeration as well as poor
road infrastructure, have kept inflation for this category high.
The SARB expects vegetables inflation to decelerate markedly,
returning to the target range by the first quarter of 2024.
Looking ahead, food and NAB inflation is expected to average
10.4% in 2023 before easing to 5.2% in 2024. However,
El Niño-related weather conditions and persistent load-shedding
present material upside risks to the food inflation outlook.
41 The anti-dumping duties on chicken imports have been reinstated after
a year-long reprieve and are expected to add to poultry inflation
in the near term.
-2

Percentage change over four quarters
Meat inflation*
Sources: Stats SA and SARB

* Dotted lines indicate forecasts

Actual

Mar 2022

Sep 2022

Mar 2023

Sep 2023

Consumer food price inflation (September 2023 forecasts)
Percentage change over four quarters, March 2023 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2012–22*
2022*
2023*
2023Q1
2023Q2
2023Q3
2023Q4
2024Q1
2024Q2
Food and non-alcoholic beverages


* Annual average percentage change
Sources: Stats SA and SARB

OCTOBER 2023
Core inflation
The dynamics of core inflation over the past year have been
shaped mostly by the developments in core goods prices.
Elevated global goods inflation, alongside a depreciated rand
exchange rate, has kept inflation in exchange rate-sensitive
core goods above the 6.0% upper limit of the inflation target
range, exerting upward pressure to core goods inflation and
core inflation. Although services inflation has also risen, the
climb was less pronounced, helping to slow the rise in core
inflation. The QPM forecasts core inflation to rise to 4.9% in the
current year before gradually sliding back to the midpoint of the
target range by 2025.
Services inflation has surprised to the downside, averaging
4.4% year to date with the same outturn projected for the year,
up from 3.9% in 2022. While some components of the services
basket, such as medical insurance, have inflated at rates well
above the 4.5% midpoint, the subdued housing inflation has
moderated the increase in overall services inflation.42 Services
inflation has also benefitted from real ULCs that have remained
subdued thus far and the sharp drop in transport inflation in
recent months. Risks, however, remain to the upside amid a
tightening rental market, rising global oil prices and still elevated
inflation expectations. Services inflation is forecast to average
4.6% in 2024 and to anchor at the midpoint of the target range
in 2025.
After averaging at 5.0% in 2022, core goods inflation is
projected higher at 6.3% this year. This is almost double its
five-year average of 3.2%. As alluded to earlier, this sharp
increase reflects the effects of a weaker rand exchange
rate together with generally elevated global goods prices.
In particular, the domestic prices of large-weight exchange
rate-sensitive core goods such as alcoholic beverages and
tobacco as well as vehicles have shown persistent inflation.43
However, global goods price inflation has eased somewhat
as supply chains have normalised. The benefits of declining
global goods inflation are expected to filter through to the
domestic market over the coming months, more so if the
rand exchange rate stabilises. The SARB projects core goods
inflation to ease to 5.2% in 2024 and to end the forecast
period slightly below the midpoint.
42 Medical insurance has averaged 7.7% year to date, up from 4.3% in 2022.
Medical schemes have applied steeper price increases in 2023 on the
back of increasing cost of care and the return of medical claims to
pre-pandemic levels.
43 These two account for nearly 53.0% of the weight in the core goods
inflation basket.
Percentage points
Contributions to core inflation
* Percentage change over 12 months
Sources: Stats SA and SARB

Core goods
Services
Core inflation*

Percentage change over 12 months

Services inflation

Sources: Stats SA and SARB

Services (excluding housing)

Services

Housing


Purchase of vehicles

Alcoholic beverages and tobacco

Core goods
Percentage change over 12 months

Large-weight core goods components
Source: Stats SA

OCTOBER 2023
Medium-term inflation outlook
Within the QPM, the medium-term path of inflation reflects
the dynamics of its underlying drivers, namely inflation
expectations, the real effective exchange rate of the rand, the
output gap and ULCs. These underlying determinants are
key to closing the gap between projected inflation and the
preferred 4.5% midpoint of the target range.
Inflation expectations are a key determinant of the future path
of inflation and serve as a guide for price and wage setters in
the economy (Box 6). Since the April 2023 MPR, the Bureau for
Economic Research (BER) inflation expectations have drifted
sideways, with the two-years-ahead inflation expectations
ticking up to 5.6% in the second quarter of 2023 from 5.5%
in the first quarter, but declining to 5.3% in the third quarter.
The rise in inflation expectations was likely due to higher
food inflation and the increased intensity of load-shedding,
while the recent decline may reflect the sharp moderation in
headline inflation over the past few months. Elevated inflation
expectations pose a risk to services- and thus core inflation,
and ultimately headline inflation. The SARB’s QPM projects
(blended) inflation expectations to decline to the midpoint over
the forecast period.44
Medium-term inflation dynamics are also influenced by
movements in the rand exchange rate, which can worsen
or lessen the impact of imported inflation. The rand has
remained volatile since the April 2023 MPR, reflecting various
global and domestic factors.45 The starting point for the
rand per US dollar exchange rate at the September MPC
meeting was R18.45 (R17.82 at the March MPC meeting).
The rand is, however, projected to appreciate marginally to
R18.22 over the forecast period.46 In real terms, a rand
exchange rate undervaluation of 6.9% is forecast in 2023. The
real rand is projected to appreciate over the outlook period,
mainly underpinned by declining domestic inflation, leaving
it undervalued by just 1.2% in 2025. The rand exchange rate
remains inflationary throughout the forecast period.
The output gap captures the impact of demand pressures
on headline inflation. A negative output gap is disinflationary
(demand falls short of supply) while a positive output gap is
inflationary. The expansionary monetary and fiscal policy
stances since the COVID-19 pandemic have helped to stabilise
44 The blended model is calculated using a combination of the QPM’s model
consistent expectations and surveyed expectations. Blended inflation
expectations are more forward-looking and consistent with the model’s
inflation target.
45 These include global markets volatility, marked softening in
commodity export prices, global economic surprises, loadshedding, policy uncertainty and the fiscal stance.
46 The key driver of the exchange rate within the model is the interest
rate differential between South Africa and the G3 economies with the
domestic interest rate adjusted for country risk premium. To this end,
the elevated level of the risk premium limits the extent to which the
currency could benefit from the prevailing interest rate differentials.


BER two-years-ahead

Blended

Model consistent
Per cent

Inflation expectations*
Sources: BER and SARB

* Dotted lines indicate forecasts
Midpoint

Actual

Mar 2023

Sep 2023
Implied rand/US$

Exchange rate forecasts*
Source: SARB

* Dotted lines indicate forecasts


Mar 2023

Sep 2023
Percentage of potential output

Output gap estimates
Source: SARB


OCTOBER 2023
the economy by bolstering demand, thereby limiting scarring
in the economy. More recently, however, amid more binding
supply constraints due mainly to load-shedding and relatively
strong demand, the SARB has normalised monetary policy to
limit the extent of build-up of demand pressures. The QPM
indicates that demand and supply conditions over the forecast
horizon are broadly balanced, albeit slightly inflationary.
The output gap is expected to average 0.2% in 2023, and to
average 0.3% in both 2024 and 2025.
The enhanced QPM assesses inflationary pressures from the
labour market by using a combination of the real ULC gap
(deviations of the productivity-adjusted real wage from its
equilibrium level) and nominal ULC growth, which indicates
whether inflationary pressures are the result of wage increases or
productivity declines.47 Wages are forecast to rise this year and
over the medium term at rates above the average level observed
since 2018, mainly reflecting indexation to higher inflation
outcomes in 2022 and the staggered real wage clawback.48 In
real terms, wages are expected to increase by 0.4% over the
47 A measure of the extent to which the cost of labour per unit of output
exceeds productivity.
48 The SARB forecasts nominal salaries to increase by 5.4%, 5.9% and 5.4%
in 2023, 2024 and 2025 respectively.


Actual

Mar 2023

Sep 2023
Percentage change over four quarters

Unit labour cost forecasts*
Source: SARB
-6
-4
-2

* Dotted lines indicate forecasts
Headline inflation (September 2023 forecasts)
Percentage change over four quarters, March 2023 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2011–22*
2022*
2023*
2023Q1
2023Q2
2023Q3
2023Q4
2024Q1
2024Q2

Annual average percentage change
**
CPI excluding food, non-alcoholic beverages, fuel and electricity
***
Combines actual rentals and owners’ equivalent rent
Sources: Stats SA and SARB

OCTOBER 2023
forecast period, which is low by historical standards.49 However,
with GDP growth projected to remain sharply lower over
the forecast period, productivity growth is seen markedly
weaker, pushing ULCs slightly higher.50 Nevertheless, the
real ULC gap does not close, implying the labour market will
remain mildly disinflationary, in turn helping to keep services
inflation muted.
Conclusion
Headline CPI inflation has moderated since the April 2023 MPR,
benefitting from strong goods disinflation, especially fuel and
food disinflation, as well as tighter monetary policy. The further
deceleration towards the 4.5% midpoint of the target range
is, however, likely to be slow due to the fading base effects
and somewhat sticky core inflation. Upside pressures to core
inflation are reflected in still elevated survey-based inflation
expectations and a weak rand, with further risks emanating
from load-shedding. The recent pickup in global oil prices
and expected drier weather conditions add to inflation risks.
Headline inflation is projected to average 5.9% in 2023, down
from 6.9% in 2022, and to only settle at the midpoint of the
target range in the second quarter of 2025.
49 Real wages are forecast to grow by -0.5%, 0.7% and 0.8% in 2023, 2024
and 2025 respectively.
50 Productivity growth is forecast to average 0.7% in 2023, and 1.0% and
0.8% in 2024 and 2025 respectively, while ULC growth is projected
at 4.7%, 4.9% and 4.6% in 2023, 2024 and 2025 respectively.

OCTOBER 2023
Box 6 Do expectations add up to persistence?
1 The BER-surveyed inflation expectations are the most
comprehensive expectations data in South Africa,
covering business, labour and financial analysts.
2 Inflation expectations are considered biased if they systematically
either underestimate or overestimate actual inflation.
3 In this box ‘rational’ should be interpreted to mean that decisionmakers are able to use all the available and relevant information
efficiently and are therefore able to make accurate forecasts. Early
attempts to include expectations in models (adaptive expectations)
relied on updating inflation forecasts based on historical inflation and
historical forecast errors. Rational expectations assume that decisionmakers make use of all available information and that this makes
their expectations forward-looking. Today, rational expectations have
evolved to include various reasons for imperfect adjustment, but the
assertion is still that these agents are forward-looking to some extent.
4 They both overestimated current year, one-year-ahead and twoyear-ahead inflation roughly two-thirds of the time since 2000, and
for five-year-ahead average inflation almost 90.0% of the time from
2011 to 2017 (the period over which this data were collected).
5 The mean and standard deviations of forecast errors have
tended to be lower for financial analysts compared with those
for business. See M Reid and P Siklos, ‘Rationality and biases:
insights from disaggregated firm-level inflation expectations data’,
South African Reserve Bank Working Paper Series No. WP /23/07,
Pretoria: South African Reserve Bank, August 2023.
Inflation expectations summarise economic agents’ beliefs about
the likely future trajectory of inflation and they often act on those
beliefs when setting prices or wages. As a result, central banks
accord an important role to inflation expectations in their assessment
of underlying inflation pressures. An important source of inflation
expectations data for South Africa is the Bureau for Economic
Research’s (BER) inflation expectations survey.1
Inflation expectations data, however, typically display some degree
of bias, which may be a result of respondents relying on their own
personal experiences of rising prices rather than the information from
movements in the generalised price level to form their expectations
about future inflation.2 Understanding the extent to which inflation
expectations are ‘rational’ (forward-looking) versus ‘adaptive’
provides insight into the dynamics of inflation, in particular, its
persistence.3
Although both the BER business sector and financial analysts
inflation expectations have, on average, tended to overestimate
inflation (thereby causing inflation persistence), analysts have tended
to be closer to actual inflation outcomes.4, 5 Combining business,
analysts, (and union) inflation expectations alongside model consistent
expectations as is done in the SARB’s Quarterly Projection Model
(QPM), should moderate the impact of the persistence embodied in
inflation expectations on inflation forecasts.

When forecasting inflation, financial analysts and business are
sensitive to different types of economic shocks, with the former
influenced mainly by external crisis events, while business is more
responsive to domestic developments.6, 7 Over the past decade,
the precision of inflation forecasts of both financial analysts and
business has risen, perhaps reflecting the generally low and
stable inflation over this period. Understanding the sources of
the forecasting errors can help improve the targeting of central
bank communication and ultimately increase the rationality of
inflation forecasts.
6 This is in line with the international literature on subjective
expectations, which finds that people are more reliant on their
own experience of price changes than aggregate measures
when reporting their inflation expectations. See for instance,
M Weber, F D’Acunto, Y Gorodnichenko and O Coibion, ‘The
subjective inflation expectations of households and firms:
measurement, determinants, and implications’, Journal
of Economic Perspectives 36(3), 2022, pp 157–184.
7 Over the period analysed (2000–22), when forecasting
inflation at the one-year horizon, financial analysts fail the
rationality test most clearly in 2008–09 and 2011–13 (aligning
with the global financial crisis and eurozone sovereign debt
crises), whereas for business this occured in 2014 (at the
time of the platinum mining sector wage strikes) and 2018
(the land expropriation without compensation debate).

OCTOBER 2023
Box 7 El Niño resurfaces
1 E Becker, ‘June 2023 ENSO update: El Niño is here’, ENSO
blog, 8 June 2023.
blogs/enso/june-2023-enso-update-el-nino-here; Australian
Government: Bureau of Meteorology, Climate Driver Update:
El Niño conditions are present.
climate/enso/index.shtml#tabs=Pacific-Ocean.
2 The full impact of El Niño usually takes up to a year to crystalise and
feed through to both domestic and global food prices. European
Central Bank (ECB) analysis suggests that a 1.0°C temperature
increase during El Niño historically raised global food prices by more
than 6.0% after one year. See I Schnabel, ‘The risks of stubborn
inflation’. Speech by Isabel Schnabel, Member of the Executive
Board of the ECB, at the Euro50 Group conference on New
challenges for the Economic and Monetary Union in the post-crisis
environment, 19 June 2023.
key/date/2023/html/ecb.sp230619_1~2c0bdf2422.en.html
3 The 2015–16 drought was similar to the one that occurred in
1997–98 where the impacts of El Niño were mostly localised.
The country’s most severe recorded drought happened in
1991–92, with similar impacts to the multi-year droughts of
1982–83 and 1985–97 where the severe impacts of El Niño
were felt with cascading consequences across the globe.
4 South Africa’s latest crop estimates are pointing to a bumper summer
grains and oilseed harvest for the 2022–23 season (16.4 million tonnes
or the second-largest harvest on record) thanks to the favourable
rains we have seen over the past three La Niña years. This year’s
winter crop, although revised down marginally, mostly reflects the
impact of load-shedding. The big risk is the impact of El Niño on
the plantings for the 2023–24 summer crop, but materiality will only
crystalise as we approach the summer months and harvest.
Domestic food and non-alcoholic beverages (NAB) inflation has finally
passed its peak, having reached a high of 14.0% in March 2023 before
easing to 8.0% in August. However, the onset of El Niño weather
conditions as of May 2023, for which the world’s major climate models
indicate a more than 95.0% chance of persisting through year-end,
puts South Africa at a high risk of a drought later this year, jeopardising
the expected food price disinflation.1
The impacts on output and inflation are potentially large and
highly uncertain, with a wide range of plausible outcomes.2
To better appreciate the risks to inflation from a severe El Niño event,
the South African Reserve Bank (SARB) modelled two drought
scenarios. These are a 1-in-20-year drought similar to the 2015–16
drought, the most severe drought in 23 years; and a 1-in-100-year
event such as in 1991–92, the most severe drought in the country’s
recorded history.3
Model simulations show inflationary pressures that start to
build up from April next year when the 2023–24 summer crop is
harvested.4 Specifically, a drought of the same magnitude as the
2015–16 drought adds up to 10 percentage points to food inflation
(3 percentage points for headline inflation). A more severe drought
such as the 1991–92 event could see food inflation surge by up
to 28 percentage points (8 percentage points for headline inflation).
The orders of magnitude reflect the sensitivity to drought of prices
in the agrifood system as well as their strong pass-through to other
Food and NAB inflation*
* Events in red denote non-drought-related anomalies.
Sources: EM-DAT and SARB
-10

Percentage change over 12 months

Anomalies

Food prices

Tropical
cyclone
GFC
Southern
African
floods

1-in-100

1-in-20

Baseline

Percentage change over 12 months
Headline inflation
Sources: Stats SA and SARB

Inflation target midpoint

OCTOBER 2023

1-in-100

1-in-20

Baseline

Percentage change over 12 months
Food and non-alcoholic beverages
Sources: Stats SA and SARB

Inflation target midpoint
prices.5 However, El Niño risks for now lie outside of the SARB’s
baseline view.
While El Niño raises the likelihood of a drought and thus upside risks
to food inflation, drought is not a fait accompli. South Africa could
still achieve a decent summer harvest because of the pre-existing
soil moisture following three consecutive years of wetter-than-usual
La Niña.6 This, however, would require that the summer rains fall
within the critical periods that coincide with the essential seed
germination and pollination stages.7, 8 Even so, geopolitical tensions
and export restrictions by major grain producers could reverse the
strong disinflation in global grain and vegetable oil prices that has
facilitated the current moderation in domestic food prices. Risks to
food inflation remain to the upside.
5 Rangasamy estimates that a one percentage point increase in
food inflation results in non-food inflation increasing by roughly 0.5
percentage points on average, with coefficients that are largest
at the 12 to 18-month lag. See L Rangasamy ‘Food inflation
in South Africa: some implications for economic policy, South
African Journal of Economics 79(2), June 2011, pp 184–201.
6 The International Grains Council (IGC) forecasts South Africa’s
2023–24 maize production at 15.6 million tonnes, marginally down
from the current crop of 16.4 million tonnes. The Agricultural
Business Chamber, however, is more sanguine and sees a 13–14
million tonnes harvest as more likely. This should be sufficient to
meet the domestic demand of approximately 11.4 million tonnes.
W Sihlobo, ‘Some observations as we approach South Africa’s
2023/24 summer crop season’, Agricultural Business Chamber
SA Weekly Agricultural Viewpoint, 31 July 2023.
co.za/content/open/31-july-2023-agri-market-viewpoint-177.
7 It would not be South Africa’s first time in such a fortunate
position. The summer of 2018–19 had an El Niño weather
event. Still, the rains fell in critical periods and South Africa
attained a decent crop harvest. See W Sihlobo; ibid.
8 The South African Weather Service forecasts above-average rainfall
for most of the country during September to December 2023. This
coincides with the planting and germination stages of the 2023–24
summer production season which starts in October. South African
Weather Service, ‘Seasonal Climate Watch: September 2023 to
January 2024’, 28 August 2023.
Documents/SeasonalForecast/SCOLF202308_29082023091515.pdf

OCTOBER 2023
Conclusion
Global inflation has subsided over the past year, underpinned
by easing supply chain pressures and falling food and energy
price inflation. The decline in inflation has also reflected tighter
monetary policy and more credible policy communications.
Inflation, however, remains well above central bank targets.
This is despite the sharp and synchronised acceleration in
the interest rate response over the past 18 months that saw
forecasts for global growth shift to project an acute slowdown
in 2023. Softer economic activity was, in turn, expected to
rapidly lower inflation.
The slower-than-expected pace of disinflation reflects the
enduring effects of the COVID-19-induced generous fiscal
transfers that increased savings in advanced economies.
Strong demand and tight labour markets have seen core
inflation, especially its services component, rise sharply and
remain persistent, exacerbated by the rotation of demand
from goods to services and second-round effects from higher
energy and food costs. Inflation also remains elevated in most
emerging market economies, despite a less pronounced buildup of savings buffers and relative slackness in labour markets.
The resilience in services demand explains much of the
upside surprises in the global economic performance over the
review period. The SARB forecasts trading-partner growth at
2.6% this year, rising to 3.1% in 2025, but still well below the
pre-pandemic trend. The somewhat better trading-partner
growth projection, however, masks the divergent trend across
countries, with the services-intensive economies such as the
US showing marked strength and the manufacturing- and
export-dependent economies such as Germany and China
experiencing deeper growth slowdowns.
The somewhat stronger moderation in headline inflation in
recent months has prompted some central banks to pause
rate hikes, in large part to assess the incoming data and finetune policy. Meanwhile, emerging markets that moved early to
hike rates, or hiked more steeply, have begun easing policy as
real rates are in danger of passively tightening. However, with
elevated inflation risks and stubborn core inflation, alongside
heightened uncertainty around the path for global neutral
interest rates, policy rates are expected to remain higher
for longer.
Like most economies, South Africa has grappled with
stagflationary conditions over the review period. Encouragingly,
headline inflation has eased markedly over the past three
months and returned to the 3–6% target range, underpinned
by decelerations in food and fuel price inflation, while core
inflation has been sticky at about 5.0%. Inflation, nevertheless,
remains above the SARB’s preferred midpoint of the target
range and is projected to trend broadly sideways into early 2024
before stabilising around the 4.5% target from the second
quarter of 2025.
The relative stickiness in core inflation reflects various
dynamics – initially markedly higher global goods inflation,
alongside a sharply depreciated rand, but later spillover
and second-round effects as well as pass-through of costs
associated with electricity self-generation. Declining global
goods inflation, alongside tighter monetary policy, should help
contain further increases in domestic core goods inflation.
Meanwhile, subdued housing inflation, together with lower
wage growth, kept services inflation lower than expected and
slowed the rise in core inflation. Although core inflation may
have peaked, it is expected to decline only gradually as core
goods inflation remains elevated.
With inflation showing signs of persistence amid heightened
risks, the MPC raised the repo rate by a further 50 basis points
at the May 2023 meeting before holding off at the July and
September meetings. The May increase brought the nominal
repo rate to 8.25% – a level at which monetary policy is now
judged to be restrictive. The QPM forecasts indicate that the
current level of interest rates will be adequate to steer inflation
back to the midpoint of the 3–6% target range over the medium
term. The MPC will continue to assess incoming data and finetune the stance as needed to manage risks and ensure that
inflation stabilises at the target.
Turning to domestic economic activity, growth has weakened
significantly this year and over the medium term as the energy
supply constraint has become more binding. The economy is
projected to expand by just 0.7% this year, rising to 1.1% by
2025. While not in the SARB’s current baseline, expectations
are for the ongoing reforms in the energy and logistics sectors,
alongside the private sector’s robust response to the energy
crisis, to eventually lift both GDP and potential growth in the
long run.
Despite the subdued activity levels, the contribution of
economic growth to inflation has increased but remains muted.
That the output gap has begun exerting inflationary pressures
at a growth rate of just 0.7% shows starkly the extent to which
the supply side of the economy is constraining monetary
policy’s role in the economy. The implementation of structural
reforms to ensure an adequate supply of energy, enhance
efficiencies in logistics, improve dynamism in product and
labour markets and reduce the impact of administered prices
on inflation should raise both GDP and potential growth, while
enhancing monetary policy’s role in keeping economic activity
buoyant closer to the new and higher potential level.

OCTOBER 2023
Statement of the Monetary Policy Committee
25 May 2023
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Commodity export prices in USD terms fell by 0.9% in 2022. South Africa’s commodity export price index is forecast to decline by 23.7% this year,
a further 10.5% in 2024 and an additional 5.4% in 2025.

Global growth in the Quarterly Projection Model (QPM) is a trade-weighted average of South Africa’s trading partners.

The number of days of expected load-shedding in 2023 is higher at 280 days and decline to 150 days and 100 days respectively in 2024 and 2025.
Estimates of the average stages of load-shedding are multiplied by the number of days and then multiplied by the cost to GDP per stage-day.
The cost per stage has been revised lower for stages 1 and 2. In nominal terms, these costs vary between R0 and R1.2 million for stages 1 and 2
and up to between R204 million and R899 million for stages 3 to 6 when continued on a 24-hour basis on weekdays.

The growth forecast includes expected changes in the policy rate as given by the QPM.

Potential growth is unchanged at -0.2% for 2023, 0.8% for 2024 and 1.0% for 2025.

In March, a current account balance of about -2.7% of GDP was expected for the forecast period. Exports are forecast to grow in real terms by only
1.8% this year and 2.4% in 2024. Our oil price forecast is also slightly lower than in March, averaging US$85 per barrel in 2023, and unchanged at
US$85 for 2024 and US$80 for 2025.
As we approach the midpoint of the year, persistent inflation
and elevated financial stability risks continue to mark a
somewhat improved global growth outlook. South Africa’s
economic conditions, however, remain poor.
Growth prospects in Asia and Europe, while improved,
remain negatively affected by Russia’s war in Ukraine
and heightened geopolitical tensions. The United States
continues to exhibit economic resilience but also specific
financial fragilities. More recent data suggests China’s
growth performance will remain relatively modest, with little
benefit to commodity prices.1 In the developing world, many
economies face high debt levels, weaker economic growth
and prolonged adverse financing conditions.
While goods price inflation has eased in much of the world,
core inflation continues to rise, keeping consumer price
inflation from falling more sharply. We expect global financial
markets to remain volatile and policy rates elevated.
Taking these and other factors into account, the SARB’s
forecast for global growth in 2023 and 2024 is revised higher
to 2.4% (from 2.0%) and to 2.7% (from 2.5%) respectively.2
The April World Economic Outlook of the International
Monetary Fund (IMF) forecasts global growth at 2.8% and
3.0% for 2023 and 2024 respectively.
For 2023, the SARB’s forecast for GDP growth is slightly
higher than in March, at 0.3%. Energy and logistical
constraints remain binding on South Africa’s growth outlook,
limiting economic activity and increasing costs. We estimate
load-shedding alone to deduct two percentage points from
growth this year.
Household spending is expected to grow very modestly
in real terms, in line with a positive but weak rise in real
disposable income. Investment by the private sector remains
positive, in part reflecting efforts to overcome constraints in
energy and transport supply.3
Our GDP growth forecast for 2024 and 2025 is unchanged
from the previous meeting, at 1.0% and 1.1% respectively.4
Economic growth has been volatile for some time and
prospects for growth remain uncertain. An improvement
in logistics and a sustained reduction in load-shedding, or
increased energy supply from alternative sources, would
significantly raise growth. The rand’s weakness provides
some short-term benefit to the tradable sector. Conversely,
alongside more modest global growth rates and lower terms
of trade, higher import prices and headline inflation create
downside risks to growth. Overall, domestic and global
prospects appear to be highly sensitive to new shocks.
At present, we assess the risks to the medium-term
domestic growth outlook to be balanced.
Turning to inflation prospects, our current growth forecast
leaves the output gap around zero over the next three years.
This implies very modest positive pressures on inflation from
the forecast growth rate.5
South Africa’s external financing needs, however, are
expected to rise. Despite broadly stable oil prices, import
price inflation is higher. Falling export commodity prices and
weaker growth in export volumes are expected to increase
the current account deficit to 2.5% of GDP this year, before
expanding it further to 3.1% and 3.6% of GDP respectively
in 2024 and 2025.6
With
reduced
tax
revenue,
higher
public
sector
compensation and state-owned enterprise financial needs
will put additional pressure on financing conditions for
rand-denominated bonds. The risk premium charged on
rand-denominated borrowing has increased sharply. Tenyear bond yields reached a high of 13.78% on 23 May,
and currently trade at about 12.3%, despite the expected
moderation of inflation over the forecast period.
The rand has weakened over the past year, with further
sharp depreciation in recent weeks. The implied starting
point for the rand forecast is R18.68 (2023Q2) to the US
dollar, compared with R17.80 at the time of the previous
meeting. Currency markets are expected to remain volatile
and sensitive to idiosyncratic shocks.

OCTOBER 2023
At the global level, consumer price inflation in 2023 is
forecast to be 7.0%, compared to 8.7% in 2022.7 In the
Group of Three (G3) economies, despite an easing in
headline inflation, price pressures remain clearly evident
in measures of core inflation, services and wages.8 Our
estimate for inflation in the G3 in 2023 is higher at 4.3% (up
from 4.2%) and is unchanged at 2.1% in 2024 and 2025.9
The rise in South Africa’s headline inflation rate has been
shaped primarily by fuel, electricity and food price inflation.
Compared to the previous meeting, fuel and electricity price
inflation is somewhat lower and food price inflation higher.
Fuel price inflation is expected to be -2.0% in 2023 (down
from -0.6%). The electricity price forecast is also lower at
11.6% this year, 13.4% in 2024 and unchanged at 10.9%
in 2025.
Local food price inflation is revised up again, in part due to
the lagged impact of the weaker exchange rate and despite
global food prices falling in dollar terms.10 Food price inflation
is now expected to be 10.8% in 2023 (up from 9.9%) and
5.0% in 2024 (up from 4.5%).
Our forecast for core inflation is revised up to 5.3% in 2023
(previously 5.1%), 5.0% (from 4.8%) and 4.6% (from 4.5%)
in 2024 and 2025 respectively. Services price inflation in
2023 is expected to come in at 4.9%, unchanged from the
previous meeting. Core goods inflation, however, is higher
for this year at 6.3% (up from 5.9%).11 Growth in average
salaries and unit labour costs is higher in 2023 and 2024
and slightly lower in 2025.12
With core goods and food higher in the near term, headline
inflation for 2023 is revised up to 6.2% (from 6.0%). Headline
inflation for 2024 also increases to 5.1%, before moderating
to 4.5% in 2025 on the back of easing food and fuel inflation.
Risks to the inflation outlook are assessed to the upside.
Despite an easing of producer price and food inflation,
global price inflation remains high. Global oil markets
are expected to remain tight, with upside risk to prices.
Electricity prices and other administered prices continue to

IMF, World Economic Outlook, April 2023.

The G3 comprises the United States, the eurozone and Japan. In the G3 economies, consumer prices rose by 7.4% in 2022.

The latest CPI inflation in the G3 sits at 4.9%, 7.0% and 3.5% respectively.
10 This year, global food inflation is expected to be in deflation of -9.9% (down from -8.7% in March) and after registering 14.3% inflation in 2022.
11 Core goods refer to total CPI goods excluding food and non-alcoholic beverages (NAB), fuel and electricity, whereas services include all surveyed
services within the CPI basket. Core goods inflation is expected to be 5.2% in 2024 and 4.5% in 2025.
12 Average salaries are expected to rise by 6.8% in 2023, 6.5% in 2024 and 4.9% in 2025, compared to 6.4%, 6.2% and 5.0% at the time of the March
meeting respectively. Unit labour costs are forecast to rise by 6.9%, 6.1% and 4.3% respectively in 2023, 2024 and 2025.
13 G3 interest rates are forecast to average 3.8% in 2023, 3.6% in 2024 and 2.5% in 2025.
14 The Q2 survey will be released in July. The BER Q1 2023 survey of inflation expectations indicated inflation at 6.3% in 2023 (up from 6.1% in Q4), 5.8%
for 2024 (up from 5.6% in Q4) and 5.5% in 2025.
15 At the median, market analysts (Reuters Econometer) in May expect inflation to be higher at 5.9% (from 5.8% in March) in 2023, 4.9% in 2024 (up from
4.7%) and 4.6% in 2025 (down from 4.7%).
16 Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds.
These now sit at about 6.24% for the 5-year and 7.0% on the 10-year break-even, while the 15-year break-even inflation sits at 7.76%.
17 The forecasted trajectory for the repurchase (repo) rate implies a rise in the inflation-adjusted repo rate from -2.1% in 2022 to 1.8% in 2023 and 2.4% in
2024. The real repo level for 2025 is expected to be 2.5%. The real repo rates calculated here are based on the one-quarter-ahead inflation forecast
and are annual average rates.
present clear short- and medium-term risks. Domestic food
price inflation continues to be elevated and the risk of drier
weather conditions in coming months has increased. Loadshedding may additionally have broader price effects on the
cost of doing business and the cost of living, in particular as
diesel consumption increases. Given sticky petrol and food
price inflation, considerable risk still attaches to the forecast
for average salaries.
Average interest rate levels in major economies are higher
than were projected in March.13 Tighter global financial
conditions raise the risk profiles of economies needing
foreign capital, leading generally to weaker currencies.
Given upside inflation risks, larger domestic and external
financing needs, and load-shedding, further currency
weakness appears likely.
Higher inflation outcomes have resulted in elevated
inflation expectations.14 Expectations for inflation in 2023
based on market surveys are 5.9%.15 Long-term inflation
expectations derived from the five-year break-even rates
in the bond market have sharply increased to about 6.5%
(up from 5.3%).16
Headline inflation is forecast to remain above the upper
end of the inflation target range until the third quarter of this
year and will only sustainably revert to the midpoint of the
target range by the second quarter of 2025. The forecast
takes into account the policy rate trajectory indicated by the
SARB’s Quarterly Projection Model (QPM).
Against this backdrop, the MPC decided to increase the
repurchase (repo) rate by 50 basis points to 8.25% per year,
with effect from 26 May 2023. The decision was unanimous.
At the current repo rate level, policy is restrictive, consistent
with elevated inflation and risks. The policy stance aims
to anchor inflation expectations more firmly around the
midpoint of the target band and to increase confidence of
attaining the inflation target sustainably over time.17
Guiding inflation back towards the midpoint of the target
band can reduce the economic costs of high inflation

OCTOBER 2023
and achieve lower interest rates in the future. Reaching a
prudent public debt level, increasing the supply of energy,
moderating administered price inflation and keeping wage
growth in line with productivity gains would enhance the
effectiveness of monetary policy and its transmission to the
broader economy.
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. Economic and financial
conditions are expected to remain more volatile for the
foreseeable future. In this uncertain environment, monetary
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 potential second-round effects and the risks of
de-anchoring inflation expectations. The Bank will continue
to closely monitor funding markets for stress.
Per cent
2017 2018 2019 2020 2021 2022 2023 2024 2025
Repurchase rate forecast (May 2023)*

90%

60%

30%

Repo rate

* The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside
or downside risk.
Source: SARB

OCTOBER 2023
Summary of assumptions: Monetary Policy Committee
meeting on 25 May 2023*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
a.
Shaded areas indicate forecast assumptions.
b.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 58 and 59.

OCTOBER 2023
Summary of selected forecast results: Monetary Policy Committee meeting
on 25 May 2023
Selected forecast results (annual)
Actual
Forecast
Steady
state


Notes
a.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the eurozone, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
b.
The nominal exchange rate steady state is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation
differential between South Africa and abroad. Given that the real effective exchange rate (REER) depreciation is zero at steady state, the nominal exchange rate will therefore
depreciate by 2.5% per year in steady state, reflecting the inflation (target) differential between domestic (4.5%) and foreign (2.0%) inflation.
c.
The REER is the NEER deflated by the consumer price differential between South Africa and the trade-weighted CPI of the eurozone, the US and Japan.
d.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency, and
vice versa.
e.
The repo rate at the end of the period refers to the average for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of South Africa’s inflation target
(4.5%) and the steady state neutral real interest rate (2.5%).
f.
The steady state is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a
steady state, where they stabilise. For more details on the estimation of steady states, see B Botha, S de Jager, F Ruch and R Steinbach, ‘The Quarterly Projection Model of the SARB’,
South African Reserve Bank Working Paper Series No. WP/17/01, Pretoria: South African Reserve Bank, September 2017.
g.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
h.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
i.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change

Steady
state

1. Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
a. Shaded areas indicate the forecasts of the Monetary Policy Committee.
b. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

OCTOBER 2023
Statement of the Monetary Policy Committee
20 July 2023
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Commodity export prices in USD terms fell by 0.9% in 2022. South Africa’s commodity export price index is forecast to decline by 27.6% this year, a
further 11.5% in 2024 and an additional 5.4% in 2025.

Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners.

The number of days of expected load-shedding is 280 days in 2023, decreasing to 150 days and 100 days respectively in 2024 and 2025. Estimates of
the average stages of load-shedding are multiplied by the number of days and then multiplied by the cost to GDP per stage-day. The cost per stage
has been revised lower for stages 1 and 2. In nominal terms, these costs vary between R0 and R1.2 million for stages 1 and 2 and up to between
R204 million and R899 million for stages 3 to 6, when continued on a 24-hour basis on weekdays.

Debt-service costs are the product of prevailing interest rates and debt volumes. The average from 1994 to 2019 was 8.8%. From the beginning of the
pandemic until March 2023, the average was 7.4%. In the last quarter of 2022, the average was 7.9%.

The growth forecast includes expected changes in the policy rate as given by the QPM.

Potential growth is revised marginally to -0.1% in 2023 (up from -0.2%) and is unchanged at 0.8% for 2024 and 1.0% for 2025.

In May, a current account balance of -2.5% of GDP was expected for the forecast period. Exports are forecast to grow in real terms by 6.2% this year
(from 1.8%) and 3.4% in 2024. Our oil price forecast is also slightly lower than in May, averaging US$81 per barrel in 2023 (US$85 in May), US$82 for
2024 (US$85) and unchanged at US$80 for 2025.
As we enter the second half of 2023, near-term prospects
for the global economy are broadly unchanged, with inflation
easing and growth forecasts stable. The longer-term
economic outlook, however, remains clouded by risks to
the inflation trajectory, ongoing geopolitical tensions and the
effects of climate change. China’s growth performance is
expected to remain modest, with little benefit to commodity
prices.1 In the developing world, many economies face
high debt levels, weaker economic growth and prolonged
adverse financing conditions. As a result, sub-Saharan
Africa’s growth prospects remain muted.
While goods price inflation has eased in much of the world,
core inflation remains elevated, keeping consumer price
inflation from falling more sharply. Globally, monetary policy
is likely to remain focused on ensuring inflation continues
to retreat, implying policy rates will stay higher. We expect
markets in major financial centres to remain volatile.
Taking these and other factors into account, the SARB’s
forecast for global growth in 2023 is revised marginally
higher to 2.5% (from 2.4%) and remains unchanged at 2.7%
in 2024.2
While South Africa’s economic conditions appear to have
improved, the longer-term outlook mirrors the uncertainty
of the global environment. Prices for commodity exports
continue to weaken. In addition, energy supply remains
unreliable and stronger El Niño conditions threaten the
agricultural outlook.
For 2023, the SARB’s forecast for South Africa’s GDP growth
is slightly higher than in May, at 0.4% (from 0.3%). Energy and
logistical constraints remain binding on the growth outlook,
limiting economic activity and increasing costs.3
From a demand perspective, spending by firms, households,
public corporations and general government remains
positive in real terms. Disposable income of households
continues to grow, albeit slowly. Investment by the private
and public sectors is revised up and the terms of trade
have remained more beneficial than previously forecast.
Debt-service costs of households have increased to 8.4% of
disposable income and now sit at around the average for the
past decade.4 Although credit growth to households and
corporates has slowed in recent months, it has increased in
real terms compared to last year.
Our GDP growth forecast for 2024 and 2025 is unchanged
from the previous meeting, at 1.0% and 1.1% respectively.5
While households and firms exhibit resilience, economic
growth has been volatile for some time and highly sensitive
to new shocks. An improvement in logistics and a sustained
reduction in load-shedding, or greater energy supply from
alternative sources, would significantly increase growth.
At present, we assess the risks to the medium-term
domestic growth outlook to be balanced.
Turning to inflation prospects, our current growth forecast
leaves the output gap around zero over the next three years,
implying little positive or negative pressure on inflation from
GDP growth.6
South Africa’s external financing needs are expected to rise
due to an expansion in the current account deficit. Despite
somewhat lower oil prices, falling export commodity prices
are forecast to result in a current account deficit of 1.9%
of GDP this year (down from 2.5%), and 2.9% and 3.3% of
GDP in 2024 and 2025 respectively.7
Sharply lower tax revenue, higher employee compensation
and the ongoing financing needs of state-owned enterprises
are likely to keep the long-term cost of borrowing elevated.
Despite the expected moderation of inflation over the
forecast period, long-term bond yields currently trade at
about 11.6%.

OCTOBER 2023

The rand has generally weakened since the beginning of
the year, depreciating by about 5% year to date against the
US dollar, and showing high volatility in response to risk-on
and risk-off episodes. The implied starting point for the rand
forecast is R18.52 (2023Q3) to the US dollar, compared with
R18.73 at the time of the previous meeting.
The trajectory of South Africa’s headline inflation rate has been
shaped primarily by fuel, electricity and food price inflation.
Compared to the previous meeting, fuel price inflation is lower
at -3.1% in 2023 (from -2.0%). The electricity price forecast is
unchanged at 11.6% this year, 13.4% in 2024 and 10.9% in
2025. Our food price inflation forecast for 2023 remains high
but is revised lower in this meeting to 10.3% (from 10.8%),
and up slightly to 5.2% in 2024 (from 5.0%).
Better monthly outcomes have led to a downward revision
in our forecast for core inflation to 5.2% in 2023 (previously
5.3%), 4.9% (from 5.0%) and 4.5% (from 4.6%) in 2024
and 2025 respectively. Services price inflation in 2023
is expected to come in at 4.8% (down from 4.9%). Core
goods inflation, while still elevated, is also revised slightly
lower for this year at 6.2% (from 6.3%).8 Growth in average
salaries and unit labour costs is lower in 2023 and 2024
and slightly higher in 2025.
With core goods and food inflation lower in the near term,
headline inflation for 2023 is revised down to 6.0% (from
6.2%). The headline inflation forecast for 2024 also decreases
to 5.0%, before stabilising at 4.5% in 2025.9
Risks to the inflation outlook are assessed to the upside.
Headline inflation at a global level continues to moderate,
but food price inflation remains high and oil markets
remain tight. Despite the recent easing in some food
price components, domestic food price inflation is still
elevated at 11% in June and the risk of drier weather
conditions in coming months has increased. In the
absence of sustained and consistent increases in energy
supply, electricity prices continue to present clear inflation
risks. Load-shedding and logistics constraints may also
have broader effects on the cost of doing business and
the cost of living. Given uncertain fuel and food price
inflation, considerable risk still attaches to the forecast for
average salaries.

Core goods refer to total CPI goods excluding food and non-alcoholic beverages (NAB), fuel and electricity, whereas services include all surveyed
services within the CPI basket. Core goods inflation is expected to be 5.1% in 2024 and 4.3% in 2025.

Average salaries are expected to rise by 6.6% in 2023, 6.1% in 2024 and 5.2% in 2025, compared to 6.8%, 6.5%, and 4.9% at the time of the May
meeting respectively. Unit labour costs are forecast to rise by 6.0%, 5.3% and 4.6% respectively in 2023, 2024 and 2025.
10 G3 interest rates are forecast to average 4.0% in 2023, 3.9% in 2024 and 2.6% in 2025.
11 The BER Q2 2023 survey of inflation expectations indicated inflation at 5.9% for 2024 (up from 5.8% in Q1) and 5.6% in 2025
12 At the median, market analysts (Reuters Econometer) in July expect inflation to remain at 5.9% in 2023, 4.9% in 2024 and 4.4% in 2025 (from 4.6%).
Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds.
The 10-year break-even now sits at about 6.1%, while the 15-year break-even inflation rate sits at 7.3%.
13 The forecasted trajectory for the repurchase (repo) rate implies a rise in the inflation-adjusted repo rate from -1.4% in 2022 to 2.7% in 2023 and 3.0% in
2024. The real repo level for 2025 is expected to be 2.7%. The real repo rates calculated here are based on the three-quarter-ahead inflation forecast
and are annual average rates.
Sticky inflation in major economies suggests that average
interest rates in these economies will remain high.10 As a
result, tighter global financial conditions are likely to persist,
raising the risk profile of economies needing foreign capital.
Higher inflation outcomes have generally resulted in elevated
inflation expectations across businesses and households,
while market-based expectations have eased recently.
The Bureau for Economic Research survey released in July
shows average inflation expectations of 6.5% for 2023 (from
6.3% in the first quarter).11 Expectations for inflation in 2023
based on market surveys are currently 5.9%, and nearterm break-even rates have decreased to around 4.5%.12
Longer-term expectations remain elevated.
Headline inflation returned to the upper end of the inflation
target range in June and is forecast to sustainably revert to
the midpoint of the target range by the third quarter of 2025.
The forecast takes into account the policy rate trajectory
indicated by the Bank’s Quarterly Projection Model (QPM).
Against this backdrop, the MPC decided to keep the
repurchase (repo) rate at its current level of 8.25% per year.
Three members of the Committee preferred to keep rates
on hold and two preferred an increase of 25 basis points.
At the current repo rate level, policy is restrictive, consistent
with elevated inflation expectations and the inflation outlook.
Serious upside risks to the inflation outlook remain. In light
of these risks, the Committee remains vigilant and decisions
will continue to be data dependent and sensitive to the
balance of risks to the outlook.
The policy stance aims to anchor inflation expectations more
firmly around the midpoint of the target band and to increase
confidence of attaining the inflation target sustainably over
time.13 The MPC will seek to look through temporary price
shocks and focus on potential second-round effects and
the risks of de-anchoring inflation expectations.
Guiding inflation back towards the midpoint of the target
band reduces the economic costs of high inflation and
will achieve lower interest rates in the future. Since early
2020, the Committee has recommended additional and

OCTOBER 2023
indirect means of lowering inflation that are within the reach
of the public sector, including achieving a prudent public
debt level, increasing the supply of energy, moderating
administered price inflation and keeping wage growth in
line with productivity gains. Such steps would strengthen
monetary policy effectiveness and its transmission to
the broader economy.
The repo rate projection from the updated QPM remains a
broad policy guide, changing from meeting to meeting in
response to new data and risks.
Per cent
2017 2018 2019 2020 2021 2022 2023 2024 2025
Repurchase rate forecast (July 2023)*

90%

60%

30%

Repo rate

* The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside
or downside risk.
Source: SARB

OCTOBER 2023

Summary of assumptions: Monetary Policy Committee
meeting on 20 July 2023*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
a.
Shaded areas indicate forecast assumptions.
b.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 58 and 59.

OCTOBER 2023
Summary of selected forecast results: Monetary Policy Committee meeting
on 20 July 2023
Selected forecast results (annual)
Actual
Forecast
Steady
state


Notes
a.
The July MPC forecast was generated using the updated QPM. The May forecast used the previous version of the QPM. For more details on the updated QPM, see E Pirozhkova,
J Rakgalakane, L Soobyah and R Steinbach, ‘Enhancing the Quarterly Projection Model’, South African Reserve Bank Working Paper Series No. WP/23/05, Pretoria: South African
Reserve Bank, June 2023.
b.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the eurozone, the US and Japan). The bilateral exchange
rates are weighted by export trade weights.
c.
The nominal exchange rate steady state is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation differential
between South Africa and abroad. Given that the real effective exchange rate (REER) depreciation is zero at steady state, the nominal exchange rate will therefore depreciate by 2.5% per
year in steady state, reflecting the inflation (target) differential between domestic (4.5%) and foreign (2.0%) inflation.
d.
The REER is the NEER deflated by the consumer price differential between South Africa and the trade-weighted CPI of the eurozone, the US and Japan.
e.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency,
and vice versa.
f.
The repo rate at the end of the period refers to the average for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of South Africa’s inflation target (4.5%)
and the steady state neutral real interest rate (2.5%).
g.
The neutral real interest rate (NRIR) is the policy rate, minus inflation, which prevails when the economy is fully in balance, with inflation at target and output at potential. The policy stance is
measured as either tight or loose based on whether actual rates are above or below this neutral rate respectively. The steady state NRIR is calculated as the sum of the respective steady
states for the G3 NRIR (0.5%), South Africa’s risk premium (2.0%) and the change in the REER (0.0%). Before the steady state is reached it is possible for the REER equilibrium to appreciate
or depreciate, so this value can have a non-zero value over the medium term. It is nonetheless always zero in the long run.
h.
The steady state is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a steady
state, where they stabilise.
i.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
j.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
k.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change

Steady
state

1. Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
a. Shaded areas indicate the forecasts of the Monetary Policy Committee.
b. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

OCTOBER 2023
Statement of the Monetary Policy Committee
21 September 2023
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Commodity export prices in USD terms fell by 0.9% in 2022. South Africa’s commodity export index is forecast to decline by 28.4% this year, a further
12.0% in 2024 and an additional 5.1% in 2025.

Global growth in the Quarterly Projection Model (QPM) is a trade-weighted average of SA’s trading partners.

The number of days of expected load-shedding is 310 in 2023, decreasing to 150 days and 100 days respectively in 2024 and 2025. Estimates of the
average stages of load-shedding are multiplied by the number of days and then multiplied by the cost to GDP per stage-day. The cost per stage was
revised lower in the March 2023 Monetary Policy Committee (MPC) meeting. In nominal terms, these costs vary between R0 and R1.2 million for
stages 1 and 2 and up to between R204 million and R899 million for stages 3 to 6, when continued on a 24-hour basis on weekdays. This will be
assessed further as new data and information is received.

Debt-service costs are the product of prevailing interest rates and debt volumes as a percentage of disposable income. The average from 1994
to 2019 was 8.7%. From the beginning of the pandemic until March 2023, the average was 7.4%. In the first quarter of 2023, the average was 8.4%.

The growth forecast includes expected changes in the policy rate as given by the QPM.

Potential growth is 0.0% in 2023 (up from -0.1%) and unchanged at 0.8% for 2024 and 1.0% for 2025.

Exports are forecast to grow in real terms by 4.5% this year (from 6.2%) and 3.0% in 2024. Our oil price forecast is also slightly higher than in July,
averaging US$82 per barrel in 2023, and unchanged at US$82 for 2024 and US$80 for 2025.
Since our last meeting, near-term prospects for the global
economy are broadly unchanged. Inflation has eased over
the course of the year but a further slowdown in inflation
looks less certain. Growth forecasts remain muted. The
longer-term economic outlook is, however, clouded by
persistent risks to the inflation trajectory, the negative
effects of climate change and ongoing geopolitical tensions.
In the developing world, financing conditions are expected
to remain tight and growth modest.
While goods price inflation has eased in much of the world,
core inflation remains elevated and oil prices have increased
significantly, keeping consumer price inflation from falling
further. Globally, monetary policy is likely to remain focused
on ensuring inflation continues to retreat. We expect markets
in major financial centres to remain volatile.
Across major advanced economies, growth remains
stronger in the United States (US) than in Europe. Higherfor-longer policy rates and extended fiscal positions are
expected to weigh on growth prospects for some time.
China’s growth performance is expected to remain modest,
with little benefit to commodity prices.1 Taking these and
other factors into account, the SARB’s forecast for global
growth in 2023 is broadly unchanged at 2.6% (from 2.5%)
and remains at 2.7% in 2024.2
Despite considerable reprieve in the winter months, South
Africa’s electricity load-shedding has increased and prices
for commodity exports continue to weaken. In the near term,
stronger El Niño conditions threaten the agricultural outlook,
while global climatic events present additional risks. Energy
and logistical constraints remain binding on the growth
outlook, limiting economic activity and increasing costs.3
From a demand perspective, spending by firms, households,
public corporations and general government remains
positive in real terms, on an annual basis. Disposable
income of households continues to grow in the forecast,
albeit slowly. Debt-service costs of households have
increased to about 8.4% of disposable income, close to
the average for the past decade.4 Although credit growth to
households and corporates has slowed in recent months,
it has increased in real terms compared to last year. The
forecast for investment for the year is revised up to 7.7%
(from 4.4%).
These supply and demand trends enabled an upward
revision to the SARB’s forecast for GDP growth to 0.7%,
from the July figure of 0.4%. Our GDP growth forecast for
2024 and 2025 is unchanged from the previous meeting, at
1.0% and 1.1% respectively.5
While households and firms exhibit some resilience,
economic growth has been volatile and highly sensitive to
new shocks. An improvement in logistics and a sustained
reduction in load-shedding, or greater energy supply from
alternative sources, would significantly increase growth.
At present, we assess the risks to the medium-term
domestic growth outlook to be balanced.
Turning to inflation prospects, our current growth forecast
leaves the output gap marginally positive, implying little
pressure on inflation from GDP growth.6
Oil prices have increased in recent months and commodity
export prices have moderated further. South Africa’s external
financing needs will increase as the current account deficit
expands from a forecasted 2.0% of GDP this year (from
1.9%), to 3.0% of GDP in 2024 and 3.4% of GDP in 2025.7
Sharply lower tax revenue, higher employee compensation
and ongoing financing needs of state-owned enterprises are
expected to keep the long-term cost of borrowing elevated.
Despite the forecasted moderation of inflation, long-term
bond yields currently trade around 12.6%.
The rand has weakened over the past year, depreciating
by about 10% year to date against the US dollar, and is
showing high volatility in response to risk-on and risk-off

OCTOBER 2023
episodes. The implied starting point for the rand forecast is
R18.45 (2023Q4) to the US dollar compared with R18.13 at
the time of the previous meeting.
The trajectory of South Africa’s headline inflation rate has
been shaped primarily by fuel and food prices. Compared
to the previous meeting, fuel price inflation is significantly
higher at 0.4% in 2023 (from -3.1%), rising to 5.8% in 2024.
Our food price inflation forecast for 2023 remains high and
largely unchanged at 10.4% (from 10.3%). The forecast for
2024 also remains unchanged at 5.2%.
Better monthly outcomes have led to a downward revision
in our forecast for core inflation to 4.9% in 2023 (previously
5.2%) and to 4.7% in 2024 (from 4.9%). The core inflation
forecast for 2025 remains at 4.5%. Services inflation in 2023
is expected to come in at 4.4% (down from 4.8%), primarily
as a result of lower public transport inflation outcomes. Core
goods inflation remains elevated and is revised slightly up
for this year to 6.3% (from 6.2%).8 Growth in average salaries
and unit labour costs is lower in 2023 and 2024. In 2025,
salaries are slightly higher.9
With services inflation lower in the near term, headline
inflation for 2023 is revised down to 5.9% (from 6.0%). The
headline inflation forecast for 2024 increases slightly to
5.1%, before stabilising at 4.5% in 2025.
Risks to the inflation outlook are assessed to the upside. At
a global level, headline inflation continues to moderate, but
food price inflation remains high, oil markets have tightened
significantly and core inflation looks sticky. Despite the
recent easing in some food price components, domestic
food price inflation was still elevated at 8% in August and
the risk of drier weather conditions in coming months has
increased. We expect food price inflation to moderate
further in the near term, but with high risk that it picks up
later in 2024. In the absence of sustained increases in
energy supply, electricity prices continue to present clear
inflation risks. Load-shedding and logistics constraints may
also have broader effects on the cost of doing business
and the cost of living. Given uncertain fuel and food price
inflation, considerable risk still attaches to the forecast for
average salaries.

Core goods refer to total CPI goods excluding food and non-alcoholic beverages (NAB), fuel and electricity, whereas services include all surveyed
services within the CPI basket. Core goods inflation is expected to be 5.2% in 2024 and 4.4% in 2025.

Average salaries are expected to rise by 5.4% in 2023, 5.9% in 2024 and by 5.4% in 2025, compared to 6.6%, 6.1% and 5.2% respectively at the time
of the July meeting. Unit labour costs are forecast to rise by 4.7%, 4.9% and 4.6% respectively in 2023, 2024 and 2025.
10 G3 interest rates average 4.0% in 2023, 4.1% in 2024 and 2.8% in 2025.
11 The BER Q3 2023 survey of inflation expectations indicated inflation at 6.1% in 2023 (from 6.5% in Q2) and 5.5% for 2024 (from 5.9% in Q2) and 5.3%
in 2025.
12 At the median, market analysts (Reuters Econometer) in September expect inflation to average 5.8% in 2023, remain at 4.9% in 2024 and 4.5% in 2025
(from 4.6%). Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflationlinked bonds. The 10-year break-even now sits at about 6.9%. The 15-year break-even inflation rate sits at 7.4%.
13 The forecasted trajectory for the repurchase (repo) rate implies a rise in the inflation-adjusted repo rate from -1.3% in 2022 to 2.6% in 2023 and 3.2% in
2024. The real repo level for 2025 is expected to be 2.9%. The real repo rates calculated here are based on the three-quarter-ahead inflation forecast
and are annual average rates.
Sticky inflation implies that average interest rates in major
economies will remain high.10 As a result, tighter global
financial conditions are likely to persist, raising the risk
profile of economies needing foreign capital.
Higher inflation has generally resulted in elevated inflation
expectations across businesses and households. The
Bureau for Economic Research survey released in
September shows average inflation expectations lower at
6.1% for 2023. The Committee, however, would prefer to
see expectations anchored at the midpoint of the target
band.11 Expectations for inflation in 2023 based on market
surveys are currently 5.8%, and near-term break-even
rates have increased to around 5.1%.12 Longer-term market
expectations for inflation remain elevated.
Headline inflation returned to below the upper end of the
inflation target range in June. In coming months, we expect
headline inflation to rise somewhat, before sustainably
reverting to the midpoint of the target range in 2025.
Against this backdrop, the MPC decided to keep the
repurchase (repo) rate at its current level of 8.25% per year.
Three members of the Committee preferred to keep rates
on hold and two preferred an increase of 25 basis points.
At the current repo rate level, policy is restrictive, consistent
with the inflation outlook and elevated inflation expectations.
Serious upside risks to the inflation outlook remain. In light
of these risks, the Committee remains vigilant and stands
ready to act should risks begin to materialise. Decisions will
continue to be data dependent and sensitive to the balance
of risks to the outlook. The inflation and repo rate projections
from the updated Quarterly Projection Model (QPM) remain
a broad policy guide, changing from meeting to meeting in
response to new data and risks.
The policy stance aims to anchor inflation expectations more
firmly around the midpoint of the target band and to increase
confidence of attaining the inflation target sustainably over
time.13 The MPC will seek to look through temporary price
shocks and focus on potential second-round effects and
the risks of de-anchoring inflation expectations.

OCTOBER 2023
Guiding inflation back towards the midpoint of the target
band reduces the economic costs of high inflation and will
achieve lower interest rates in the future. Since early 2020,
the Committee has recommended additional means of
lowering inflation that are within the reach of the public
sector, including achieving a prudent public debt level,
increasing the supply of energy, moderating administered
price inflation and keeping real wage growth in line
with productivity gains. Such steps would strengthen
monetary policy effectiveness and its transmission to the
broader economy.
Per cent
2017 2018 2019 2020 2021 2022 2023 2024 2025
Repurchase rate forecast (September 2023)*

90%

60%

30%

Repo rate

* The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside
or downside risk.
Source: SARB

OCTOBER 2023
Summary of assumptions: Monetary Policy Committee
meeting on 21 September 2023*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
a.
Shaded areas indicate forecast assumptions.
b.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 58 and 59.

OCTOBER 2023
Summary of selected forecast results: Monetary Policy Committee meeting
on 21 September 2023
Selected forecast results (annual)
Actual
Forecast
Steady
state


Notes
a.
The September MPC forecast was generated using the updated QPM. For more details on the updated QPM, see E Pirozhkova, J Rakgalakane, L Soobyah and R Steinbach, ‘Enhancing the
Quarterly Projection Model’, South African Reserve Bank Working Paper Series No. WP/23/05, Pretoria: South African Reserve Bank, June 2023.
b.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the eurozone, the US and Japan). The bilateral exchange
rates are weighted by export trade weights.
c.
The nominal exchange rate steady state is estimated using the Purchasing Power Parity (PPP) condition, which links the depreciation of the nominal exchange rate to the inflation differential
between South Africa and abroad. Given that the real effective exchange rate (REER) depreciation is zero at steady state, the nominal exchange rate will therefore depreciate by 2.5% per year
in steady state, reflecting the inflation (target) differential between domestic (4.5%) and foreign (2.0%) inflation.
d.
The REER is the NEER deflated by the consumer price differential between South Africa and the trade-weighted CPI of the eurozone, the US and Japan.
e.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation of the currency, and vice versa.
f.
The repo rate at the end of the period refers to the average for the last quarter of the year. The nominal repo rate steady state is calculated as the sum of South Africa’s inflation target (4.5%) and
the steady state neutral real interest rate (2.5%).
g.
The neutral real interest rate (NRIR) is the policy rate, minus inflation, which prevails when the economy is fully in balance, with inflation at target and output at potential. The policy stance is
measured as either tight or loose based on whether actual rates are above or below this neutral rate respectively. The steady state NRIR is calculated as the sum of the respective steady
states for the G3 NRIR (0.5%), South Africa’s risk premium (2.0%) and the change in the REER (0.0%). Before the steady state is reached it is possible for the REER equilibrium to appreciate
or depreciate, so this value can have a non-zero value over the medium term. It is nonetheless always zero in the long run.
h.
The steady state is the long run value in the model. While model equilibriums can have different values over the medium term, as conditions change, all equilibriums eventually reach a steady
state, where they stabilise.
i.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
j.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
k.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change

Steady
state

1. Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
a. Shaded areas indicate the forecasts of the Monetary Policy Committee.
b. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

OCTOBER 2023
Foreign sector assumptions
1. Trading-partner gross domestic product (GDP) growth
is broadly determined using the Global Projection Model
(GPM), which is adjusted to aggregate the GDP growth
rates of South Africa’s major trading partners on a tradeweighted basis. Individual projections are done for the
six largest trading partners, namely the eurozone, the
United States (US), the United Kingdom (UK), Japan,
China and India. Other countries considered, although
with small weights, are Brazil, Mexico and Russia. The
remaining trading partners are grouped into the ‘Rest
of Countries’ bloc. Since sub-Saharan Africa is also a
major trading region for South Africa (but does not have
a bloc in the GPM), it is modelled separately and then
combined with the aggregate of all the countries in the
GPM to make up total trading-partner growth.
2. As with GDP growth, the output gap is determined using
the GPM and is adjusted in a similar way. The output gap
is driven by a combination of country-specific domestic
factors, external factors and financial-real linkages
(beyond interest rate and exchange rate effects).
Domestic factors include expectations of future demand
and medium-term interest rates. External factors include
exchange rate impacts on demand, direct spillovers
through trade with trading-partner countries and
foreign demand.
3. The commodity price index is a weighted aggregate price
index of the major South African export commodities.
4. The Brent crude oil price is expressed in US dollars
per barrel. The assumption incorporates supply and
demand dynamics as well as oil inventories (of all grades).
The assumption is also informed by projections from the
US Energy Information Administration, the Organization
of
the
Petroleum
Exporting
Countries
(OPEC)
and Reuters.
5. World food prices is the composite food price index
of the United Nations (UN) Food and Agriculture
Organization (FAO) in US dollars. It is weighted using
average export shares and represents the monthly
change in the international prices of a basket of five
food commodity price indices (cereals, vegetable oil,
dairy, meat and sugar). World food price prospects
incorporate selected global institution forecasts for
food prices and imbalances from the anticipated trend
in international food supplies relative to expected food
demand pressures.
6. International consumer prices are also broadly
determined using the GPM. The index is an aggregate
of the consumer price indices of the eurozone, the US
and Japan, weighted by their relative trade shares.
Consumer prices are determined for each of these
economies by accounting for inflation expectations,
demand pressures and pass-through from changes in
the relevant exchange rate. Other institutional forecasts
for international consumer prices are also considered.
7. International policy interest rates are again broadly
determined using the GPM. Interest rates are a weighted
average of the policy rates of the eurozone, the US and
Japan. They are individually determined by a ‘Taylortype’ monetary policy rule. The communications of the
relevant central banks and other institutional forecasts
are also considered.

OCTOBER 2023
Domestic sector assumptions
1. The electricity price is an administered price measured
at the municipal level with a weight of 3.63% in the
headline consumer price index (CPI) basket. Electricity
price adjustments generally take place in the months of
July and August of each year, and the assumed pace of
increase over the forecast period reflects the multi-year
price determination agreement between Eskom and the
National Energy Regulator of South Africa (NERSA), with a
slight adjustment for measurement at the municipal level.
2. Fuel taxes and levies are the total domestic taxes and
costs included in the price of fuel paid at the pump. They
include the Road Accident Fund (RAF) levy, the fuel levy,
retail and wholesale margins, the slate levy and other minor
levies. The two major taxes, which are set by the Minister
of Finance in the annual National Budget, are the RAF levy
and the fuel levy. The income generated by the RAF levy is
utilised to compensate third-party victims of motor vehicle
accidents, while the fuel levy is used to provide funding for
road infrastructure.
3. Potential growth is derived from the South African Reserve
Bank’s (SARB) semi-structural potential output model.
The measurement accounts for the impact of the financial
cycle on real economic activity, and introduces economic
structure via the relationship between potential output
and capacity utilisation in the manufacturing sector (SARB
Working Paper Series No. WP/18/02).
4. The midpoint of the inflation target range is 4.5%.
The official inflation target range is 3–6%.
5. The neutral real interest rate (NRIR) is the interest rate
consistent with stable inflation and output in line with
the economy’s potential. This variable is the basis for
judging whether a given policy stance is expansionary,
contractionary or neutral.

OCTOBER 2023
Glossary
Advanced economies: Advanced economies are countries
with high gross domestic product (GDP) per capita,
diversified exports and close integration into the global
financial system.
Balance of payments: This is a record of transactions
between the home country and the rest of the world over a
specific period of time. It includes the current and financial
accounts. See also ‘Current account’ below.
Brent crude: Brent crude is a light and sweet blend of oil from
five different fields in the North Sea. The price of Brent crude
is one of the benchmark oil prices in international markets.
Budget deficit: A budget deficit indicates the extent to which
government expenditure exceeds government revenue.
Business and consumer confidence: These are economic
indicators that measure the level of optimism about
the economy and its prospects among business managers
and consumers.
Commodities: Commodities can refer to energy, agriculture,
metals and minerals. Major South African-produced
commodities include platinum and gold.
Consumer price index (CPI): The CPI provides an indication
of aggregate price changes in the domestic economy.
The index is calculated using a number of categories
forming a representative set of goods and services bought
by consumers.
Core inflation: Core generally refers to underlying
inflation, excluding the volatile elements (e.g. food
and
energy
prices).
The
SARB’s
forecasts
and
discussions refer to headline CPI excluding food,
non-alcoholic beverages (NAB), fuel and electricity prices.
Crude oil price: This is the United States (US) dollar price
per barrel of unrefined oil. See also ‘Brent crude’ above.
Current account: The current account of the balance of
payments consists of net exports (exports less imports)
in the trade account as well as the services, income and
current transfers.
Emerging markets: Emerging markets are countries with
low to middle income per capita. They are advancing
rapidly and are integrating with global (product and
capital) markets.
Exchange rate depreciation (appreciation): Exchange rate
depreciation (appreciation) refers to a decrease (increase) in
the value of a currency relative to another currency.
Exchange rate pass-through: This is the effect of exchange
rate changes on domestic inflation (i.e. the percentage
change in domestic CPI due to a change in the exchange
rate). Changes in the exchange rate affect import prices,
which in turn affect domestic consumer prices and inflation.
Forecast horizon: This is the future period over which the
SARB generates its forecasts, typically between two and
three years.
Gross domestic product (GDP): GDP is the total market
value of all the goods and services produced in a country. It
includes total consumption expenditure, capital formation,
government consumption expenditure and the value of
exports less the value of imports.
Gross fixed capital formation (investment): The value of
acquisitions of capital goods (e.g. machinery, equipment
and buildings) by firms, adjusted for disposals, constitutes
gross fixed capital formation.
Headline consumer price index (CPI): Headline CPI refers
to CPI for all urban areas, as measured on a monthly basis
by Statistics South Africa (Stats SA). Headline CPI is a
measure of price levels in all urban areas. The 12-month
percentage change in headline CPI is referred to as ‘headline
CPI inflation’ and reflects changes in the cost of living. This
is the official inflation measure for South Africa.
Household consumption: This is the amount of money
spent by households on consumer goods and services.
Inflation (growth) outlook: This outlook refers to the evolution
of future inflation (growth) over the forecast horizon.
Inflation targeting: This is a monetary policy framework
used by central banks to steer actual inflation towards an
inflation target level or range.
Monetary policy normalisation: This refers to the unwinding
of an unusually accommodative monetary policy. It could
also mean adjusting the economy’s policy rate towards its
real neutral policy rate.
Neutral real interest rate (NRIR): The NRIR is the level at
which the real interest rate will settle once the output gap is
closed and inflation is stable.
Nominal effective exchange rate (NEER): The NEER
is an index that expresses the value of a country’s
currency relative to a basket of other (trading-partner)
currencies. An increase (decrease) in the NEER indicates
a strengthening (weakening) of the domestic currency with
respect to the selected basket of currencies. The weighted
average exchange rate of the rand is calculated against
20 currencies. The weights of the five major currencies are
as follows: the euro (30.68%), the Chinese yuan (24.53%),

OCTOBER 2023
the US dollar (10.56%), the Japanese yen (4.95%) and the
Indian rupee (4.85%). Index: 2015 = 100. See also ‘Real
effective exchange rate’ below.
Output gap/potential growth: Potential growth is the rate
of GDP growth that could theoretically be achieved if all the
productive assets in the economy were employed in a stable
inflation environment. The output gap is the difference between
actual growth and potential growth, which accumulates over
time. If this is negative, then the economy is viewed to be
underperforming and demand pressures on inflation are low.
If the output gap is positive, the economy is viewed to be
overheating and demand pressures are inflationary.
Policy rate: A policy rate is the interest rate used by a central
bank to implement monetary policy.
Productivity: Productivity indicates the amount of goods and
services produced in relation to the resources utilised in the
form of labour and capital.
Real effective exchange rate (REER): The REER is the NEER
adjusted for inflation differentials between South Africa and its
main trading partners. See also ‘Nominal effective exchange
rate’ above.
Repurchase (repo) rate: This is the policy rate that is set
by the Monetary Policy Committee (MPC). It is the rate that
commercial banks pay to borrow money from the SARB.
Real repo rate: This is the nominal repo rate, as set by the
MPC, adjusted for expected inflation.
Terms of trade: This refers to the ratio of export prices to
import prices.
Unit labour cost (ULC): A ULC is the labour cost to produce
one ‘unit’ of output. This is calculated as the total wages
and salaries in the non-agricultural sector divided by the real
value added at basic prices in the non-agricultural sector of
the economy.

OCTOBER 2023
Abbreviations
BER
Bureau for Economic Research
BFP
basic fuel price
BVAR
Bayesian vector autoregression
CIT
corporate income tax
CPI
consumer price index
EAF
energy availability factor
EBB
Energy Bounce-Back (Loan Guarantee scheme)
ECB
European Central Bank
FATF
Financial Action Task Force
Fed
Federal Reserve
FRN
floating rate note
FX
foreign exchange
G3
Group of Three
GDE
gross domestic expenditure
GDP
gross domestic product
GFC
global financial crisis
GVA
gross value added
IGC
International Grains Council
IMF
International Monetary Fund
Jibar
Johannesburg Interbank Average Rate
LEX
large exposures framework
MPC
Monetary Policy Committee
MPIF
monetary policy implementation framework
MPR
Monetary Policy Review
MW
megawatt
NAB
non-alcoholic beverages
NERSA
National Energy Regulator of South Africa
NHS
non-housing services
non-comps
non-competitive tenders
NTSDA
National Treasury Sterilisation Deposit Account
OCGT
open cycle gas turbine
OER
owners’ equivalent rent
OPEC
Organization of the Petroleum Exporting Countries
PA
Prudential Authority
PIT
personal income tax
QPM
Quarterly Projection Model
repo
repurchase (rate)
SAGB
South African government bond
SARB
South African Reserve Bank
SIT
services, income and transfer (account)
SST
sea surface temperature
Stats SA
Statistics South Africa
WEO
World Economic Outlook
UK
United Kingdom
ULC
unit labour cost
US
United States
VAT
value-added tax