MPC Statement 21 July 2022


PRESS STATEMENT
21 July 2022

STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
In the wake of the Covid-19 pandemic and aggravated geo-political tensions, the
global economy has entered a period of persistently high inflation and weaker
economic growth. Many developing economies have yet to recover fully from the
pandemic. Global economic conditions remain fragile.
Russia’s war in Ukraine will continue to impair production and trade of a wide range of
energy, food and other commodities. The supply of energy to the Euro Area is limited
as winter approaches, and is likely to reduce growth this year and next. With rapid
inflation and withdrawal of policy stimulus, the United States will also experience
slower economic growth. China’s recovery from the Covid-19 outbreak and resultant
lockdowns remains uncertain. The much-needed resumption of international travel
and tourism will take time to generate large benefits.
Taking these and other factors into account, the SARB’s forecast for global growth in
2022 is revised down from 3.5% in the May meeting to 3.3%, and is lowered to 2.5%
(from 2.7%) for 2023 and 2024.1 The International Monetary Fund (IMF) has signalled

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

MPC Statement 21 July 2022


a lower global growth forecast for 2022 and 2023 in its upcoming World Economic
Outlook Update.2
Although policy settings in advanced economies remain broadly accommodative,
policy normalization by major central banks has accelerated, and higher yields are
tightening global financial conditions. Investor appetite for riskier assets is weaker and
asset values in major markets have declined sharply.
Last year saw the South African economy expand by 4.9%. This year the economy is
expected to grow by 2.0%, revised up from 1.7%. Growth in output in the first quarter
of this year surprised to the upside, at 1.9%, stronger than the 0.9% expected at the
time of the May meeting. Despite this outcome, flooding in Kwa-Zulu Natal and more
extensive load-shedding are expected to result in a contraction of 1.1% in the second
quarter. Growth in the third and fourth quarters is forecast to be 0.7% and 0.4%,
respectively.
The economy is forecast to expand by 1.3% in 2023 and by 1.5% in 2024, below the
previous projection of 1.9% for both years at the time of the last meeting.3 Despite
these downward revisions, economic growth remains above a low rate of potential.4
Private investment has strengthened on the back of the recovery, but public sector
investment remains weak. Household spending remains supportive of growth, but is
likely to soften next year due to higher inflation, lower asset prices, and rising interest
rates. Tourism, hospitality and construction should see stronger recoveries as the year
progresses.

2 An update to the World Economic Outlook will be released on 26 July.
3 The growth forecast includes expected changes in the policy rate.
4 Potential growth for 2022 is 0.5% (from 0.6%), 0.8% (from 0.9%) in 2023 and unchanged at 1.1% in 2024.

MPC Statement 21 July 2022


With potential growth revised somewhat lower for this year and expected GDP growth
higher, the output gap narrows slightly faster over the forecast period. The output gap
is expected to turn positive in the second quarter of 2023. Overall, and after revisions,
the risks to the medium-term domestic growth outlook are assessed to the downside.
Commodity price movements in recent months have been mixed. The export price of
coal has increased alongside oil, while prices for metals have declined. Oil prices
spiked to around US$130 per barrel in the early days of the conflict in Ukraine. While
oil prices currently sit at around US$106 per barrel, we expect them to stay higher than
we did in May, and to average US$108 per barrel for 2022, US$92 per barrel in 2023
and US$85 per barrel in 2024.5
South Africa’s export commodity price basket has come down from earlier peaks and
is now forecast to rise by 3.2% for the year as a whole (down from 9.5%), before falling
in 2023 by about 19.0% and by a further 8.0% in 2024. As a result of these export
and import price and volume developments, the current account balance is expected
to register a surplus of 2.0% of GDP this year, falling to 0.4% in 2023 and to reach a
deficit of 0.4% in 2024.6
Although fiscal risk has eased on the back of better tax revenue and reduced
borrowing needs, financing conditions remain tight and the yield curve for randdenominated bonds is steep. Ten-year bond yields increased to about 11.4% in recent
months.

5 The Brent crude oil assumptions in May were US$103, US$90, and US$85, respectively.
6 In May, the current account surplus for 2022 was expected to be about 2.1% of GDP, 0.8% in 2023 and 0.0%
in 2024.

MPC Statement 21 July 2022


Policy normalisation in major economies and the slowdown in China have contributed
to rand depreciation in recent months. The implied starting point for the rand forecast
is R16.10 to the US dollar, compared with R15.88 at the time of the previous meeting.7
While economic growth is slowing globally, inflation continues to surprise to the upside.
Sustained policy accommodation, supply shortages and other restrictions have
sharply increased the prices of many goods, services and commodities.8 Producer
price increases continue to pass-through to wages and consumer prices globally. Our
estimate for inflation in the G3 is revised higher to 6.9% in 2022 (from 6.3%) and up
to 3.0% in 2023 (from 2.7%), and stays unchanged at 2.0% in 2024.9
A higher global oil price and rand weakness contribute to higher expected fuel price
inflation for this year at 38.9% (up from 31.2%) and to 4.5% in 2023 (up from -0.3%).
Local electricity price inflation is unchanged at 11.0% in 2022, 9.2% in 2023, and 10%
in 2024.
As a result of higher global food prices, local food price inflation is also revised up and
is now expected to be 7.4% in 2022 (up from 6.6%), and 6.2% in 2023 (up from 5.6%).
The food price inflation forecast for 2024 is unchanged at 4.2%.
The Bank’s forecast of headline inflation for this year is revised higher to 6.5% (from
5.9%). Higher food, fuel, and core inflation are expected to keep headline inflation
elevated at 5.7% in 2023 (up from 5.0%). Headline inflation of 4.7% is expected in
2024, unchanged since the May meeting.

7 The rand has depreciated by about 6.3% to the US dollar since the May meeting and 7.2% year to date.
8 World food prices continue to rise. The assumption used for the forecast for USD-denominated world food
prices in 2022 is revised higher from 15.3% to 22.3%.
9 The G3 comprises the United States, the Eurozone, and Japan. The latest CPI inflation in the respective
components sits at 9.1%, 8.6% and 2.4%.

MPC Statement 21 July 2022


Core inflation is forecast higher at 4.3% in 2022 (up from 3.9%), rising to 5.6% (from
5.1%) in 2023. Our forecast for core inflation in 2024 is slightly higher at 4.9% (from
4.8%). Core goods and services price inflation are forecast higher through to the end
of 2024, compared to May when only core goods inflation was rising each year.10
Nominal wages are forecast to rise by 5.6% in 2022, 7.3% in 2023 and 5.7% in 2024.
The risks to the inflation outlook are assessed to the upside. Global producer price
and food price inflation continued to surprise higher in recent months and may do so
again. Russia’s war in Ukraine is likely to persist for the rest of this year and may have
significant further effects on global prices. Oil prices increased strongly from the start
of the war and may rise further as stresses in energy markets intensify. Electricity and
other administered prices continue to present short- and medium-term risks. Given
below-inflation assumptions for public sector wage growth and higher petrol and food
price inflation, considerable risk still attaches to the now elevated nominal wage
forecast.
Higher than expected inflation has pushed major central banks to accelerate the
normalisation of policy rates, tightening global financial conditions and raising the risk
profiles of economies needing foreign capital. We now expect G3 interest rate levels
for the forecast period to be twice as high as expected in May.11 On balance, and with
few exceptions, capital flows and market volatility are expected to remain elevated for
emerging market assets and currencies.
Alongside currency depreciation, other risks to the inflation outlook, such as increased
food and fuel prices, have been realised, pushing up unit labour costs and

10 Core goods refers to total CPI goods excluding food and NAB, fuel and energy, whereas services include all
surveyed services within the CPI basket.
11 The weighted average of G3 policy rates is forecast to be 1.2% in 2022, 3.0% in 2023 and 3.1% in 2024.

MPC Statement 21 July 2022


expectations of future inflation. Average surveyed expectations of future inflation have
increased to 6.0% for 2022 and 5.6% for 2023.12 Expectations for inflation based on
market surveys have increased to 6.5%.13 Long-term inflation expectations derived
from the break-even rates in the bond market have also increased.14
In the second quarter of this year, headline inflation breached the target range and is
expected to remain above it until the second quarter of 2023. By the fourth quarter of
2024, we expect headline inflation to revert to the mid-point of the target range, on the
back of declining fuel and food inflation. The forecast takes into account the policy rate
trajectory indicated by the Bank’s Quarterly Projection Model (QPM). 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.
Against this backdrop, the MPC decided to increase the repurchase rate by 75 basis
points to 5.50% per year, with effect from the 22nd of July 2022. Three members of the
Committee preferred the announced increase. One member preferred a 100 basis
points increase. Another member preferred a 50 basis point increase.
The revised repurchase rate path remains supportive of credit demand in the near
term, while raising rates to levels consistent with the current view of inflation risks. The

12 The (Q2) Bureau for Economic Research (BER) survey expectations rose above the target midpoint to 6.0%
(5.1%) for 2022 and 5.6% (5.0%) for 2023.
13 Market analysts (Reuters Econometer) in July expect inflation to be higher at 6.5% (6.0%) in 2022, 5.0%
(4.7%) in 2023 and 4.4% in 2024.
14 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 6.97% for the 5-year and 7.49% on the 10-year
breakeven. 15-year break-even inflation sits at 7.64%.

MPC Statement 21 July 2022


aim of policy is to stabilise inflation expectations more firmly around the mid-point of
the target band and to increase confidence of hitting the inflation target in 2024.15
Guiding inflation back towards the mid-point of the target band can reduce the
economic costs of high inflation and enable lower interest rates in the future. Achieving
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.
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.
Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be released on 22
September 2022.
Contact person:
Thoraya Pandy
0824168416


15 The forecasted trajectory for the repurchase rate implies a rise in the inflation-adjusted repo rate from -1.7%
for 2021 to -2.0% for 2022, 1.0% for 2023, and 2.0% in 2024. The real repurchase rate calculation here is based
on the 1-quarter ahead inflation forecast and are annual average rates.