MPC Statement May 23rd, 2019


South African Reserve Bank

PRESS STATEMENT
23 May 2019


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Over the past few months, global growth has rebounded somewhat, but significant
downside risks remain, in particular from threats to the global trade regime.
Domestically, electricity supply constraints and a protracted strike in a major gold mine
contributed to a weak first quarter performance. Business and consumer confidence
continue to weigh on the near-term growth forecast. Recent monthly inflation
outcomes have remained around the mid-point of the inflation target range, in part due
to weak demand and positive inflation data surprises. The medium-term inflation
outlook has moderated slightly.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all
urban areas was 4.4% in April (down from 4.5% in March). Goods price inflation was
4.2% (up from 4.1% in March), while services price inflation was 4.6% (down from
4.9% in March). The Bank’s measure of core inflation, which excludes food, fuel and
electricity, was 4.1% in April (down from 4.4% in March). Producer price inflation for
final manufactured goods increased to 6.2% in March (from 4.7% in February).
The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) has
improved since the previous MPC. Headline inflation is expected to average 4.5% in
2019 (down from 4.8%), increasing to 5.1% in 2020 (down from 5.3%) and moderating
MPC Statement May 23rd, 2019


to 4.6% in 2021 (down from 4.7%). Headline CPI inflation is expected to peak at 5.5%
in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021.
The main drivers of the forecast are a lower starting point for food and services
inflation, and the revised oil price assumptions. Food price inflation is now expected
to average 3.7% in 2019 (down from 4.1%). The assumptions for Brent crude oil in the
QPM were revised up from US$64 to US$69.50 for 2019. The assumptions for 2020
and 2021 were also revised up from US$65 to US$68.
Moderation in rental prices, unit labour costs and inflation expectations also contribute
to lower core inflation over the medium term. The forecast for core inflation is lower at
4.5% in 2019 (down from 4.8%), 4.8% in 2020 (down from 4.9%) and 4.5% in 2021.
Average inflation expectations have been declining slowly since the end of 2017. The
inflation expectations of market analysts in the May 2019 Reuters Econometer survey
were unchanged at 4.7% for 2019 while expectations edged down to 5.2% for 2020
(from 5.3%) and 5.0% for 2021 (from 5.1%). Market-based expectations implicit in the
break-even inflation rates (i.e. the yield differential between conventional and inflationlinked government bonds) remain sensitive to exchange rate movements. Since our
last meeting, five-year break-even rates increased to 5.1% and ten-year break-even
rates were unchanged at 5.8%. The next BER1 inflation expectations survey will be
published in July.
Global GDP is expected to average 3.3% in 2019 and stabilise around 3.5% from
2020. While global economic activity remains moderate overall, growth momentum
has slowed somewhat and there are many risks. Trade tensions have escalated

1 Bureau for Economic Research
MPC Statement May 23rd, 2019


between the United States and China, weighing on market confidence. Further tariff
increases could disrupt global value chains and further reduce global trade. The IMF
April 2019 World Economic Outlook estimates that tariff increases could subtract as
much as 0.8 percentage points from global growth. Much uncertainty remains around
Brexit, alongside other geo-political developments. In some countries, there also
remain significant financial vulnerabilities associated with elevated private and public
debt.
Inflation in most advanced economies remains below targeted levels, allowing major
central banks space to put monetary policy normalisation on hold. However, the risk
of a renewed tightening of financial conditions should not be underestimated.
The performance of emerging market currencies was mixed, reflecting a combination
of changes in investor sentiment, easier monetary conditions in major economies and
country specific factors. Currencies of countries with stronger macroeconomic
fundamentals remain better placed to benefit from these developments. The rand has
benefited from improved sentiment towards riskier assets but will continue to be
affected by idiosyncratic factors such as domestic growth prospects and policy
settings.
Since the March MPC, the rand has appreciated by 1.5% against the US dollar, by
2.5% against the euro, and by 3.1% on a trade-weighted basis. The implied starting
point for the rand is R14.40 against the US dollar, compared with R14.00 at the time
of the previous meeting. At these levels, the QPM assesses the rand to be slightly
undervalued.
Based on recent short term indicators and negative growth in mining and
manufacturing, GDP is expected to contract in the first quarter of 2019. The
MPC Statement May 23rd, 2019


disappointing data outcomes partly reflect supply side constraints due to load
shedding and a strike at a major gold mine. Fixed capital formation and household
consumption expenditure also remain weak.
The Absa Purchasing Managers’ Index has recovered to 47.2 index points, remaining
below the neutral level. The SARB’s composite leading business cycle indicator has
trended lower since March 2018 and decreased further by 0.4% in March 2019.
The SARB now expects GDP growth for 2019 to average 1.0% (down from 1.3% in
March). The forecast for 2020 and 2021 is unchanged at 1.8% and 2.0% respectively.
The near term growth outlook is limited by the larger than expected slowdown in the
first quarter, weak business and consumer confidence as well as growing pressure on
household disposable income. Real fixed investment is now forecast to contract
by 0.3% in 2019, while household consumption expenditure will rise by a modest
1.0%.
The MPC assesses the risks to the growth forecast to be on the downside. Weak
business confidence, possible electricity supply constraints and high debt levels in
certain state-owned enterprises will continue to limit investment prospects. The
escalation of trade tensions could significantly impact global trade with likely negative
impacts for South Africa as a small open economy. The Committee remains of the
view that current challenges facing the economy are primarily structural in nature and
cannot be resolved by monetary policy alone. It is now even more urgent to have a
combination of prudent macroeconomic policies and structural reforms that raise
potential growth and lower the cost structure of the economy.
The MPC welcomes the continued downward trend in recent inflation outcomes and
the moderation in inflation expectations. These are positive developments, as the
MPC Statement May 23rd, 2019


Committee would like to see inflation remain close to the mid-point of the inflation
target range on a more sustained basis.
The overall risks to the inflation outlook are assessed to be more or less evenly
balanced. While there is scope for further moderation in meat and services prices, oil
prices are expected to remain elevated and global food prices appear to have
bottomed out. Electricity and water prices, among other administered prices, present
additional upside risks.
Against this backdrop, the MPC decided to keep the repurchase rate unchanged at
6.75% per year. Three members preferred to keep rates on hold and two members
preferred a cut of 25 basis points. The Committee assesses the stance of monetary
policy to be broadly accommodative over the forecast period. Any future policy
adjustments will continue to be data dependent.
The implied path of policy rates generated by the Quarterly Projection Model is for one
cut of 25 basis points to the repo rate by the end of first quarter of 2020. The
endogenous interest rate path is built into the growth and inflation forecast. As
emphasized previously, the implied path remains a broad policy guide which could
change in either direction from meeting to meeting in response to new developments
and changing risks.
Lesetja Kganyago
GOVERNOR

The next statement of the Monetary Policy Committee will be released on 18 July 2019.

Contact person:
Ziyanda Mtshali - Tel: 012 399 7966 Email: