MONETARY POLICY
REVIEW
APRIL 2022
APRIL 2022
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APRIL 2022
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.
In normal circumstances, the MPR is presented by senior officials of the SARB in major centres across South Africa. However,
due to COVID-19, this MPR will be launched virtually.
Questions about the publication may be directed to Marlene Hugo at
APRIL 2022
Contents
Beyond the recovery: ensuring price stability


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

APRIL 2022
Beyond the recovery:
ensuring price stability
Executive summary and
overview of the policy stance
In response to rising inflation and a closing output gap, the
Monetary Policy Committee (MPC) has raised the repurchase
(repo) rate by a cumulative 75 basis points since the previous
edition of the Monetary Policy Review (MPR), bringing it to
4.25%. The policy stance remained strongly supportive of the
economic recovery over the six-month period under review.
By the fourth quarter of 2021, the economy had recovered
to above 98% of the 2019 gross domestic product (GDP)
level. Economic growth this year is expected to be somewhat
stronger than previously forecast on stronger commodity
export prices. Headline inflation, however, rose sharply
from 5% in September 2021 to 5.9% in December, before
moderating somewhat. Inflation was pushed higher by large
increases in fuel and food prices amid a more modest pickup
in core inflation. Headline inflation is expected to average 5.8%
in 2022, well above the 4.9% forecasted in January this year,
and with risks tilted to the upside.
Global economic activity rebounded sharply over the past year,
led by advanced economies and underpinned by ample policy
support and progress made with COVID-19 vaccinations.
Emerging market economies recovered at a slower pace than
advanced economies, and for many of them activity remains
somewhat below 2019 levels. Persistent supply constraints
and robust demand growth at a global level, however, continue
to give strong impetus to inflation, which accelerated rapidly in
a wide range of countries, both advanced and emerging. As a
result, policy tightening has been expected for some time.
In this complex environment, economic uncertainty spiked in
February 2022 with the Russian invasion of Ukraine. Oil prices
rose sharply to above US$130 per barrel in early March before
retreating somewhat, followed by wheat and other grains
prices. Higher input prices and disruptions to global trade
have increased downside risks to global growth and raised
forecasts for global inflation. The South African Reserve Bank
(SARB) expects global growth to decelerate sharply to 3.7%
in 2022, down from an estimated 6.4% in 2021, and to remain
modest over the medium term.
Up until February, the foremost risk to global growth in 2022
was an acute rise and then progressively non-transitory
inflation.1 Inflation was given impetus by the massive fiscal
support provided by advanced economies, an accumulation

Inflation for February 2022 in the Group of Three countries and in
the United Kingdom (UK) more than trebled the 2% targets for these
countries, with 7.9% recorded in the United States and 6.2% in the UK.
The euro area registered a record high of 7.5% in March, after recording
6.2% in February. Japan is the exception, recording only 0.9% in February.

Percentage change over 12 months
Jan

Apr
Jul
Oct
Headline inflation
Sources: Stats SA and SARB
Midpoint
3–6% inflation target range
Jan
Apr
Jul
Oct
Jan
Percentage change
Global growth*
Source: SARB

-6
-4
-2

Forecast
* Real GDP growth in SA’s major
trading-partner countries

Euro area

Japan

UK

US
Forecast
Percentage change over 12 months
Headline consumer inflation
Sources: Bloomberg and Haver

-2

APRIL 2022
of household savings, and expansive monetary conditions
which led to a surge in demand for consumer goods as
restrictions eased. The supply response, however, remained
constrained due to supply chain bottlenecks and COVID-19
restrictions that affected production activity. Price pressures
further emanated from the tightening in labour markets in
some advanced economies (e.g. the United States (US) and
the United Kindom (UK)), and sharply higher oil and global food
prices. Major emerging markets, particularly Brazil, Mexico
and Turkey, also experienced markedly higher inflation from
fuel and food, though demand pressures were also evident.
For other emerging markets, such as South Africa, the inflation
build-up was less pronounced early in the recovery period but
has ramped up quickly over the past year.
In response to climbing inflation and its increasingly less
transitory features, the major global central banks moved
faster to normalise rates. The US Federal Reserve (Fed) raised
the federal funds rate by 25 basis points in March after two
years of rates remaining at the effective zero lower bound.
Meanwhile, the Bank of England has raised its policy rate three
times since December 2021, bringing it to 0.75% in March
2022.2 For emerging markets, pressure on policy rates has
also increased with inflation and heightened risk to capital
flows and exchange rates.
Domestic economic outlook
The domestic economy grew by 4.9% in 2021 – its fastest
pace of growth since 2007 – after the sharp contraction of
6.4% in 2020. This brought South Africa’s GDP to within
2 percentage points of the 2019 level. This was achieved
despite the recovery being temporarily derailed by the
steep decline in GDP (1.7% quarter on quarter, seasonally
adjusted) during the third quarter of 2021, prompted by the
July riots in KwaZulu-Natal and Gauteng, among other factors.
The economy would have surpassed pre-COVID-19 economic
output in the first quarter of 2022 had the third quarter’s events
not transpired.3
The economy’s recovery from the pandemic has featured
a gradual resumption of consumption spending, a return to
positive private investment growth, and sustained, robust
terms of trade gains from high global commodity export prices.
Fiscal and monetary policy have been strongly accommodative,
adding directly to demand and reducing debt-service costs to
ease borrowers’ cash flow and encourage more credit demand.
Spending by households also benefitted from the rebound
in wages, a recovery in asset prices as well as increased
social transfers.

The European Central Bank has not provided a firm indication on
the possible rate path, and prospects may now have been dampened by
the Russia–Ukraine war, which could create stagflationary conditions
for the region.

The economy grew by 1.2% quarter on quarter in the fourth quarter
of 2021, lower than the SARB’s estimate of 1.4% at the January 2022
MPC meeting.

Index

Oct
Nov
Dec
Jan
Feb
Mar
Financial conditions
Source: Bloomberg


US

Euro area
Tighter
Percentage change over four quarters

Real GDP growth*
* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%.
This chart shows seasonally adjusted data, as used in the QPM.
Sources: Stats SA and SARB


Percentage points
Contributions to GDP growth
2021Q1
2021Q2
2021Q3
* Percentage change from quarter to quarter
Sources: Stats SA and SARB
Forecast

2021Q4
2022Q1
Agriculture
Manufacturing
Mining
Taxes minus
subsidies
Trade
Other
GDP*

APRIL 2022
While the recovery of the economy has progressed well,
the pandemic has scarred some sectors severely. The most
impacted are the construction, transport and trade sectors
which remain well below 2019 output levels. As these are more
labour-intensive sectors, reduced output levels help explain
why overall employment levels have yet to recover. Some firms
appear to have delayed re-hiring as sales have been slow,
while others may have achieved efficiency gains.4
At the aggregate sector level, the primary sector has expanded
beyond its 2019 size, benefitting from favourable weather
conditions (agriculture) and elevated global commodity
prices (mining).5 The secondary sector, at 90% of its 2019
output level, remains furthest behind.6 The tertiary sector has
surpassed its 2019 output level, despite persistent weakness
in transport and trade activity. These two subsectors are
expected to rebound as the pandemic fades and help to boost
employment. However, inadequate electricity supply remains
a serious drag on growth and impedes the contribution of
demand to the economy.
South Africa’s trajectory through the pandemic and into the
recovery phase has demonstrated the overall macroeconomic
resilience of the economy – benefiting from the terms of trade
despite globally weak output, and able to partially finance
higher public spending through greater saving and drawing on
external assets. This resilience is perhaps best displayed in
the external balances, particularly the current account, which
shows the net borrowing needs of the economy given a specific
level of spending by households, firms and the public sector.
As demand slowed into the pandemic, savings by corporates
and households surged, helping drive the current account into
surplus, and together with revenue windfalls, provided relatively
cheap financing to public spending. The current account,
which reached 3.7% of GDP in 2021, supported the rand,
and contributed to less inflationary pressure than had been
expected when the crisis first unfolded. The recent resurgence
in commodity export prices could prolong the surplus until
2024, even as imports continue to recover.
Despite borrowing requirements remaining high, South Africa’s
fiscal ratios improved markedly, underpinned by the revenue
recovery and commodity windfalls. Public debt is now projected
to stabilise at 75.1% of GDP in 2024/25, 3 percentage points
lower than the projection in the 2021 Medium Term Budget
Policy Statement (MTBPS). A permanent reduction in fiscal risk
should, all other things being equal, lower long-term borrowing
costs, in turn supporting investment. The achievement of fiscal
targets remains sensitive to additional support to state-owned

See in the October 2021 MPR.

Mining would have performed significantly better if not for transport
logistics challenges, confrontational labour relations and load-shedding.

Construction contracted further in 2021, continuing a downward trend
that began in 2017. After growing by 0.5% in the first quarter of 2021,
the sector contracted by 0.8%, 0.6% and 2.2% in the second, third and
fourth quarters respectively.
Number (millions)
Labour trends

Source: Stats SA
Labour force
Employed
Index: 2019 = 100
GDP levels*

Q1
Q2 Q3
Q4
Sources: Stats SA and SARB
* Seasonally adjusted

Trade

Mining

Utilities

Finance

Transport

Agriculture

Construction

Manufacturing

Community, social and personal services

Q1
Q2 Q3
Q4
Q1 Q2 Q3
Q4

Oct 2021

Mar 2022
Percentage of GDP
Current account balance
Source: SARB
-6
-4
-2

* Dotted lines indicate forecasts

APRIL 2022
enterprises, growth of the public sector wage bill, and the
introduction of new and permanent spending streams funded
by temporary revenues.
Unlike in the recovery phase, the growth outlook now is
more subdued, as deep-seated structural constraints are
expected to limit realised and potential growth.7 The economy
is expected to grow at an annual average rate of 1.9%, while
potential is much weaker at 0.9% over the outlook period.8
Despite medium-term growth remaining disappointingly low,
the economy is expanding faster than potential, resulting in
the output gap closing a little faster and disinflationary pressures
moderating further, as seen in the trajectory of core inflation.
South Africa’s inflation rate shifted markedly higher during
the period under review, underpinned by soaring fuel prices
and elevated food inflation, with rising core inflation adding to
pressures, though from a low base. After averaging 4.5% in
2021, up from 3.3% in 2020, headline consumer price index
(CPI) inflation is projected at 5.8% in 2022 (4.2% in the previous
MPR). Administered price inflation (12.2% in 2022) will again
exert upward pressure on headline inflation, having risen
persistently above the upper limit of the inflation target range.9
In contrast with headline inflation, core inflation has remained
subdued since the release of the previous MPR, kept down
by unusually low insurance price inflation and despite a broad
rise in services prices from low levels. Core inflation averaged
3.1% in 2021, down from 3.3% in 2020, before increasing to a
projected 3.7% in the first quarter of this year. Sharply higher
imported inflation and the closing output gap are forecast to
lift core inflation to 4.2% in 2022 and 5.0% in 2023, before
receding somewhat to 4.7% in 2024.
Looking ahead, domestic inflation could surprise higher
if the hostilities in Ukraine continue to intensify or if oil and
gas supplies are additionally constrained. The upward drift
in inflation expectations and sharply higher producer prices
further tilt the inflation risk to the upside.10 Higher expected
wage growth, a somewhat weaker rand and further advances
in global goods prices could exert additional upward pressure
on headline inflation.

The low potential growth rate reflects, among other things, weak
investment, persistent electricity supply constraints and skills shortages.

Growth in GDP was revised slightly higher to 2.0% in 2022, up from 1.7%
in the October 2021 MPR, as the resurgence in the commodity export
prices is expected to raise growth through increased exports, terms
of trade gains, and the income and wealth effects from higher prices,
countering the adverse effects from higher fuel prices and inflation.

The recent announcement of a temporary R1.50 reduction in the general
fuel levy is expected to directly lower headline inflation by between
0.4 percentage points and 0.5 percentage points in April and
0.3 percentage points in May. Consequently, the average inflation for
the second quarter of 2022 drops to 5.9%, lower than the Quarterly
Projection Model’s (QPM) projected second-quarter rate of 6.2%
at the March MPC meeting.
10 The average surveyed inflation expectations for 2023 edged higher
to 5.0% during the first quarter of 2022, up from 4.7% in the fourth
quarter of 2021.
Percentage of GDP
Public debt
Source: National Treasury

Actual
2021 MTBPS
2021 Budget
2022 Budget

Forecast

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

Total

Goods

Services
Percentage change over four quarters
Core inflation*
Source: SARB

* Dotted lines indicate forecasts

APRIL 2022
Overview of the policy stance
Over the three meetings covered in this edition of the MPR
(November 2021, January 2022 and March 2022), the MPC
raised the repo rate three times, bringing it to 4.25% after
leaving it unchanged at 3.5% from July 2020. Despite the
upward adjustment to the repo rate, the current rate broadly
keeps the underlying degree of support to the economy where
it has been for some time.
The Quarterly Projection Model (QPM) adjusts the repo rate
to achieve inflation outcomes at the target midpoint over the
forecast horizon of three years, depending on the near-term
shocks buffeting the economy. Because of the strong upward
shift in inflation outcomes, the QPM adjusted to show a faster,
yet still gradual, reduction in monetary accommodation.
The normalisation of the repo rate began with a 25 basis point
increase in November 2021, followed by two further hikes of
the same magnitude at the January and March 2022 meetings.
At the November meeting, the QPM-implied repo rate path
signalled an immediate 25 basis point increase in the repo rate,
followed by a 50 basis point increase in the first quarter of 2022.
Total rate hikes over the forecast period amounted to 325 basis
points. The MPC unanimously voted to raise the repo rate by
25 basis points at this meeting, setting policy normalisation
in motion. The pace of policy normalisation thus far has been
gradual, in some contrast to the sharp rise in inflation which is
projected to breach the upper limit of the target range in the
second quarter of this year. Inflation is, however, expected to
return to the target midpoint in 2023.11
The period between the November 2021 and the January
2022 meetings saw the release of the third-quarter GDP data.
This showed a much larger contraction than was expected,
resulting in the output gap widening. At the same time, inflation
expectations drifted slightly higher, labour costs ticked up, and
the rand weakened somewhat. Fuel and food inflation were
both projected higher over the near term, but fuel inflation was
seen lower over the medium term, pulling the three-to-fivequarters-ahead average inflation lower to 4.5%. Lower inflation
at this horizon directly reduces upward pressure on rates and,
at the same time, narrows the real repo rate gap. Consequently,
the QPM shaved 25 basis points off the November-implied
repo hike for the first quarter of 2022. The MPC voted to raise
the repo rate by 25 basis points at the January meeting, with
four members expressing a preference for an increase while
one member preferred no change.
11 The projection does not take into account the recent announcement
of a R1.50 temporary fuel price relief.
Per cent
Repo rate

Source: SARB


Percentage change over four quarters
Evolution of headline inflation forecasts*

Sources: Stats SA and SARB

Actual

Nov 2021

Jan 2022

Mar 2022
* Dotted lines indicate forecasts
Midpoint
3–6% inflation target range

Per cent
Evolution of repo rate forecasts*

Source: SARB

Actual

Nov 2021

Jan 2022

Mar 2022
* Dotted lines indicate forecasts

APRIL 2022
By the March 2022 meeting of the MPC, the global environment
had changed considerably. Downside risks to global growth
were heightened, while new uncertainties surrounding the
Russia–Ukraine war and its impact on oil and food prices and on
supply chains emerged. Global growth was seen slowing faster
than was projected at the January MPC meeting, while South
Africa’s commodity export prices reversed their moderation.
Global inflation was projected substantially higher on markedly
high energy and food inflation. The meeting was also preceded
by the Fed raising its policy rate by 25 basis points.
In terms of domestic growth, the 2021 fourth-quarter GDP
data showed the economy had made further progress.
With growth over the outlook period revised slightly higher on
improved terms of trade, the output gap was forecast to close
a little earlier, adding to price pressures. Headline inflation
was seen rising sharply, driven by fuel and food prices, and
averaging 6.2% in the second quarter of 2022 before returning
close to the target midpoint in 2023 and 2024.12 The forecast
projected steep rises in both services and core goods inflation,
to 4.2% in 2022, 5.0% in 2023 and 4.7% (4.9% for core goods)
in 2024. Between the January and March meetings, inflation
expectations measured by surveys and by market indicators
continued to rise well above the midpoint of the target band.
At the March meeting the MPC raised the repo rate by
25 basis points, citing higher upside risks to inflation over the
medium term. The committee unanimously agreed to continue
to normalise the repo rate, with three members opting for a
25 basis point increase while two members preferred a hike of
50 basis points. The QPM signalled a 25 basis point increase
at the March meeting. The implied repo rate trajectory closely
tracked that of the January meeting but added an additional
25 basis points in the first quarter of 2023, steepening the repo
profile slightly. The baseline scenario further assumed a faster
correction in oil prices than was forecast in January, which
explains the sharp deceleration in inflation in 2023.13 The repo
rate is expected to rise to 6.75% by the fourth quarter of 2024.
12 The return to target is conditional on a repo response (endogenous
repo rate).
13 Should this not materialise, inflation will remain elevated for longer,
requiring a stronger policy response than indicated in the QPM baseline.

Percentage change over four quarters
G3 inflation

Source: SARB

Jan 2022

Mar 2022
Forecast
Percentage points
Contributions to change in headline
inflation forecast*

* Between Jan and Mar 2022
Sources: Stats SA and SARB
Core
Food
Fuel
Electricity
Headline


APRIL 2022
Conclusion
With core inflation gathering pace, and fuel and food prices
markedly higher, headline inflation has accelerated. Looking
ahead, while fuel and food prices should moderate, the closing
output gap and higher imported inflation are expected to exert
upward pressure on headline inflation. The Russia–Ukraine
conflict has added additional price pressures to both oil
and food, and elevated uncertainty around the inflation
forecast trajectory.
The MPC has raised the repo rate by 75 basis points since
November 2021, bringing the policy rate to 4.25%. Gradual
normalisation dials back the degree of accommodation, in line
with the expected inflation trajectory, and returns the repo rate
to a sustainable long-term level that limits the risk of inflation
exceeding the target for a lengthy period.
Over the longer-term, higher inflation is associated with
lower growth and higher unemployment, and worsens wage
inequality in South Africa (see Box 1).14, 15 Low and stable
inflation, on the other hand, promotes economic growth and
protects the real consumption of households, particularly
those living on grants or pension income.16
The attainment of low and stable inflation is necessary, but
not sufficient, to achieve faster economic growth. Low inflation
should be complemented by structural reforms that seek to
provide sufficient energy for growth, reduce product and labour
market regulation, lower the impact of administered prices on
overall inflation, and further de-risk the economy by stabilising
public debt. These reforms will bring about more dynamism in
the economy, underpin low domestic inflation and permanently
reduce borrowing costs.
14 S Merino, ‘Wage inequality under inflation-targeting in South Africa’.
South African Reserve Bank Working Paper Series No. WP/21/18,
Pretoria: South African Reserve Bank, September 2021.
15 T Janse van Rensburg, W Simbanegavi and D Steenkamp, ‘The case
for a 3% point inflation target’, South African Reserve Bank Economic
Note No. EN/2021/10, Pretoria: South African Reserve Bank, May 2021;
K Makrelov and C Loewald, ‘Impact of inflation on the poor’, South
African Reserve Bank Bulletin of Economic Notes No. OBEN/20/01,
Pretoria: South African Reserve Bank, June 2020.
16 Inflation is a regressive tax and should thus be kept low and stable.
Inflation is considered ‘low’ if economic agents can afford to ignore
it when making consumption or investment decisions.

Real repo rate

Real repo rate gap

Real neutral rate
Per cent

Real repo rate, gap and neutral level*
-6
-4
-2

* Dotted lines indicate forecasts
Source: SARB
Percentage change over 12 months

Inflation by income decile

Decile 1

Decile 2

Decile 3

Decile 10

Headline CPI
Source: Stats SA

APRIL 2022
Box 1 The Phillips curve and monetary policy in
South Africa

A W Phillips, ‘The relation between unemployment and the
rate of change of money wage rates in the United Kingdom,
1861–1957, Economica 25(100), 1958, pp 283–299.

See, for example, M Friedman, Nobel lecture: ‘Inflation and
unemployment’, Journal of Political Economy 85(3), 1977, pp 451–472.

This latter point, however, can be intermediated by central
bank credibility, reducing the sacrifice ratio.

See, for instance, J Fedderke and Y Liu, ‘Inflation in South
Africa: an assessment of alternative inflation models’, South
African Journal of Economics 86(2), 2018, pp 197–230.

See, for example, M Reid and G du Rand, ‘A sticky information Phillips
curve for South Africa’, South African Journal of Economics 83(4), 2015,
pp 506–526; and M Botha, L Kuhn and D Steenkamp, ‘Is the Phillips
curve framework still useful for understanding inflation dynamics in
South Africa?’, South African Reserve Bank Working Paper Series
No. WP/20/07, Pretoria: South African Reserve Bank, September 2020.

See P Honohan and A Orphanides, ‘Monetary policy in South Africa,
2007–2021’, WIDER Working Paper No. 2022/29, Helsinki:
UNU-WIDER, March 2022; and A Kabundi, E Schaling and M Some,
‘Estimating a Phillips curve for South Africa: a bounded random-walk
approach’, International Journal of Central Banking 58, June 2019.
Monetary policy decisions are guided by how far future inflation is
from its target value and the extent to which demand relative to
supply is increasing or decreasing inflationary pressures. The policy
rules that capture these relationships therefore embed a trade-off
with inflation that involves growth and/or employment: as inflation
falls, measured output or employment levels are also expected to
decline. These relationships have remained central to monetary
policy since the seminal work of Phillips (1958).1
Phillips found a negative relationship between inflation and
unemployment,
suggesting
that
policymakers
could
drive
unemployment below its natural rate by tolerating somewhat higher
inflation. In the ‘great inflation’ era of the 1960s and 1970s, however,
the relationship broke down, with high inflation co-existing with high
unemployment, repudiating the general validity of Phillips’ original
thesis.2 More recent studies suggest a weaker relationship – a ‘flatter’
Phillips curve – which implies that inflation has become less
responsive to fluctuations in output and unemployment, and that
once inflation is entrenched, it may be harder to get rid of.3
Despite the conventional use of the Phillips curve hypothesis in
monetary policy in South Africa, econometric studies have found little
evidence for the trade-off between inflation and unemployment,
consistent with the global literature. Using output or other measures
of aggregate demand as proxies for the unemployment rate have
generated similar outcomes.4 Other advanced estimations that
include inflation expectations and wage determination, while
confirming the existence of an output-inflation trade-off, have also
shown the impacts to be much smaller than conventionally assumed.5
Notwithstanding the lack of support in the data, the Phillips curve
framework has remained central to the application of policy.
An evaluation of the decisions of the South African Reserve Bank’s
Monetary Policy Committee over the past decade shows that policy
has responded more to the output gap than to the deviation of
inflation from the target and has been generally more accommodative.6
This in part reflects a systematic overestimation of potential gross
domestic product that implied a wider output gap than actually
existed at the time of estimation.
Per cent


Sources: Honohan and Orphamides (2022)
Real repo rate and output gap*

Real repo rate less 2.5%

Real-time output gap
* The real repo rate is the policy rate minus oneyear-ahead inflation expectations of analysts
Per cent

-6
-4
-2

Sources: BER and SARB
Real repo rate and inflation expectations*

Real repo rate less 2.5%

One-year-ahead inflation expectations less 4.5%
* The real repo rate is the policy rate minus one-year-ahead
inflation expectations of analysts

APRIL 2022
These econometric evaluations make it plain that policy rules
predicated on simple macroeconomic relationships need ongoing
assessment in the light of other economic shocks and structural
factors that can be better explanators of economic growth and job
creation outcomes. In some contrast to the basic Phillips curve
intuition, studies show that higher inflation is undesirable for various
reasons, including having adverse distributional effects on the poor
and those living on fixed incomes, while also reducing competitiveness
and placing jobs in export- and import-competing businesses at
risk.7 Indeed, there is a long-run negative relationship between
inflation and employment in South Africa that operates in part through
the effects of higher inflation on the supply cost of less-skilled
workers.8

Lower-income households experience higher and more volatile inflation
than those from higher income groups (see C Loewald and K Makrelov,
‘The impact of inflation on the poor’, South African Reserve Bank
Economic Note No. EN/2019/20, Pretoria: South African Reserve Bank,
October 2019). See W L Kumo, ‘Inflation targeting monetary policy,
inflation volatility and economic growth in South Africa’, African
Development Bank Group Working Paper Series No. 216, Abidjan: African
Development Bank, January 2015.

See J C Vermeulen, ‘Inflation and unemployment in South Africa: is the
Phillips curve still dead?’, Southern African Business Review 21(1), 2017,
pp 20–54.
Box 2 Neutral real rates in the post-COVID-19
pandemic era

Neutral interest rates are not observable, and their estimation is subject
to considerable uncertainty.

When the real policy rate is below its neutral level, monetary policy is said
to be accommodative (or loose), while it is said to be contractionary when
the real policy rate is above its neutral level.
As monetary policy normalisation proceeds in many economies,
increasing attention will be paid to the distance between the current
real policy rate and the neutral real interest rate level (r*, or r-star).1 R*
is the real short-term interest rate that is consistent with the economy
being at equilibrium, that is, having inflation stable around the target
and output/unemployment at its sustainable rate. In this state, the
economy does not require any monetary stimulus. The neutral real
interest rate thus serves as a benchmark for assessing the
contribution of the current real policy rate to inflation.2 In the context
of the process of normalisation, the neutral rate also indicates the
‘end point’ of any normalisation cycle.
In the past decade, neutral real interest rate estimates for both
advanced and developing economies have declined for a range of
reasons, but primarily because a lower rate is needed to equilibrate
savings with demand for capital. Lower potential economic growth
can imply less demand for investment. Alternatively, higher life
expectancy can incentivise more saving for retirement, and in some
economies, generate excess saving. Rising income inequality can, in
some instances, also generate a too high savings rate, as higher

US

Canada

Euro area

UK
Per cent
Estimates of r* in selected economies, 1985–2020

Source: Holston, Laubach and Williams


APRIL 2022
income earners have a higher propensity to save.3 For emerging
markets, enhanced integration with global finance, the shift to inflation
targeting and enhanced central bank credibility may have contributed
to a decline in r* as these helped reduce macroeconomic risks.
South Africa has also seen a decline in the neutral interest rate over
the past two decades, in part reflecting the declining trend for r*
globally. However, despite lower potential real gross domestic
product growth, a sharp rise in demand for foreign saving (reflected
in South Africa’s persistent current account deficit) has kept the
neutral interest rate relatively high. The South African Reserve Bank
(SARB) estimates the domestic neutral real interest rate at 2.3% in
2022, rising marginally to 2.4% in 2024.4
How will r* evolve in the post-pandemic global economy? A higher
global r* means (all other things being equal) a higher cost of
accessing foreign savings. Major pandemics typically would be
expected to lower r* for at least two reasons. First, a high mortality
among the working-age population should result in excess capital
per worker, depressing the return on capital, and thus the incentive
to accumulate more capital. Second, pandemics typically would
result in loss of income and dissaving, causing households to
increase (precautionary) savings post-pandemic.5 The COVID-19
pandemic, however, hasn’t resulted in sharply higher mortality among
the working-age population, while the swift and generous fiscal
policy support limited income and wealth losses, and hence
dampened the long-term need to build additional savings.6
Although the expected slower accumulation of physical and human
capital globally should depress r*, other factors may push it higher,
including rising dependency ratios in advanced economies and
elevated inflation that reduces saving.7 A rising global r* would require
a higher domestic r* for savings-constrained countries like South
Africa to continue to attract foreign capital. This would widen the real
repurchase (repo) rate gap, potentially requiring a steeper policy
normalisation path.

See, for instance, K Holston, T Laubach and J C Williams, ‘Measuring the
natural rate of interest: international trends and determinants’, Journal of
International Economics 108(S1), 2017, pp 59–75; F Ruch, ‘Neutral real
interest rates in inflation targeting emerging and developing economies’,
Policy Research Working Paper No. 9711, World Bank, June 2021; and
K Tanaka, P Ibrahim and S Brekelmans, ‘The natural rate of interest in
emerging Asia: long-term trends and the impact of crises’, Asian
Development Bank Institute Working Paper No. 1263, May 2021.

Given differences in methodologies and the high uncertainty around the
point estimates for r*, there will be various estimates for r*. See, for
instance, A Masia, ‘Navigating the natural rate’, South African Economics
– EEMEA, RMB/Morgan Stanley, 18 January 2022.

O J Jorda, S R Singh and A M Taylor, ‘Longer-run economic consequences
of pandemics’, Federal Reserve Bank of San Francisco Working Paper
No. 2020–09, San Francisco: Federal Reserve Bank, June 2020.

Monetary policy measures also facilitated a quick rebound in asset
prices, preventing permanent wealth losses.

A factor that has not yet received much attention in this literature is the
possibility for increased accumulation of green capital as countries
transition to low-carbon economies, driving r* higher.
Per cent

Neutral interest rate*

Source: SARB
* Dotted line indicates forecast

APRIL 2022
A disrupted global recovery
Following a strong rebound in economic activity for most of
2021, the global growth momentum started to slow towards
year-end. Growth is expected to moderate substantially in 2022
as headwinds have strengthened, with inflation emerging as a
key risk to the recovery. The elevated inflation rate is projected
to persist for longer than initially expected amid extremely high
energy prices, continuing supply chain bottlenecks and rising
wage pressures. As new upward inflation shocks emerge, the
risk of inflation expectations rising further has become material.
Risks to the growth outlook are tilted to the downside due to rising
inflation, the Russia−Ukraine war, the possible emergence of
new waves of COVID-19 infections as well as a more aggressive
policy normalisation response by major central banks.
Global growth loses momentum
Over the past year the global economy has continued its
strong recovery despite frequent interruptions. It successfully
navigated the Omicron variant of the COVID-19 infections at the
end of 2021, with growth recovering quickly once restrictions
were eased. The recovery is said to be the strongest postrecession rebound in the past 80 years, though the global
economy is yet to heal completely.17 However, the headwinds
of sharply higher inflation and, more recently, the Russia–
Ukraine war, are expected to slow global growth substantially.
The SARB projects a steep decline in global growth to 3.7%
this year, down from 6.4% in 2021. Since the middle of 2021,
market analysts and economists have progressively revised
their 2022 real GDP forecasts lower amid rising energy prices
and persistent supply bottlenecks. The Russia–Ukraine war
has increased uncertainty around the trajectory for global
growth, with risks tilted to the downside. The sharp increase in
energy prices, particularly oil and gas, now implies significantly
higher inflation profiles for 2022 that could weigh on real
incomes and growth and, in turn, spur higher inflation.
Real GDP growth rates across the advanced economies
should fall markedly this year, but are expected to remain
above their pre-pandemic averages before easing back
to more sustainable levels (i.e. trend growth) by 2023.18 For
instance, real GDP growth in 2022 is projected to reach 3.3%
in the US, from 5.7% in 2021, and 3.2% in the euro area, from
5.3% last year.19 Private consumption and investment should
continue to drive growth in 2022, though moderated by the
sharply rising consumer prices and the withdrawal of monetary
accommodation. Growth in both the US and euro area began
to moderate towards the end of 2021 as the effects of higher
consumer prices, supply chain disruptions and the surge in
17 World Bank, Global Economic Prospects, June 2021.
18 The World Bank projects the average growth for advanced
economies over the 2022–2023 period to be markedly higher
(3.1%) compared to growth during 2010−2019 (2%). See
World Bank, Global Economic Prospects, January 2022.
19 Consensus Economics, Consensus Forecasts, March 2022.

Percentage change
Jan

Apr
Apr
Jul
Oct
Jan
Evolution of 2022 real global GDP growth forecasts
Source: Bloomberg

Percentage change
Real GDP growth projections: G3 economies
Sources: Consensus Economics, Haver and SARB


US
Euro area
Japan
2018–2023
* Dotted lines indicate forecasts

Pre-COVID-19 GDP growth average (2010–2019)

APRIL 2022
Omicron infections weighed on economic activity. However,
activity picked up again as restrictions were lifted, but the
Russia−Ukraine war poses a major downside risk to the
growth outlook, particularly for the euro area.
Growth rates in most emerging markets should remain firm but
are expected to decline below pre-COVID-19 trends in 2023
due to elevated inflation, the withdrawal of fiscal and monetary
accommodation, and lower vaccination rates. Looking ahead,
a full recovery is expected in some economies, while in most
countries output should continue to fall short of pre-pandemic
levels. Recoveries across emerging markets have been
underpinned by consumption as investment has remained
fairly subdued.20 Concerns of a sharper slowdown in China
have eased as policy has become relatively more supportive.
However, the country’s zero-tolerance COVID-19 policy as
well as protracted financial stress among property developers
remain risks to the outlook.
The growth outlook has, however, deteriorated in countries
such as Brazil and Chile where intense inflationary pressures
prompted a strong monetary policy response. Growth in
sub-Saharan Africa (SSA) is expected to moderate to 2.6%
in 2022, from 3.8% in 2021, with recoveries expected to
remain uneven among SSA countries. The divergence mostly
reflects the region’s slow vaccine roll-out, slow recovery in
tourism, high inflation and limited fiscal space. The recent
rapid advance in energy prices will likely further depress
growth in emerging markets, though the elevated commodity
prices are expected to mitigate the impacts, particularly for
the commodity-exporting emerging markets.
Inflation higher and more persistent
Inflation has emerged as a major threat to the sustainability of
the global economic recovery, with near-term price pressures
aggravated by the geopolitical tensions in Eastern Europe.
Global inflation has been considerably stronger and more
persistent than had been expected.21 At 7.9% in February
2022, inflation in the US has reached levels not seen since
the 1980s. US households anticipate prices to continue rising
in the short term, with one-year-ahead inflation expectations
having risen sharply to 5.4% in March 2022. In the euro area,
households’ opinion on both past and future price gains has
also risen strongly. Although longer-term inflation expectations
have edged up, they remain generally in line with central banks’
objectives. However, the sharp increases in the oil price and
further upward pressures on food prices associated with the
Russia−Ukraine war could cause these expectations to drift
higher. Inflation in advanced economies is anticipated to peak
in the second quarter of 2022 and to decelerate rather slowly
towards the target.
20 According to the World Bank, aggregate investment across emerging
markets was subdued during 2021 and should remain around
4 percentage points below pre-COVID-19 trends over the medium
term (World Bank, Global Economic Prospects, January 2022).
21 In most countries, inflation is well above target and is expected
to take longer to slow.
Percentage change
Real GDP projections of selected
emerging markets*
Sources: Consensus Economics, Haver and SARB
2019–2023
Brazil
Chile
China
India
South Africa
-10
-5

* Dotted lines indicate forecasts

Pre-COVID-19 GDP growth average (2010–2019)

World

Advanced economies

Emerging market and developing economies
Percentage change

Deviation of investment from pre-pandemic trends*


* Dotted lines indicate forecasts
Source: World Bank
Per cent

US one-year-ahead household
inflation expectations

Source: Bloomberg

APRIL 2022
Acute increases in energy prices have added markedly to
inflation pressures.22 The spot price for Brent crude oil has
more than tripled since the end of June 2020, with most of
the increase occurring at the start of this year. Gas prices
in Europe have risen by about 400% over the past year.23
The oil market is currently in backwardation, with the spot
price exceeding futures contracts, consistent with consensus
expectations of oil supply moving past demand in coming
quarters. However, the Russia−Ukraine war and uncertainty
about the speed at which oil supply will increase continue to
pose upside risks to the oil price.
Another factor that will determine how quickly inflation declines
is the pace at which supply constraints are resolved. The rapid
and skewed recovery in global demand for goods in 2021 and
the slower recovery of production capacity have generated
excess demand. Recurring COVID-19 outbreaks have led to
disruptions in production, particularly in Asia where some
countries have implemented zero-tolerance COVID-19 policies.
The closure of some key ports at the height of the pandemic
created bottlenecks in global shipping. Shipping costs spiked
in 2021 but there are signs these may have peaked as costs
on certain shipping routes have come down from their highs.
For example, shipping rates along the China to US West Coast
route and China to the euro area, viewed as among the world’s
busiest, have been declining (see Box 3). Supply bottlenecks
are likely to be corrected through adjustments in both supply
(rebuilding of inventories and investment in new capacity) and
demand (rotation in spending back from goods to services
amid relative price shifts, and a price squeeze on real incomes).
However, in sectors such as shipping, adjustments could prove
lengthier than in others.24
The apparent tightening in advanced economy labour
markets and the emergence of labour shortages may exert
upward pressures on wage inflation. The pandemic has led
some workers to voluntarily withdraw from the labour market,
dropping the participation rates.25 For instance, millions of
workers in the US have quit their jobs since the pandemic
began, a pattern now termed the ‘Great Resignation’. This has
resulted in the US labour force participation rate falling to levels
below its long-run trend. Many other countries, including the
UK and those in Latin America, have also experienced sharp
declines in labour force participation. However, others such as
Japan and several European countries have seen labour force
participation rates increase to above pre-pandemic levels,
implying muted wage inflation pressures in these countries.
22 For instance, nearly half of the 7.5% January inflation rate in the US
can be attributed directly to energy prices. See the US Bureau of
Labor Statistics.
23 See, for instance, Bank of England, Monetary Policy Report,
February 2022.
24 Citigroup believes that current supply chain disruptions are partly due to
decades of disinvestment in US infrastructure, including ports. For that
reason, some supply chain tensions, in particular shipping, would take
longer to resolve. See Citi GPS, ‘Global supply chains’, December 2021.
25 Reasons for exiting the labour market varied, including (early)
retirement, caregiving and fear of contracting the virus. See United
States Federal Reserve, Monetary Policy Report, February 2022.

Per cent
* Personal consumption expenditure
Evolution of 2022 inflation forecasts
Source: Bloomberg

US*

Euro area

UK

Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
US$ per FEU*
Container rates for various shipping routes

Shanghai to Rotterdam container rate

Shanghai to Los Angeles container rate

Composite freight rate


* Forty-foot equivalent unit

Source: Bloomberg
Mar
Jun
Sep
Dec
Mar
Mar
Jun
Jun
Sep
Dec

APRIL 2022
Unfilled job vacancies (as a share of the workforce) in major
advanced economies have also risen sharply in recent months.
Firms in the UK, Germany and France have been reporting an
unusually high number of staff shortages, especially in consumerorientated services sectors such as accommodation, catering
and real estate services. Expectations are that some workers
will return to the labour market once the COVID-19 pandemic
has sufficiently faded and they feel more comfortable working
again or once their savings accumulated during the lockdown
have been exhausted.
2022: the year for a rates lift-off
During the first half of 2021, the expectation for 2022 was
that monetary policy would remain accommodative across
advanced economies. The expectations have shifted radically
as inflation has soared, and investors now expect 2022 to be
the year for a rates lift-off in developed economies. With the
economy growing above trend and inflation at record levels,
the US Fed accelerated its tapering of asset purchases and
raised the federal funds rate by 25 basis points at its March
Federal Open Market Committee meeting.26 Expectations are
broadly for the Fed to hike the federal funds rate at least seven
times this year and begin downsizing its balance sheet. Markets
are pricing in more aggressive rate hikes in the US as inflation
continues to surprise on the upside. This, however, has raised
concern about a possible ‘hard landing’ that could derail the
global recovery. Although inflation is also sharply higher in the
euro area, there is markedly higher uncertainty around the
policy rate path due to heightened growth concerns as a result
of the Russia−Ukraine war. Emerging market central banks
are expected to continue policy normalisation given the high
inflation and expected rate hikes in the advanced economies.
Conclusion
The recovery in the global economy has been strong despite
repeated disruptions from the COVID-19 outbreaks. Meanwhile,
inflation has emerged as a major risk to the sustainability of the
recovery. Robust demand, supply chain disruptions, tighter
labour markets and sharply higher energy prices have pushed
inflation to its highest level in decades. The Russia−Ukraine war
poses further upside risks to energy prices, and thus inflation.
Despite mounting downside risks, advanced economy central
banks are expected to begin policy normalisation during the
first half of 2022, while it should continue in emerging markets.
Rising interest rates and higher inflation, however, will be a
drag on growth.
26 The US Congressional Budget Office estimates US real potential GDP
at 1.9% in both 2022 and 2023.
Per cent

Staff shortages across major economies

Source: EU Commission and Confederation of British Industries

Germany

France

UK

APRIL 2022
Box 3 Global supply chain bottlenecks contributing
to inflation

Services have generally been slow to reopen globally.

The strong pickup in demand can be attributed to pent-up demand due
to the lockdowns, large fiscal support and exceptionally accommodative
monetary policy, particularly in the advanced economies.

A penalty on long-aging containers in the United States (US) was
instituted in November 2021. Additionally, Europe, Asia and the US have
each invested more than US$40 billion in their semiconductor industries
to help enhance supply chains (D Shepardson, ‘US Senate approves
$52 bln chips bill in bid to reach compromise’, Reuters, 29 March 2022).
Furthermore, the shift away from zero-tolerance COVID-19 policies in
Asia has led to an immediate reduction in backlogs.

According to Statistics South Africa, the number of producers citing raw
material shortages as a reason for capacity underutilisation rose from an
average of 2.3% in 2019 to 3.8% in 2021.

The producer price index for intermediate manufactured goods rose
sharply to 23.1% in December 2021 before moderating marginally to
21% in January 2022 and to 19.3% in February 2022.
Since the onset of the COVID-19 crisis, lockdown restrictions
implemented across the globe have disrupted global supply chains.
The disruptions include production halts, border closures, heightened
logistical bottlenecks, and restrictions in the mobility of goods and
people. At the same time, the pandemic and the measures to slow
its spread, such as social distancing, have resulted in a sharp shift in
consumer spending towards manufactured goods.1 This shift in
consumption towards goods has added pressure on already strained
supply chains.2 The unexpectedly strong rebound in the demand for
goods forced a marked drawdown on inventories, and now firms
need to simultaneously meet the persistently high demand and
rebuild inventories, further exacerbating pressure on supply chains.
Although the supply chain challenges are far from being resolved,
the Global Supply Chain Pressure Index suggests that bottlenecks
may have begun easing. This is attributable, at least in part, to
initiatives from various countries relieving backlogs and improving
delivery times.3
Robust demand, and supply chain and logistical difficulties have also
exerted upward pressure on prices. The strong demand for goods
has further supported higher oil prices, with geopolitical tensions in
Eastern Europe providing additional impetus. This has driven noncore inflation higher. Meanwhile, the strong demand for goods has
given sellers room to pass through some of the cost increases to end
users. Consequently, consumer inflation for various countries
reached multi-year highs towards the end of 2021 and is expected to
remain above central bank targets over the medium term.
South African manufacturers are experiencing difficulties replenishing
inventories and equipment because of raw material shortages and
bottlenecks at ports. This is evidenced by order delivery times of
manufactured goods which have increased sharply since the second
half of 2020.4 The South African Reserve Bank’s composite supply
chain pressure index increased further in December 2021 (see the
Quarterly Bulletin, March 2022, pp 102–107). Supply-related prices
have risen markedly, leaving manufacturers reeling.5 Despite low
pass-through to date, the elevated producer prices could shape the
future trajectory of consumer price inflation.
Standard deviation from average value

-2
-1

2020 2022

2008 2010

Source: Bloomberg
Global Supply Chain Pressure Index
Net balance

-20
-10

Source: BER
Delivery periods of orders received
in manufacturing

APRIL 2022
Financial markets:
three large shocks
Over the past six months, global markets have experienced
three large shocks: an intensification of the COVID-19 pandemic
driven by the Omicron variant, a rapid change in monetary
policy expectations prompted by high inflation outcomes,
and a surge in uncertainty related to the war in Ukraine. This
has driven volatility towards levels last seen in March 2020
and reduced prices for many risk assets. Despite this difficult
global context, local assets have been generally resilient, with
the currency, for instance, now marginally stronger than it was
six months ago.
Global financial markets
The six-month period under review started with the discovery
and rapid spread of the Omicron variant of COVID-19. This
shock deflated a period of financial market exuberance,
marked by strong equity gains and easy financial conditions.
The CNN Business’ Fear and Greed Index, for instance,
switched abruptly from greed to fear in late November 2021.27
After an initial period of uncertainty, it became clearer that the
new variant, while highly infectious, was also less deadly than
previous strains and would not derail the global economic
recovery. By January, market concerns had moved on,
focusing instead on unexpectedly high inflation and with it a
need for tighter monetary policies.
The shift was particularly marked in the US and the UK, as these
central banks moved to raise rates in response to persistent
upside inflation surprises. The Bank of England lifted off from
the effective zero lower bound in December 2021, while the
US Fed moved in March 2022. Longer-term yields have also
risen, but these increases have been more muted, reflecting
confidence that inflation will stabilise over the medium term.
The US and UK yield curves have therefore flattened markedly.
Meanwhile, the global stock of negative yielding debt has
contracted from around US$16 trillion to under US$3 trillion
over the past six months, as concerns about high inflation
have eclipsed the spectre of ‘Japanification’ and chronic low
inflation, which dominated much of the previous decade.
The US dollar has appreciated on the growing divergence in
advanced economy short-term rate expectations, with the euro
correspondingly weaker. This trend has been accentuated
by the Russia–Ukraine war, which has dampened rate hike
prospects for the euro area more than those for the US.
27 This index uses seven equity market indicators to assess the ‘mood
of the market’ – see
Index points

Bond market volatility
Sources: Bloomberg and SARB

MOVE Index

Mar 2020 average

2022 average

Mar
Jun
Sep
Dec
Mar
Mar
Jun
Sep
Dec
Basis points
Global government bond performances*

US
Euro area
UK
Japan
Source: Bloomberg
* Change in bond yields since previous MPR
2-year
10-year
30-year
Index points

US dollar index
Source: Bloomberg

Mar
Jun
Sep
Dec
Mar
Mar
Jun
Sep
Dec

APRIL 2022
In the emerging market sphere, countries with idiosyncratic
vulnerabilities (notably Argentina, Russia and Turkey) have seen
dramatic currency weakness. Many others have been resilient,
however, with Latin American currencies in particular holding
up well despite the strong dollar and risk-off environment.28
The rand has been similarly robust, outperforming most peers
over the past six months.
Global stocks have had a difficult start to the year, surrendering
some of 2021’s record gains. The MSCI Developed Markets
(DM) Index has declined by 6.0% for the year to date, while
the emerging markets equivalent is down by 9.0% (in US dollar
terms). The broad-based decline in global equities is primarily
explained by risk-off sentiment. As discussed below, however,
South Africa is an exception, with the local MSCI metric up by
8.0% for the year to date (again expressed in US dollars).
Domestic financial markets
According to JSE Limited (JSE) data, there have been capital
inflows to both the bond and equity markets this year, after
outflows through most of 2021. These flows have benefitted
equities more than bonds. Despite the difficult global situation,
the JSE reached a new all-time high in early March 2022, with
mining stocks in particular benefitting from higher commodity
prices. South African stocks have performed better than the
average of either developed or emerging markets, both for the
year to date and over the past six months.
The South African government bond yield curve flattened
somewhat during the review period, with short rates rising in
line with the SARB’s hiking cycle. Markets are now pricing in a
further 2 percentage points in hikes this year, which would take
the repo rate to 6.25%. Analysts’ expectations are significantly
lower, however, with the latest Reuters and Bloomberg surveys
indicating a year-end rate of between 4.75% and 5.00%.
Meanwhile, yields further out on the curve have been relatively
stable, with the longer-end yields (over 10 years) even falling
somewhat over the past six months. The bond market has
been supported over the review period by strong government
revenue inflows, linked to high commodity prices, which
have permitted reduced debt issuance. Long-term rates,
nonetheless, remain high compared with both peer countries
and South African history, reflecting fiscal challenges (elevated
debt levels and chronically weak growth) as well as the South
African strategy of targeting a long debt maturity.
28 As remarked upon in the BIS Quarterly Review, ‘Markets jolted’,
March 2022.

Since previous MPR

Year to date
Per cent
Change in emerging market currencies


Source: Bloomberg
TRY
RUB
ARS
HUF
PLN
TWD
INR
KRW
CZK
MYR
IDR
SGD
COP
THB
CNY
ZAR
CLP
MXN
BRL
Index: 1 Jan 2020 = 100

Equities performance
Sources: Bloomberg and SARB

MSCI DM

MSCI EM

MSCI SA

Mar
Jun
Sep
Dec
Mar
Mar
Jun
Sep
Dec


R billions
Non-resident capital flows
Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
Source: JSE

Bonds

Equities

APRIL 2022
Despite fairly stable yields over the past six months, the bond
market remains fundamentally more fragile than it was before
the onset of COVID-19 and the sovereign’s simultaneous loss
of investment-grade status. Bid-ask spreads on even the
most liquid bond (the R186) have averaged roughly double
their 2019 levels recently, given lower levels of liquidity, with
bond prices seeing large movements even on relatively
small trades (‘gapping’). These dynamics reflect, in part, a
lower level of non-resident participation in the bond market,
with the share of domestic bonds owned by non-residents
down to 28.2% in 2021, from 37.1% in 2019. While domestic
buyers (especially banks, pension funds and unit trusts)
have increased their holdings of government debt, they have
limited scope to absorb further issuance, implying there
are not always ready buyers at prevailing rates. This adds a
liquidity premium to bond yields.
Monetary policy implementation
South African monetary policy is implemented through a
‘shortage’ or classical cash reserve system, with the SARB
engineering a deficit of bank reserves and then lending the
missing funds to banks at the policy rate. Before the onset of
COVID-19, this shortage was typically R56 billion, but it has
been smaller since, at around R30–35 billion. The Wednesday
repo auctions have nonetheless continued to offer a maximum
of R56 billion, and banks have typically borrowed more than
would be required purely to offset the shortage. Accordingly,
the interbank market has generally ended the day with a
substantial surplus, in contrast with the pre-crisis norm where
excess reserves were nearly zero. For instance, the average
end-of-day position has been R5.3 billion over the past six
months; it averaged just R161 million in 2019.
While an oversupply of funds can depress interbank
rates, there is relatively little evidence of excess liquidity
lowering interbank rates for the period under review. The
South African Benchmark Overnight Rate (Sabor) shows
some volatility, but this is mainly traceable to the foreign
exchange (FX)-implied component of that benchmark. The
three-month Johannesburg Interbank Average Rate (Jibar)
is trading at a smaller margin to the repo than it did preCOVID-19, but there is no clear correlation with the endof-day surplus. Short-term Treasury bill yields have also
dipped below the repo rate on occasion, but these bids
were generally traceable to specific institutions buying
for regulatory purposes rather than a broader excess
of liquidity.
Basis points
Change in SA government bond yields
-30
-20
-10

R2023
R186
R2030
R213
R2032
R2035
R2037
R2040
R2041
R2044
R2048
Source: Bloomberg

Since previous MPR

Year to date
Basis points
Bid-offer spread
Sources: Bloomberg and SARB

R186

2019 average

Mar 2020 average

Oct 2021 to date average

Mar
Jun
Sep
Dec
Mar
Mar
Jun
Sep
Dec
R millions

Interbank, end-of-day position
Source: SARB

-30 000
-20 000
-10 000


APRIL 2022
Leaving excess funds in the payment system at the end of
the day involves an opportunity cost for banks, as the SARB’s
deposit facility pays 100 basis points less than the repo rate.
There are several reasons why it has been difficult for banks
to recycle excess balances through the interbank market.
These include the market’s shift away from unsecured towards
collateralised lending, as well as the sovereign credit rating
downgrade, which has placed tighter risk limits on international
banks’ exposures to local institutions. In an environment of
excess liquidity, there have also been fewer banks with short
positions to fund.
Despite an oversupply of central bank liquidity, FX-implied
rates have remained generally high and volatile over the past
six months, and well above their pre-COVID-19 range. They
have nonetheless moderated somewhat this year, even falling
below the repo rate briefly during February 2022. Distortions
in the forward market over the past two years have meant that
non-residents have faced generally higher costs of hedging
domestic investments. To moderate FX-implied rates, the
SARB has taken steps to reduce its stock of foreign currency
swaps. The forward position has consequently declined to
about US$3.9 billion, from a peak of around US$5 billion in
October 2020. Moving to a surplus liquidity framework (as
discussed in Box 5) is expected to ease FX-implied rates
further, while also mitigating some shortcomings of the
interbank market.
R millions

Liquidity requirement
Source: SARB


Range (2015–2019)

2015–2019 (average)

Basis points
FX-implied rate spread to the repo rate*
-100

Sources: Bloomberg and Haver
Trading days
* Overnight to 1 week

APRIL 2022

Box 4 Evolution of the sovereign yield curve in a
pandemic era

A similar trend is observed for other emerging market economies, with term
premium estimates around 2% or above and on an upward trend. See
Center for Latin American Monetary Studies, ‘Term premium estimates’,

premium%20estimates%20eng.html

See I Domowitz, J Glen and A Madhavan, ‘Country and currency risk
premia in an emerging market’, Journal of Financial and Quantitative
Analysis 33(2), 1998, pp 189–216.

This is based on work conducted by the South African Reserve Bank’s
Financial Markets Department in a research note titled ‘A decomposition of
the South African yield curve’, which was published in February 2022.

This inflation differential/risk includes an inflation risk premium as well as
inflation expectations. Therefore, the contribution of the inflation risk
premium is smaller.

A decomposition of the two-year yield shows that the sovereign risk
contributed, on average, 42.0% to yields between 2019 and 2021,
compared to 30.0% by the inflation differential.

Since the end of 2021, the contribution of the risk-free rate at the short end
of the yield curve has increased significantly due to the United States (US)
two-year rate rising sharply (in comparison to the US 10-year rate) and
adding pressure on yields at the short end of the South African yield curve.

A rising real FX risk could be due to foreign investor participation becoming
more elastic since South Africa was excluded from the World Government
Bond Index (WGBI) in 2020 as well as the increased emerging market FX
volatility since the onset of COVID-19.
The sovereign yield curve shows the price of capital borrowed over
different maturities or periods of time. Its level and steepness change
over time as economic fundamentals move, especially inflation and risk
perceptions. South Africa’s yield curve has steepened considerably
since the onset of the COVID-19 pandemic, despite some flattening
since the middle of 2021. Compared to emerging market peers, the
South African yield curve remains steep, with long yields currently at
around 10.6%. While Brazil’s yield curve is flat and high, those of
Mexico and Chile reveal higher short-term interest rates and less
longer-term inflation and sovereign risk.
A decomposition of the sovereign yield curve shows why the curve
remains steep. The future expectations of the short rate component have
been anchored around the 7% mark, while the term premium component
has been rising steadily since 2018. Following the COVID-19-related
sharp spike in 2020, the term premium dropped closer to its prepandemic levels, but remained elevated at 2.7% at the start of 2022.1
The term premium reflects liquidity, sovereign and inflation risks.
Following a well-known approach,2 nominal yields can also be
decomposed into four separate risk components.3 The first component,
real foreign exchange (FX) risk, reflects the potential change in the hard
currency value of investors’ local currency government bond holdings.
Second, the risk-free rate is the basic underlying cost of global capital,
often proxied by the yield on a short-dated US Treasury bill. Third,
sovereign risk captures additional credit or domestic risk. The last
component is the inflation differential, which captures both inflation risk
and inflation expectations.
A decomposition of the 10-year nominal bond yield shows that the
main drivers of the long end of the curve (for both the 10-year and 30year yield) were the inflation differential and sovereign risk components,
contributing 37.0% and 29.0% respectively by the end of 2021.4
Sovereign risk continues to determine both short-end and long-end
yields in South Africa.5 The risk-free rate contribution, at 13.6%, has
remained relatively stable over the 2019–2021 period. Its contribution
has been higher at the long end than the short end during this period.6
In addition, the real FX risk has also been rising gradually since the
onset of COVID-19, contributing to higher yields.7

Per cent
Evolution of SA’s sovereign yield curve
Source: Bloomberg
Years to maturity

15 20

Per cent
Selected emerging market sovereign
yield curves, 2022
Source: Bloomberg
Years to maturity
Months

South Africa

Brazil

Mexico

Chile

Per cent
Decomposition of 10-year nominal bond yield

Source: SARB
Real FX risk
Sovereign risk
Inflation risk
Risk-free rate
Yield
-4
-2

APRIL 2022

Box 5 Reforming the South African Reserve Bank’s
monetary policy implementation framework

The large exposures framework restricts the total exposure a bank can
have to any other institution. It is designed to limit risk by ensuring no
bank has ‘too many eggs in one basket’. This may reduce interbank
market activity. The framework was entered into force on 1 April 2022,
but banks moved to achieve compliance before this date.
In November 2021, the South African Reserve Bank (SARB)
published a consultation paper outlining a new monetary policy
implementation framework (MPIF). The paper proposes to switch
from a shortage system, which has been in use since 1998, to a
surplus system. Instead of draining bank reserves from the market to
engineer a shortage, and then lending funds needed by banking
institutions at the policy rate, the SARB would instead permit a
market surplus. Banks would be able to place these funds, up to
certain limits, at the SARB, and earn the policy rate.
The new framework is expected to improve interest rate control,
despite a large surplus of bank reserves. It will avoid some of the
distortions and expense involved in the current implementation
framework. A larger supply of highly liquid, safe assets is also likely to
have financial stability benefits. In addition, a surplus system is likely
to cope better with an interbank market made less active by
regulatory changes, such as the large exposures framework.1
While the new approach will require open market operations to ‘cash
up’ the system, a major expansion of the central bank balance sheet
is not envisaged. The SARB has ample scope to add liquidity by
unwinding existing liquidity-draining operations and replacing
liabilities, such as foreign exchange swaps and Corporation for
Public Deposit funds, with central bank reserves.
In the new system, reserve holdings of banks will be guided by caps
that prevent banks from hoarding liquidity, helping maintain an
interbank money market. This is similar to the ‘tiered floor’ systems
used by the Reserve Bank of New Zealand and the Norges Bank.
The SARB is currently finalising the proposal in light of inputs received
during the consultation period, with the goal of implementing reforms
this year. The transition to a new MPIF is expected to take around
three months, with the system following a pre-announced path away
from the existing shortage towards a surplus. Without a shortage for
banks to fund, repo auctions will become steadily less important
during this transition, with the SARB providing ample liquidity through
open market operations instead.
R billions

Total liquidity-draining operations
Source: SARB

R billions
Illustrative transition path


Source: SARB
1–2
3–4

Week
5–6
7–8

Pretransition
1st month
2nd month
3rd month
Shortage
Surplus
Weeks
Weeks
Week

APRIL 2022
Real economy: recovery and
its discontents
The domestic economy has made substantial progress in
its recovery following the COVID-19-induced contraction
in 2020, being just 1.5 percentage points shy of the
2019 output level by the fourth quarter of 2021. It grew
by a robust 4.9% in 2021, despite the sharp contraction
(1.7% quarter on quarter, seasonally adjusted) in the third
quarter output on account of the July riots, load-shedding
and a severe third wave of COVID-19 infections. The recovery
has benefitted from stronger global growth and supportive
domestic fiscal and monetary policy. Growth is projected
to slow, averaging just below 2.0% over the medium term.
The low growth momentum reflects binding structural
constraints to investment and a less supportive global
backdrop. Growth in 2022 would have been lower if not for the
robust terms of trade. The implementation of structural reforms,
such as embedded electricity generation in the energy sector,
should improve the business climate and support domestic
investment and growth.
Progress with the recovery
The South African economy grew at a robust pace of 4.9% in
2021, after the acute contraction of 6.4% in 2020.29 Growth was
helped by the stronger terms of trade amid buoyant commodity
prices and a slower recovery in imports, firm consumer
spending, and a pickup in investment. The progressive easing
of lockdown restrictions enabled the broadening of economic
activity, further supporting the recovery.
After delivering strong growth in the first two quarters of 2021
(1.0% and 1.3% respectively), the economy contracted in the
third quarter. Growth of -1.7% quarter on quarter (revised), was
worse than most forecasters had expected.30 The third-quarter
contraction was induced by civil unrest and the more stringent
mobility restrictions associated with the third wave of COVID-19
infections, among other factors. Although the fourth quarter
endured the Omicron variant and brief international travel bans,
the government did not impose additional restrictions. This
permitted the rebound in economic activity, and the economy
grew by 1.2% quarter on quarter, bringing the real level of GDP
to above 98% of its 2019 level.
The recovery continues to be led by the primary sector, which
grew by 10.5% in 2021, underpinned by robust output growth in
the agricultural sector. The secondary sector, despite growing
by 4.6% in 2021, remains 10% below its 2019 level. Output in
the tertiary sector, which is also the largest economic sector,
has surpassed its 2019 level, driven by the finance subsector.
Considering the subsectors, only agriculture; finance; and
29 The growth was lower than the 5.2% projected in the October
2021 MPR, but in line with the SARB’s downwardly revised
projection of 4.8% at the January 2022 MPC meeting.
30 Forecasts ranged from -1.2% to 2.5%.
Percentage change


Source: Stats SA
Real GDP growth
Index: 2019 = 100

Output, distance from 2019 levels
Sources: Stats SA and SARB

Primary sector

Secondary sector

Tertiary sector
2021Q4 as a percentage of 2019 average level
Gross value added*
Agriculture (2.5)
Mining (4.8)
Manufacturing (12.0)
Electricity (2.4)
Construction (2.9)
Trade (12.0)
Transport (7.9)
Finance (22.6)
GDP (100.0)
Source: Stats SA

Community and social
services (23.2)
* Numbers in brackets indicate weight in GDP

APRIL 2022
community, social and personal services managed to improve
on their 2019 output in 2021.31 The rest of the subsectors
are still below their pre-COVID levels, with construction and
transport furthest behind.
The construction subsector entered the COVID-19 period in
a very weak state, as both investment and value added have
been in decline since 2017, and has remained in distress in the
wake of the shock. It declined by 2.2% in the fourth quarter and
is the only subsector that contracted in 2021. Confidence in the
construction subsector remains low, with 91% of the Bureau
for Economic Research (BER) survey respondents dissatisfied
with the prevailing business conditions.32 Unlike construction,
manufacturing posted a 2.8% quarter-on-quarter growth
in the fourth quarter of 2021, despite challenges associated
with water supply adequacy, strike action in the steel industry,
supply bottlenecks and load-shedding. While higher domestic
and export selling prices were reported (up 19 index points and
27 index points respectively in the fourth quarter), manufacturers
remain somewhat pessimistic about business conditions over
the coming 12 months.33 However, the subsector has had a
good start to 2022, with output increasing by 1.9% month on
month in January.
Despite elevated commodity prices and the sector having
underpinned much of the recovery, mining contracted for
a second successive quarter in the fourth quarter of 2021,
following an upwardly revised contraction of 0.6% in the
previous quarter. For the year, mining grew by 11.8% and
was 3.5% shy of its 2019 output level by the fourth quarter.
Factors such as inadequate transport logistics infrastructure,
confrontational labour relations and load-shedding have held
back the sector’s recovery.
Within the tertiary sector, the transport and the trade
subsectors grew by 2.2% and 2.9% respectively in the
fourth quarter of 2021, following third-quarter contractions
of 1.7% and 5.5% respectively. These subsectors, which are
associated with tourism, bore the brunt of the lockdowns
over the past year. By comparison, the retail subsector has
fared better, with official trade sales for the fourth quarter
0.25 percentage points higher than pre-COVID-19 levels.
This was also reflected in retailer sentiment which showed
marked improvement, even compared to its pre-crisis average
of 38 index points. The subsector, however, remains vulnerable
to global and domestic supply chain bottlenecks, rising input
costs and unstable electricity supply.
Concerns of scarring of the economy have arisen as the labour
market has failed to reflect the stronger recovery in output.
The official unemployment rate increased further, reaching a
record high of 35.3% in the fourth quarter of 2021, up from
31 These three sectors make up just under 50% of total gross value added.
32 The FNB/BER Civil Confidence Index slipped to 9 index points
in the first quarter of 2022.
33 See the Absa/BER Manufacturing Survey.
BER%20Documents/Manufacturing-Survey/?doctypeid=1067
Percentage satisfied

Civil contractor confidence*
Sources: BER and Haver
* Seasonally adjusted and annualised

Index: 2019 = 100

Source: Stats SA
Real manufacturing sales
Percentage satisfied

Business confidence: retail sales
Sources: BER and Haver

APRIL 2022
34.9% in the third quarter. After losing 2.2 million jobs during
the second quarter of 2020 due to the adverse impact of the
lockdowns, the economy had only recovered a net 396 000
jobs by the fourth quarter of 2021.34 Unemployment will
likely remain elevated, as labour-intensive sectors such as
construction and tourism remain constrained and domestic
growth moderates.
Despite the slower recovery in employment, average real
private sector wages have recovered substantially, reaching
98.6% of their pre-pandemic level by the fourth quarter of
2021, partly reflecting large productivity gains.35 As with the
recovery in value added, there are substantial disparities
across subsectors. Earnings remain below their pre-COVID-19
averages across all subsectors, except for mining as well as
community, social and personal services.36 The faster recovery
in average wages and total compensation has supported
household consumption. Household spending grew by 2.8%
in the fourth quarter of 2021 after retreating significantly (-2.4%)
in the third quarter. In level terms, this represents a return to
its pre-pandemic standing. Growth in household spending
is expected to slow in 2022, as pent-up demand fades and
households start to feel the effects of sharply higher inflation,
high fuel and electricity prices, and rising interest rates.
However, the terms of trade gains and expected higher asset
returns should offset most of these pressures, while social
transfers should provide relief to low-income households.
On the back of stronger household consumption and demand
for commodities, corporates have recently enjoyed higher
selling prices, particularly in the mining and manufacturing
industries. This has boosted profit margins, permitting them
to record all-time high real surpluses in 2021. This, together
with the easing of restrictions, has contributed to a modest
improvement in corporate sentiment. Against this backdrop,
corporate borrowing has begun to improve, driven by the
loans and advances category (a category most associated
with investment), though it remains well below pre-pandemic
levels.37 This bodes well for investment, which declined from
16% of GDP before the pandemic to around 14% to date.
On a quarterly basis, gross fixed capital formation (GFCF) rose
by 1.9% in the fourth quarter of 2021, after a 0.4% contraction
in the third quarter. The rebound was underpinned by private
34 It remains unclear whether the slow recovery in employment represents
a long-term scarring of the labour market underpinned by fundamental
shifts in the structure of the economy or a temporary phenomenon which
will be reversed as the recovery of the economy progresses further.
35 Real total salaries and wages paid to workers have recovered to 94.3%
of their 2019 fourth-quarter level. In rand terms, real total earnings
decreased from R764.1 billion in the fourth quarter of 2019 to
R734.3 billion in fourth quarter of 2021.
36 Higher average wages in mining reflect the windfall profits from
the elevated commodity prices.
37 By December 2021, corporate borrowing was still 5.9% below
the 2019 average, and even remained below its December 2020
level in real terms (by 1.7%).
Level change over one quarter (millions)
Q1
Q2
Q3
Q4

Employment gains/losses
Source: Stats SA

Q1
Q2
Q3
Q4


Index: 2019 = 100
Real average wages*

Total

Trade

Mining


Finance

Construction

Manufacturing

Transportation

Community services
Sources: Stats SA and SARB
* Seasonally adjusted
R billions (real)
Company surpluses

Source: SARB
Financial corporations
Non-financial corporations

APRIL 2022
sector capital outlays, which grew by 4.2% as firms increased
their purchases of machinery and equipment. While investment
is expected to improve further, its momentum continues to
face challenges, including unstable electricity supply, transport
inefficiencies, weak confidence, and slow progress in the
execution of structural reforms.
The growth outlook
Both the global and the domestic economic landscapes have
shifted markedly since the release of the October 2021 MPR,
raising uncertainty around the future trajectory for GDP growth.
Inflation has risen sharply in recent months, which could see
policy normalisation being accelerated, while the Russia–
Ukraine war presents new risks (and benefits) to growth,
having already pushed oil, food and mineral commodity prices
substantially higher. Taking these dynamics into account, the
SARB expects the domestic economy to grow by 2.0% in 2022
and by 1.9% in both 2023 and 2024, slightly higher than the
projections in the previous MPR. The subdued growth rates
over the medium term suggest that the economy has mostly
completed its recovery from the COVID-19 shock, and that the
underlying structural constraints have become more binding.
Although the output growth outlook is muted, the economy is
expected to expand significantly faster than potential, which is
estimated at just 0.8% in 2022 and 2023, with a rise to 1.1%
in 2024. Weak investment, electricity supply constraints, skills
shortages, and high long-term borrowing costs are among the
main contributing factors to lower potential growth. Indeed,
the declining trend for potential GDP growth since the global
financial crisis closely mirrors that for investment, which
declined from a high of about 20% of GDP in 2008 to 14% in
2021. The output gap, which measures the distance of actual
GDP from its potential level, is wider in the near term compared
to the projection in the October 2021 MPR. However, the gap
closes by the third quarter of 2023 (the same as in the previous
MPR), as the economy is expected to grow much faster than
potential. The wider near-term gap is due to a combination of
downward revisions to GDP growth in 2021 and unchanged
potential growth estimates (see Box 6).
Growth over the medium term will continue to be supported
by household spending and exports as well as investment.
Household spending is expected to continue to increase,
although moderately, as interest rates rise and the COVID19-induced fiscal stimulus fades. Growth in spending is
also likely to be somewhat constrained by fragile consumer
confidence, in part reflecting the slow recovery in employment
and the sharply rising cost of living on the back of higher fuel
and electricity prices. These effects will, however, be offset by
the gains in the commodity export prices which have begun
increasing again, driven by the Russia–Ukraine war, after
moderating through the second half of 2021, and despite the
expected deceleration in global growth. The higher commodity

Percentage satisfied
Business confidence

Source: BER
Percentage change from quarter to quarter

Gross fixed capital formation
Source: Stats SA


Total

Public authorities

Public corporations

Private business enterprises
Percentage change
Real GDP growth
Sources: Stats SA and SARB


Forecast

APRIL 2022
export prices should support export growth and growth in real
consumption through both the terms of trade channel and the
income effect, as well as household net wealth through the
gains in asset prices.38
After five consecutive years of subtracting from GDP growth,
investment spending grew by 2.0% in 2021, and is expected
to rise further over the medium term, though off a low base,
supported by firmer capital outlays by the private sector
and public corporations. A timely roll-out of government
infrastructure projects, such as the R812.5 billion outlined in
the 2022 Budget, as well as the implementation of structural
reforms to improve efficiencies in core infrastructure sectors
could further incentivise the private sector.39 Investment
will also get a boost from the fifth round of the Renewable
Energy Independent Power Producer Procurement (REIPPP)
Programme, which includes various projects worth about
R50 billion.40 The reform and restructuring of the energy sector
to permit for embedded generation and a more competitive
electricity market could see massive private sector investment
flows into the sector.41 Gross fixed capital formation is expected
to average 14.3% of GDP by 2024, well below the National
Development Plan’s 2030 target of 30%.
Load-shedding, however, will likely remain a constraint to
growth and investment in 2022, after worsening progressively
since 2019. The sharply higher diesel and coal prices could
raise electricity generation costs considerably, potentially
necessitating more severe load-shedding or sharply higher
price increases.42
Macro balances
The current account and its drivers
Supported by the elevated commodity prices, the current
account balance has remained in surplus since the release
of the previous MPR, and for six consecutive quarters since
the third quarter of 2020. The current account is impacted
38 Logistical constraints may limit the country’s ability to leverage the
higher commodity prices to raise net exports, particularly for bulk
commodities such as coal and chrome (about 40% of export receipts
in 2021). Non-bulk commodities such as platinum group metals and
gold should, in principle, be able to benefit, though electricity supply
challenges could impose a hard constraint on all producers.
39 The bulk of the government infrastructure spending is allocated
to the transport, water and sanitation, and energy sectors.
40 Nedbank Group, Nedbank Capital Expenditure Project Listing,
30 July 2021.
41 Several energy generation projects were announced at this year’s State
of the Nation Address. These include the fifth window of the REIPPP
Programme, which will add 2 600 megawatts (MW) of generation
capacity; the liquid natural gas-to-power project, which will realize
3 000 MW of gas-generated power; and the development of 800 MW
of capacity under the Risk Mitigation Independent Power Producer
Procurement (RMIPPP) Programme, which is ready to proceed. Eskom
also announced plans to invest R178 billion in transmission capacity
over the next 10 years under its Transmission Development Plan (TDP).
42 Eskom’s latest expectation is for up to 61 days of load-shedding between
April and August 2022, following 29 days between January
and March 2022.
Per cent

2019 2020 2021 2022 2023 2024
Output gap estimates
Source: SARB


Nov 2021

Jan 2022

Mar 2022
Forecast
Percentage points
Contributions to real GDP growth
Sources: Stats SA and SARB
GFCF
Government consumption
Household consumption
Real GDP growth*
Imports
Exports
Residual
Inventories


Forecast
* Percentage change
R billions
Current account
Source: SARB

-300
-200
-100

Services, income and
transfers balance
Trade balance
Current account
balance
Forecast

APRIL 2022
predominantly by the trade account, which reached recordhigh surpluses over the past year. As commodity prices
slipped from their peak and imports recovered, both the
trade and the current account surplus moderated through
the second half of 2021, with the latter declining to 1.9% of
GDP in the fourth quarter, down from 3.5% in the third quarter.
The current account further benefitted from a narrower
services, income and transfers account (SIT). This deficit
declined to 3.2% of GDP in the fourth quarter, down from
4.4% and 3.6% in the second and third quarters respectively.43
The SIT balance benefitted from an improvement in net
income receipts as dividend payments declined more sharply
relative to receipts (a net improvement of R8.6 billion) in the
fourth quarter. As South Africa’s commodity export prices are
projected to achieve further price gains, the current account
balance is expected to remain in surplus over the forecast
period, narrowing from 3.7% in 2021 to 3.0% in 2022, 1.6% in
2023 and to 0.8% in 2024.
Beyond the current account, the commodity boom has
permitted the economy to enjoy increases in its terms of
trade, which reached an all-time high of 128.5 index points
in the second quarter of 2021. While it has moderated
through the second half of 2021, the index remains elevated,
reflecting high commodity prices and an incomplete recovery
in imports, which has benefitted the rand exchange rate (see
Box 7). The expected surge in commodity prices should
further lift the terms of trade, supporting real income in the
domestic economy.
Fiscal balances
Tax revenue windfalls associated with the high commodity
prices helped lower the budget deficit to 5.7% of GDP in
2021/22, down from 7.8% at the 2021 MTBPS.44 The public
debt profile has also shifted lower, and debt is now expected
to reach 69.5% (69.9% at the 2021 MTBPS) of GDP in
2021/22, and to stabilise at 75.1% in 2024/25. Debt-service
costs, however, remain the fastest-growing expenditure
item, and now dwarf spending on healthcare, consuming
10.7% of the budget over the Medium-Term Expenditure
Framework (MTEF).
43 The Naspers/Prosus share exchange partly explains the elevated
services receipts during the third quarter. This share exchange
impacted the direct and portfolio investment liabilities as well
as the portfolio investment assets functional categories.
44 The deficit expands marginally to 6% in 2022/23, largely due to
the extension of the SRD grant, and falls lower to 4.8%
and 4.2% in 2023/24 and 2024/25 respectively.
Index: 2015 = 100

2020 2021 2022 2023 2024
Terms of trade
Source: SARB

* Dotted line indicates forecast
Index: 2015 = 100

Commodity prices

Source: SARB

Including gold

Excluding gold
R billions

Dividend payments and receipts
Source: SARB

Receipts

Payments

APRIL 2022
Additional revenue windfalls of R61.7 billion in 2021/22 (relative
to the 2021 MTBPS projection) are now expected as all the
major tax categories − corporate income tax (CIT), personal
income tax (PIT) and value-added tax (VAT) − have performed
above expectation. Revenue is expected to continue to
overperform over the medium-term, supported by the elevated
commodity prices.45
The 2022 Budget reaffirmed the government’s commitment
to fiscal consolidation as exemplified by real government
spending, which is projected to decline over the MTEF. Noninterest spending is projected to expand by 2.1% in nominal
terms over this period, driven by the Social Relief of Distress
(SRD) grant extension to March 2023, which will add an
additional R44 billion to spending, as well as the wage bill
allocation of R20.5 billion.46 Debt-service costs are projected
to absorb 18.9% of gross tax revenue in 2022/23. A key
component of government spending – the public sector wage
bill – continues to add uncertainty to expenditure estimates,
with substantial upside risk, given more elevated inflation.47
Conclusion
The domestic economy achieved notable gains in output in
2021, but its failure to move beyond the 2019 level two years
after the COVID-19 shock reveals the binding nature of the
constraints to economic growth, which have made South
Africa lag peer emerging markets. The outlook for investment
and growth remains hostage to energy supply constraints,
an unconducive investment climate and high long-term
borrowing costs, among other factors. Although commodity
prices remain elevated, the global environment has become
less supportive of domestic growth, as higher global inflation
has seen a more rapid withdrawal of policy accommodation.
In addition, geopolitical tensions in Eastern Europe have
driven commodity and food prices higher and contributed
to heightened uncertainty. Policy interventions such as skills
development, reforming the core infrastructure sectors of
energy and logistics, and improving the ease of doing business
will support higher investment and enhance domestic growth
and job creation.
45 The 2022 Budget tax revenue projections are higher than the 2021
MTBPS estimates by R71 billion in 2022/23, R86.3 billion in 2023/24
and R92.4 billion in 2024/25.
46 Government allocated the additional funds to meet the cost of the
2021 public sector wage agreement.
47 The wage dispute relating to the 2018 wage agreement that went to the
Constitutional Court has been resolved in favour of National Treasury
easing potential strain on the fiscus.
Percentage of GDP
Budget deficit
Source: National Treasury

2021 MTBPS

2022 Budget


Forecast
2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25
R billions

Tax revenue
Source: National Treasury

PIT

CIT

VAT
Q1
Q2
Q3
Q4
Index: 2019Q4 = 100
Q4
Q1
Q2
Q3
Q4

South Africa versus emerging market peers
(deviation from 2019 GDP levels)
Sources: Haver and SARB

SA

Brazil

India

Poland

APRIL 2022

R trillions

Potential GDP estimates: pre-benchmarking
Source: SARB


Jan 2020

Mar 2020

Apr 2020

Sep 2020

Jan 2021
R trillions

* Dotted line indicates forecast

Actual and potential GDP: post-benchmarking
Sources: Stats SA and SARB

Actual GDP

Potential GDP

Percentage of potential GDP

Output gap estimates
Source: SARB


Jan 2020

Mar 2020

Apr 2020

Sep 2020

Jan 2021

Mar 2022
Box 6 Impact of GDP revisions on the output gap

Potential output is the maximum level of output attainable at any given
point in time when all productive resources are fully employed.

The method also accounts for short-term supply shocks such as
load-shedding, strikes, droughts and, more recently, the COVID-19related supply disruptions.

South African GDP numbers exhibit markedly high volatility. Therefore,
revising potential growth with every data release would introduce
excessive volatility in potential. Potential output growth is a slow-
changing variable, driven by factors such as the growth rate of labour
and capital stock as well as total factor productivity.

These analyses were, however, subject to exceptionally high uncertainty.
Monetary policy operates through several channels: output relative
to potential (the output gap); interest rate differentials and the
exchange rate; and inflation expectations. This box looks at factors
shaping the output gap channel. The output gap reflects deviations
in the level of real output from its potential level.1 All other things
being equal, a positive (negative) output gap exerts upward
(downward) pressure on inflation, while the effect is neutral when the
level of gross domestic product (GDP) is equal to its potential level.
The conduct of monetary policy is complicated by the fact that the
‘output gap’ and ‘potential output’ are unobservable, and their
estimates are subject to considerable uncertainty and revisions.
The South African Reserve Bank (SARB) uses a semi-structural
multivariate filter to estimate potential growth.2 The approach
extracts the underlying growth trend from actual GDP data. To avoid
excessive volatility in potential growth estimates, revisions to
potential output tend to be less frequent.3 As a rule, the SARB
strives to re-estimate potential output once a year, when a full-year
set of data is obtained. However, this was not possible over the past
two years. First, the rebasing and benchmarking of GDP data by
Statistics South Africa (Stats SA) in August 2021 necessitated the
re-estimation of potential at the September 2021 Monetary Policy
Committee (MPC) meeting. Second, the COVID-19 shock entailed
exceptional uncertainty for forecasting, particularly whether the
shock was primarily a demand or supply shock. The assumptions
about the nature of the shock carried implications for trend growth
and required the SARB to adjust its estimates as new information
came to light.
The rebasing and benchmarking exercise revised GDP upwards and
investment downwards, with the investment-to-GDP ratio being
about 2 percentage points lower than was previously estimated.
As a result, potential output was revised slightly lower at the
September 2021 MPC meeting, resulting in an historically narrower
(i.e. less negative) output gap.
As the economy adjusted to the COVID-19 shock, GDP repeatedly
surprised by wide margins, challenging the earlier assessment of the
distribution of the shock and necessitating revisions to potential.4
Early analyses suggested the shock was half demand and half
supply, justifying a downward revision to potential. Following the
sharp contraction of 17.4% between the first and second quarters of
2020, GDP, however, rebounded markedly in the third quarter
(13.9% quarter on quarter), pointing to a stronger supply response
as the economy reopened. Over several MPC meetings, the
estimates of the shock improved as more information became

APRIL 2022

Percentage change over four quarters


Source: SARB
Underlying trend growth
available, and so did the revisions to potential growth estimates.5
With hindsight, the contraction in the second quarter of 2020 is
now estimated to have been more supply than demand driven,
and the output gap narrower than was projected in real time.
Weak investment, together with the persisting electricity supply
constraints, underpin the decline in underlying trend growth
estimates and the several downward revisions to potential.6 The
same factors also explain the subdued GDP growth achieved
since the global financial crisis.

For example, following the initial estimate of the impact of COVID-19
on potential output at the (unscheduled) April 2020 MPC meeting,
potential output estimates were revised at the September 2020 and
January 2021 meetings. The first revision was occasioned by the
significant downside surprise in the GDP release for the second
quarter of 2020 (-17.4% quarter on quarter versus the SARB estimate
of 12.0%), resulting in a downward revision to the potential output
estimate for 2020. The latter revision was prompted by the
stronger-than-anticipated rebound of GDP in the third quarter of
2020 (13.9% quarter on quarter versus the SARB estimate of 10.7%),
hence the upward revision to potential output.

The Quarterly Projection Model’s (QPM) estimates for potential
growth are 0.8% in 2022 and 2023 and 1.1% in 2024.


REER

Terms of trade (including gold) (rhs)
-20
-10

Percentage change over four quarters (both scales)

Source: SARB

Effective exchange rate and terms of trade
-8
-4

EMBI+

SA risk

Basis points

Sources: Bloomberg and JPMorgan

EMBI+ and SA risk
Box 7 The real effective exchange rate and the terms
of trade

The terms of trade reflect the ratio in which export and import prices move.
Terms of trade improve when export prices rise faster than import prices
(and vice versa). In 2021, commodity exports’ share in total exports
was 68.3%.

E Visser and T Janse van Rensburg, ‘The surge in South Africa’s terms of
trade – truly exceptional?’, South African Reserve Bank Research Brief
No. RB/2021/09, Pretoria: South African Reserve Bank, August 2021.

The terms of trade, however, remain elevated, and should benefit from the
recent renewed strengthening in commodity prices.

See, for instance, V Coudert, C Couharde and V Mignon, ‘Do terms of trade
drive real exchange rates? Comparing oil and commodity currencies’, CEPII
Working Paper No. 2008 32, 2008.
Commodities constitute a large weight in South Africa’s export basket
and are a primary determinant of the country’s terms of trade and
exchange rate level.1 When the terms of trade are elevated, the current
account benefits from higher net export receipts, which should
appreciate the currency, and vice versa. However, the typically strong
correlation between the real exchange rate and the terms of trade tends
to break down when the South African risk premium rises sharply.
As discussed in the October 2021 Monetary Policy Review (MPR), the
combination of rapidly rising export prices and only moderately rising
import prices saw a surge in the terms of trade to its highest level on
record of 128.5 index points in the second quarter of 2021.2 These
gains were reflected in the strengthening of the real effective exchange
rate (REER) of the rand, which improved from 104.5 index points in
the third quarter of 2018 to 109.7 index points in the second quarter
of 2021. As the terms of trade weakened following the sharp rise in oil
prices recorded since the second quarter of 2021, so has the REER.3
That relationship is common and consistent with the international
literature and strengthened in the six years leading up to the COVID-19
pandemic.4 However, the correlation broke down during the
pandemic, with the REER weakening sharply, reaching a trough of
93.6 index points in the second quarter of 2020.

APRIL 2022

What explains the breakdown in the strong correlation in 2020?
The answer lies largely in the sharp increase in the South African
risk premium, which increased from around 310 basis points in the
final quarter of 2019 to 560 basis points in the second quarter of
2020. This is explained by a global risk-off episode during the
heightened uncertainty around the COVID-19 pandemic – not
unlike what happened during the global financial crisis (GFC) when
investors also fled more risky emerging market assets. However,
there is a significant difference between these two risk-off
episodes. During the GFC the South African risk premium rose in
line with those of other emerging markets (global factors), but
during the COVID-19 pandemic South Africa’s risk premium was
driven more by idiosyncratic factors (South African fiscal debt
increased sharply).
A simple ordinary least squares (OLS) regression indicates that
changes in the REER are well explained by changes in the terms of
trade and deviations in the risk premium from its four-quarter moving
average. In particular, a 1% increase in the terms of trade appreciates
the REER by about 0.4 percentage points. However, when the risk
premium rises 1% above its four-quarter moving average, the REER
depreciates by about 8%.
Does the strong correlation between the terms of trade and the
REER during ‘risk-on’ episodes result in the South African economy
suffering from Dutch disease? Symptoms of the latter may come in
the form of a higher import penetration ratio, as an overvalued
exchange rate renders domestic output uncompetitive against
cheaper imports. Although imports as a share of gross domestic
product (GDP) have been declining since 2014, the decrease is
largely related to the fall in the investment/GDP ratio over the period,
as both ratios declined by between 6 percentage points and
7 percentage points of GDP between the first quarter of 2014 and
the third quarter of 2021. Therefore, had capital goods imports not
declined, import penetration would likely have increased, confirming
the adverse impacts of an overvalued REER on domestic
economic activity.5

Pulumo (2020) finds evidence of Dutch disease in South Africa.
See S Pulumo, ‘Dutch disease and its effects in South Africa’,
South African Reserve Bank Economic Note No. EN/2020/03,
Pretoria: South African Reserve Bank, February 2020.

Imports

Investment

Percentage of GDP (both scales)

Sources: Stats SA and SARB

Imports and investment

SA risk

Government debt (rhs)

Basis points
Percentage of GDP

Sources: JPMorgan and SARB

Government debt and SA risk

APRIL 2022
Price developments: fading
disinflationary effects,
heightened risks
Headline inflation has accelerated markedly over the past
year due to sharply higher fuel and food prices, and is now
forecast to average 5.8% this year, up from 4.5% in 2021 and
3.3% the year before. Core inflation pressures have become
more broad-based and less disinflationary, while administered
price inflation remains extremely high, contributing to a highcost structure for the economy. The Russia–Ukraine war has
raised energy prices significantly further. Food prices are
expected to be severely impacted by higher input costs and
supply disruptions. The expectation is for headline inflation to
return closer to the target midpoint in 2023, supported by fuel
price base effects and a moderation in oil prices, and to hover
around the midpoint into 2024. Risks are tilted to the upside.
After remaining subdued since 2019, South Africa’s headline
CPI inflation exceeded the midpoint of the 3–6% target range in
May 2021 due to sharply higher fuel and food prices. Inflationary
pressures have increased considerably since the beginning of
the year. The Brent crude oil price touched US$130 per barrel
in early March in response to the Russia−Ukraine war, before
moderating somewhat. Fuel inflation is now expected to average
26.1% in 2022, up from the 3.7% projected in the previous
MPR. Headline inflation is projected to remain above the target
midpoint in 2022, and to break through the 6.0% upper ceiling,
before returning closer to the target midpoint in 2023.48
The sharp rise in inflation presents an unwelcome development,
as South Africans have become accustomed to low and stable
inflation closer to the target midpoint ever since the MPC
communication in 2017 of a clear preference for the 4.5%
target midpoint. Expectations for inflation fell sharply following
the MPC communication and settled closer to the midpoint,
though they have tended to drift below or above the target
midpoint following shocks to headline inflation.49 Keeping the
expectations for inflation closer to the target midpoint is a key
objective of the SARB’s monetary policy.
Although the breach of the target midpoint is attributed to food
and fuel prices, inflationary pressures have broadened in line
with the normalisation of economic activity from the pandemicinduced lows, while risks have increased. The output gap has
narrowed, indicating a recovery in demand and with it the lift
in core inflation, albeit from a low base. The global backdrop is
marked by far higher inflation than expected even six months
ago, with elevated commodity prices, particularly oil and
48 This projection does not account for the recent announcement
of a temporary R1.50 reduction in fuel prices.
49 For a long time, inflation expectations remained stuck at the upper limit
of the target range, but trended lower following the MPC communication
on the target midpoint. Inflation expectations for 2021 dropped below 4.0%
in the 2021 first-quarter survey, while the two-year-ahead expectations
were at 4.4%. By the first quarter of 2022, current year inflation expectations
averaged 5.1%, while the two-year-ahead expectations settled at 5.0%.
-3
-2
-1

Percentage points
Forecast
Contributions to headline inflation

Electricity (3.63%)

Fuel (4.82%)

Headline inflation* (100%)
Sources: Stats SA and SARB

Food and non-alcoholic beverages (17.14%)

Core inflation (74.4%)
* Percentage change over four quarters

US$ per barrel

Brent crude oil price
Source: Bloomberg


Spot price*

Futures prices (on 5 Apr 2022)
Mar
Jun
Sep Dec
Mar Jun
Sep Dec Mar Jun
Sep Dec
* The monthly spot price for April 2022
is the average of the available data.

APRIL 2022
food, presenting risks of imported inflation. While the relatively
appreciated rand and deflating import prices have helped keep
domestic price inflation low over the past 18 months, the risk of
reversal has increased considerably, with import prices already
inflating fast and the rand expected to weaken somewhat.
Oil prices and fuel inflation
Brent crude oil prices increased sharply during the period
under review, nearly doubling between January 2021
and February 2022. The Brent crude oil price averaged
US$97 per barrel in February 2022, up from US$55 in January
2021. Oil prices touched the US$130 per barrel mark on
9 March 2022 before receding somewhat. The current
projection for 2022 is much higher (54%) than the projections
in the October 2021 MPR, where oil was expected to average
US$67 in 2022 and moderate over the medium term.
The Russia–Ukraine war, a sharper-than-anticipated recovery
in the global economy, and production deficits by the
Organization of the Petroleum Exporting Countries (OPEC)
have contributed to the exceptionally steep price increase.50
Although oil markets appear to have settled despite the
persistent high uncertainty, prices could escalate further
should Russia’s oil exports be additionally sanctioned or if
oil is substituted for natural gas in Europe as shortages of
the latter worsen.51 The slower supply response, in part due
to the reduced capital expenditure in oil production and
infrastructure following the oil price crash of April 2020, could
aggravate the demand/supply imbalance and add to the
already heightened uncertainty.52, 53 Oil prices are expected
to average US$103 in 2022, US$80 in 2023 and US$75 in
2024 − a large upward revision compared to the expectations
in the previous MPR.
The pass-through of higher oil prices to domestic fuel
prices is largely immediate and complete, as the market is
regulated. Pump prices increased sharply to R21.60 per litre in
March 2022, up from R18.33 in October 2021 (for Gauteng).
The effect on pump prices was worsened by the simultaneous
depreciation of the rand, from R14.53 in September 2021
to R15.41 in March 2022, and increases in fuel taxes and
margins, which rose by a cumulative 65 cents per litre between
August and December 2021.54 The February 2022 Budget,
however, included no increase in the general fuel levy or the
Road Accident Fund levy, providing some relief to consumers.
50 Some members of OPEC have fallen short of the production targets
agreed to in August 2021.
51 Russia is the third-largest global producer of crude oil and
second-largest for natural gas.
52 Concerns about stranded assets as the world is poised to transition
to a low-carbon global economy could also be a factor.
53 The expectation for increased production from OPEC+, the US and other
non-OPEC countries, and the likely expansion in production capacity
spurred by the current high price of oil present downside risks to the oil price.
54 The large increase arose from the adjustments in the slate levy of
42 cents over that period.
US$ per barrel

Evolution of oil price forecasts*
Source: SARB
MPC meeting dates

Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
May
Jul
Sep
Nov
Jan
Mar
Apr
May
Jul
Sep
Nov
* Dotted lines indicate forecasts

Rand

Gauteng unleaded petrol price

Sources: Bloomberg and Central Energy Fund

95 unleaded petrol (per litre)

Exchange rate (per US$)
Rand per litre

2018 2019 2020
Petrol price decomposition*

Sources: Stats SA and SARB
2021 2022 2023 2024

Taxes and margins

Basic fuel price

Petrol price
Forecast
* Gauteng unleaded petrol

APRIL 2022
Fuel inflation averaged 18.1% in 2021, higher than the 16.1%
projected in the October 2021 MPR, and is now expected to
average 26.1% in 2022, -7.1% in 2023 and 0.0% in 2024.55
Core inflation
Core inflation has diverged materially from headline inflation
over the past year as it remained well contained, averaging
3.1%, down from 3.3% the year before (2020). The subdued
core inflation is due to very low services inflation and still low
core goods inflation, though it has shown upward momentum
since the release of the previous MPR, consistent with the
recovery in economic activity.56 Looking ahead, core inflation is
expected to accelerate as the output gap closes and inflation
expectations drift up, and is also expected to accelerate due to
higher imported inflation, rising to 4.2% in 2022, 5.0% in 2023
and 4.7% in 2024.
The relatively low services inflation in 2021 was due to the
benign housing inflation and historically low insurance inflation.
Housing inflation was weaker at the start of 2021 as the supply
of rental space far exceeded the demand. While the expectation
was for the prices of rentals and owners’ equivalent rent to
remain subdued for longer, housing inflation surprised on the
upside in the second half of 2021, as the faster recovery in
worker earnings improved the financial standing of tenants.
Housing inflation recorded 1.0% in 2021, slightly higher than
the October 2021 MPR forecast of 0.9%. On the back of
improved household finances, housing inflation is forecast to
accelerate to 2.5% in 2022 compared to 2.1% at the time of the
October 2021 MPR.
For a second successive year, medical aid schemes have
indicated less aggressive price increases. This follows the
very low (by historical standards) medical insurance inflation of
5.6% in 2021, down from 9.5% in 2020, and the total insurance
average of 4.8%, down from 7.6% the year before. Expectations
were that the relief on medical insurance would be temporary
and that price increases would revert to their long-term average
of 9.0% in 2022. As a result, the MPR forecast for 2022 is thus
revised lower to 6.7%, down from 9.0%.57
Core goods inflation exerted upward pressure on core inflation
in 2021 as base effects from 2020, supply chain bottlenecks
and a weaker rand translated into higher price increases,
particularly for vehicles, spare parts, and alcoholic beverages
and tobacco. These components averaged 5.0% (3.8%),
55 The government recently announced a temporary reduction in the
general fuel levy of R1.50 per litre for a period of two months, namely,
April and May 2022, with additional relief measures under consideration.
This will directly lower the 2022 fuel inflation by 1.7 percentage points
and administered prices by 0.4 percentage points. The QPM projections
reported here are from the March MPC meeting and do not account
for this policy announcement.
56 Services inflation averaged 2.9% in 2021, down from 3.9% in the
previous year, while core goods inflation edged higher to 3.2%,
up from 2.1% in 2020.
57 The February CPI outcome for medical insurance came out
lower than what was forecasted, suggesting that there might
be a downward revision to the current 6.7% forecast.
-1

Per cent
Per cent
Rental escalation and vacancy rate
Source: TPN Credit Bureau

Escalation

Vacancy rate (rhs)

Percentage change over 12 months

Services inflation*

Sources: Stats SA and SARB

Services inflation

Insurance inflation

Housing inflation
* Dotted lines indicate forecasts
Per cent

Core goods
inflation
Services
inflation
Core
inflation
Sources: Stats SA and SARB
Components of core inflation


APRIL 2022
9.2% (5.9%) and 4.6% (3.4%) respectively in 2021 (2020).
Although supply chain bottlenecks have started to ease in
2022, the expectation is for higher imported inflation, reflecting
both higher goods prices and a weaker rand. Elevated producer
prices add to inflationary pressure on goods (see Box 8).
Core goods inflation is projected at 4.2% this year, rising to
5.1% in 2023 and 4.9% in 2024.
Administered prices
The regulated/administered price component of the CPI
inflation basket is projected to average 12.2% in 2022, up
from 9.2% in 2021, and to slow to 1.9% in 2023, mainly from
base effects of the oil price rally in 2022 and the expected
moderation in oil prices. Administered prices have historically
inflated at rates markedly higher than the target midpoint,
underpinned by fuel and electricity inflation. Electricity price
inflation will average 11% in 2022 and is projected at 9.2% in
2023 and 10.0% in 2024.58 Education inflation, which averaged
4.5% in 2021, is expected to rise to 4.9% in 2022, 5.4% in 2023
and 5.5% in 2024. The projections for education inflation are in
line with the Minister of Education’s recent proposal (which is
non-binding) for universities to increase tuition fees for this year
by 4.3% and student accommodation by 6.3%.
Administered price inflation remains a major driver of headline
inflation and a structural obstacle in achieving permanently
lower domestic price inflation (see Box 9). Many of the
administered price sectors, including water, electricity and
fuel, serve as inputs into the production process. Therefore,
the considerably higher administered price inflation raises the
overall cost structure of the economy.
The Russia–Ukraine war has pushed thermal coal prices to
unprecedented levels, with the Richard’s Bay variant touching
US$456 per ton on 8 March 2022 − a 141% increase since the
beginning of February. Higher coal and diesel prices will likely
raise Eskom’s generation costs and drive additional electricity
price increases.
Food and non-alcoholic
beverages inflation
After registering 6.1% in 2021, food and non-alcoholic
beverages (NAB) inflation is projected to again average 6.1%
in 2022, higher than the 4.2% forecast in the previous MPR.
This is due to the emergence of heightened food inflation
pressures at the beginning of the year, partly as a result of the
expected disruptions to the global supply of grains owing to
the Russia–Ukraine war. Pressure will be aggravated by the
high energy prices, a slightly depreciated rand exchange rate
and excessive rains.
58 In February 2022, the National Energy Regulator of South Africa
(NERSA) announced a 9.61% increase for municipal bulk purchases.
The estimated price increase to households for the period July 2022
to June 2023 stands at 8.3%.
Percentage points
Contributions to core goods inflation

Sources: Stats SA and SARB
Paraffin
Residual goods
Spare parts and accessories
Vehicles
Alcoholic beverages and tobacco
Clothing
Household contents
Medical goods
-1

Forecast
Forecast

Jan 2022

Mar 2022
Percentage change over 12 months
Electricity prices*

2021 2022 2023 2024

Sources: Stats SA and SARB

APRIL 2022
Ordinarily, South Africa’s food inflation dynamics are driven
largely by domestic factors.59 The bulk of the upward pressure
on food inflation over the past year came from meat inflation,
which averaged 8.5%, up from 5.2% in 2020.60 Price increases
within the meat basket have been more pronounced in the
beef, poultry and lamb segments. Beef inflation surged to an
average of 11.5% in 2021, up from 8.2% in 2020, on account of
low slaughtering activity amid herd rebuilding. Poultry inflation
increased to 7.4% in 2021, up from 4.4% in 2020, reflecting
low base effects in 2020 and high feed costs. Imports
exerted downward pressure on poultry inflation, but this is
likely to change as South Africa imposed large provisional
anti-dumping duties on bone-in chicken meat imports in
December 2021, which will remain in effect until 14 June 2022.61
Bucking the trend of most food components, bread and
cereals inflation decelerated sharply in 2021, reaching 1.8%
in December, down from 5.1% in January (3.9% for the year),
supported by bumper harvests locally and also in parallel with
that seen in global markets. This may reflect the integration of
the South African and global markets for grain, with domestic
prices oscillating between export parity and import parity,
depending on the harvests.
59 Good harvests in 2020 and 2021 partially insulated domestic prices from
the sharply higher global food prices, where the United Nations Food and
Agriculture Organization (FAO) food price index increased by 28% in 2021.
60 At 32%, meat is heavily weighted in the food and NAB basket.
61 These anti-dumping duties range from 6% to 265.1% for various
poultry producers.
-2

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

Actual

Sep 2020

Mar 2021

Sep 2021

Mar 2022
* Dotted lines indicate forecasts
Consumer food price inflation (March 2022 forecasts)
Percentage change over four quarters, September 2021 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2011–21*
2021*
2022*
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
Food and non-alcoholic beverages


* Annual average percentage change
Sources: Stats SA and SARB
Percentage change over 12 months
Slaughtering rates and meat inflation
Sources: Levy Admin, Stats SA and SARB


Meat inflation

Slaughtering rates*
* Six-month moving average

-15
-10
-5

APRIL 2022
Although grain prices have recently edged higher amid the
Russia–Ukraine war, the first domestic crop estimates remain
favourable.62, 63 The global production of grain crops is also
projected higher in 2021/22, and this should support lower
bread and cereals inflation.64 Together with the high base
effects from the first half of 2021, these factors should partially
counter the expected rise in bread and cereals inflation.
The feedthrough from global food inflation to its domestic
counterpart appears strongest for the sugar and the oils and
fats categories, as South Africa tends to be a net importer.
Global sugar prices increased by 37% in 2021 and vegetable
oils by 66%, lifting domestic sugar prices by 6.3% and oils
and fats prices by 18.6% in 2021. Although the sugar tax of
4.5% announced in the 2022 Budget is expected to raise
prices, favourable production conditions in major exporting
countries, notably India and Thailand, should support lower
sugar prices. The global supply for oils remains tight, and the
Russia–Ukraine war may have aggravated the supply situation.
Consequently, the domestic oils and fats inflation is expected
to remain elevated.
The recent excessive rains associated with La Niña negatively
affected the domestic harvests of staple fruits and vegetables,
pushing vegetable inflation to 8.6% in January 2022 and 7.7%
in February, up from 3.2% in December 2021.65 The impact
of the heavy rains on the cereal crops appears to be minimal,
as estimates for 2021/22 are in line with their five-year
production average.
Overall, despite the expected good harvest, the near-term
outlook for food and NAB inflation has lifted to 6.1% in 2022,
considerably higher than the 4.2% projected in the October
2021 MPR. The shift is driven by the Russia–Ukraine war,
sharply higher energy prices and a somewhat weaker rand.
62 The domestic maize crop is estimated at 14.5 million tonnes in the current
season, down from 16.3 million tonnes in 2020/21, but in line with the
five-year average.
63 Russia and Ukraine are the largest exporters of wheat, maize and
sunflower oil, while Russia is also one of the largest exporters of
fertiliser material.
64 International Grains Council, Grain Market Report, February 2022.
65 Business Insider, ‘Heavy rains continue to hit tomato and potato supply,
causing a surge in prices’, December 2021.

and-potato-supply-and-causes-a-spike-in-prices-2021-12
Percentage points
Contributions to meat inflation

Sources: Stats SA and SARB
Beef
Pork
Lamb
Poultry
Dried meat
Meat inflation*
-4
-2

* Percentage change over 12 months
-6
-4
-2

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

Actual

Sep 2020

Mar 2021

Sep 2021

Mar 2022
* Dotted lines indicate forecasts

Actual

Sep 2020

Mar 2021

Sep 2021

Mar 2022
Percentage change over four quarters

Food and non-alcoholic beverages inflation*

* Dotted lines indicate forecasts
Sources: Stats SA and SARB

APRIL 2022
Medium-term inflation
The medium-term trajectory for headline inflation is shaped
by the drivers of core inflation, namely inflation expectations,
real unit labour costs (ULCs), the real rand exchange rate and
the output gap, with the latter three proxying the real marginal
costs facing domestic producers. The output gap captures the
extent to which the degree of economic slack affects the costs
of producing additional output, the real ULC gap expresses
real wage pressures greater than productivity gains, while the
real exchange rate reflects costs associated with the use of
imported inputs.66
Better anchored inflation expectations benefit inflation by
guiding price/wage setters. The BER’s two-year-ahead
surveyed inflation expectations have hovered around the target
midpoint for most of the past two years. However, (global)
supply chain disruptions and the surge in oil prices have pushed
domestic inflation higher. During the period under review, the
surveyed two-year-ahead inflation expectations edged higher
to 5.0% in the first quarter of 2022, up from 4.7% in the fourth
66 The lag in inflation (i.e. inflation persistence) and the real policy rate are
also important determinants of medium-term inflation.
Headline inflation (March 2022 forecasts)
Percentage change over four quarters, September 2021 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2011–21*
2021*
2022*
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4


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

Per cent

Inflation expectations*
Sources: BER and SARB

Midpoint

Current year

One year ahead

Two years ahead

Five years ahead
3–6% inflation target range
* Dotted lines indicate blended forecasts

APRIL 2022
quarter of 2021. Rising inflation expectations are also seen
in break-even rates, which have risen sharply. The drift in
inflation expectations, if sustained, presents the prospect of
more enduring second-round effects, including feedthrough to
wage setting.
Numerous studies show that wages in South Africa respond
strongly to inflation outcomes but are less responsive to
employment conditions.67 This implies that, during periods
of elevated inflation, real wage gains substantially above
productivity are common, despite the high unemployment
levels. The forecast is for nominal wages to increase by 5.5%
in 2022, 6.7% in 2023 and 6.1% in 2024, with the real ULC
gap switching from being disinflationary in 2022 to inflationary
from 2023 onwards.
Medium-term inflation also responds to the exchange
rate. Through the currency conversion effect, a nominal
depreciation of the rand directly raises the prices of imported
goods in the domestic economy, driving inflation up, while a
more appreciated and stable rand helps buffer the effects of
imported inflation, exerting downward pressure on headline
inflation.68 The starting point for the rand per US dollar
exchange rate at the March MPC meeting was R15.41, and it
is projected to depreciate to R16.22 over the forecast period
– a 5.2% depreciation.69 At the same time, the real effective
exchange rate (REER) gap is projected to deteriorate over the
forecast horizon, raising the real marginal costs of production
and adding to inflationary pressures.
Although it remains negative, the projected output gap
continues to narrow, and is expected to close by the third
quarter of 2023 before turning positive for the remainder
of the forecast period. A negative and narrowing output
gap implies diminishing disinflationary pressure, while a
positive output gap exerts upward inflationary pressure.
The narrowing output gap partly explains the sharp
acceleration in core inflation, which edges past the midpoint
of the target range by the fourth quarter of 2022 and remains
above it over the medium term.
67 See, for instance, N Viegi and V Dadam, ‘Estimating a New Keynesian
Wage Phillips Curve’, South African Reserve Bank Working Paper Series
No. WP/20/13, December 2020.

detail-pages/working-papers/2020/working-paper-20-13
68 For complete pass-through goods, such as fuel, the impact is instant,
while for manufactured goods, the price impacts may be mediated by
market competition.
69 A 1% nominal exchange rate shock in one quarter generates a
0.12 percentage point rise in headline at its peak, typically three
quarters after the shock.
Per cent

Break-even inflation rates
Source: Bloomberg
2021 2022

5-year break-even rate

10-year break-even rate

-3
-2
-1

Percentage points
2016 2017 2018 2019 2020
2022 2023 2024

Contributions to the unit labour cost gap

Productivity

Real wage gap

Real ULC gap
Source: SARB

Sep 2021

Mar 2022
* Values < 0 imply undervaluations


Per cent
Real effective exchange rate gap*
Source: SARB

APRIL 2022
Conclusion
Headline inflation has risen sharply, underpinned by supplyside factors as well as rising core inflation pressures, and is
now expected to average 5.8% for the year. It should return
closer to the midpoint of the target in 2023, driven by fuel price
base effects and a moderation in oil prices, and hover around
the midpoint into 2024. The Russia–Ukraine war has further
driven oil prices to unprecedented highs, exerting intense
pressure on headline inflation and adding to high administered
price inflation. Taking a medium-term perspective, currency
weakness, high wage pressures and a closing output gap
will further exert upward pressure on headline inflation, even if
exogenous price pressures fade quickly.

Sep 2021

Mar 2022

Implied rand per US$
Nominal exchange rate
Source: SARB

* Dotted lines indicate forecasts

APRIL 2022
Box 8 What do high producer prices tell us about
CPI inflation?

Organisation for Economic Co-operation and Development,
Methodological Guide for Developing Producer Price Indices for
Services, 2006.

Intermediate PPI, which measures the change of input prices at the
intermediate production stage, soared to 23.1% in December 2021,
before moderating slightly to 21% in January 2022.

R Moreno, ‘Some issues in measuring and tracking prices in emerging
market economies’, BIS Paper No. 49, 2010.

In South Africa, services constitute about 52% of the CPI basket.

See S B Blomberg and E S Harris, ‘The commodity-consumer price
connection: fact or fable?’, Federal Reserve Bank of New York
Economic Policy Review 1(3), October 1995, pp 21–38; and T E Clark,
‘Do producer prices lead consumer prices?’, Federal Reserve Bank of
Kansas City Economic Review 80(QIII), 1995, pp 25-39.

For a discussion on the relationship between intermediate and final PPI,
see S Knox, P Mnguni, P Pienaar and W Simbanegavi, ‘How much
should we worry about the high producer prices?’, South African
Reserve Bank Research Economic Note, forthcoming.
The producer price index (PPI) is a measure of the change in the
prices of goods, either as they leave their place of production or as
they enter the production process.1 It is an alternative measure of
domestic inflation and important correlate of consumer price index
(CPI) inflation. Both CPI and PPI inflation have risen sharply
worldwide as economies recover from the COVID-19-induced
recession of 2020. In South Africa, final PPI inflation recorded
10.8% in December 2021, moderated to 10.1% in January 2022,
and rose to 10.5% in February 2022.2 CPI inflation also rose
sharply, reaching 5.9% in December 2021 before moderating
slightly to 5.7% in January and February 2022.
Do producer prices contain useful information about the future
trajectory for CPI inflation? A strong co-movement would suggest
that the two series (PPI and CPI) are driven by similar fundamentals
or that one drives the other. One linkage is the production chain
idea that posits that PPI inflation is ‘pipeline inflation’ and will
ultimately be passed on to final consumers, suggesting a stronger
correlation.3 Producer and consumer price inflation often move
together, despite considerable structural differences between the
indices. PPI typically measures only domestic prices, while the
CPI also includes prices of imported consumer goods.
Additionally, government taxes and subsidies affect CPI but not
PPI, which can be seen in the different way administered prices
pass through into the inflation indices. Finally, most PPI measures
exclude services – a large share of the CPI.4 Consequently, passthrough of PPI to CPI is typically much weaker than implied
by the production chain view.5
In South Africa, producer prices are measured at the intermediate
and final goods levels.6 Compared to headline CPI inflation, goods
CPI inflation, which excludes services inflation, shows a stronger
correlation with final PPI inflation. Although CPI goods and final PPI
baskets are more closely related and hence exhibit stronger
co-movement, they differ in that the CPI goods basket has a large
import component.
Percentage change over 12 months
-2

Source: Stats SA
PPI and headline CPI inflation

Final PPI

Headline CPI
Percentage change over 12 months
-2

Source: Stats SA
PPI and goods CPI inflation

Final PPI

Goods CPI

Weight (per cent)
Difference in weights of the common components
in goods CPI and PPI
Food,
beverages
and tobacco
Clothing
Fuel
Motor
vehicles
Remaining
unmatched
categories
Source: Stats SA
Final PPI
Goods PPI


APRIL 2022
Another source of divergence between final PPI and goods CPI is the
differences in the weights of the coinciding constituent components. The
weights of final PPI are based on the value-added of products in the
national accounts, while the weights of CPI are based on household
consumption expenditure, which is again influenced by imports.7
Yet another important determinant of the degree of correlation between
PPI and CPI is the extent of market competition. Firms facing stronger
competition may choose to absorb rising costs rather than pass the
higher costs on to consumers, and this is reflected in survey data showing
margin compression in the domestic market. According to the Bureau for
Economic Research’s (BER) survey of manufacturers, a net majority of
81% of respondents reported that production costs quickened in the
fourth quarter of 2021 compared to a year ago, while only 55% reported
increased selling prices. This is opposed to the period from the second
quarter of 2020 to the second quarter of 2021 where the share of
respondents who reported increased selling prices rose sharply relative
to those who reported increased production costs. A similar trend is
evident at the retailer level.8 The survey findings correspond closely to
measures of realised inflation.
In conclusion, producer prices contain important information about costs
that feed into consumer goods, and thus infer some pass-through from
PPI to CPI inflation, particularly when considering closely related baskets
such as final PPI and goods CPI. However, the pass-through is
intermediated by factors such as the degree of competition in consumer
goods markets, with firms facing stiffer competition often sacrificing
margins rather than fully passing the higher costs on to consumers; the
strength of consumer demand; and the structural differences between
the final PPI and the targeted headline CPI baskets.

See also RMB Markets Research, ‘Explaining the divergence between PPI
and CPI’, SA Macro Data Review and Preview, 10 May 2021.

See BER, Manufacturing Survey, fourth quarter 2021.
Net (per cent)

Manufacturers

Source: BER

Production cost

Domestic selling price
Net (per cent)

Retailers

Source: BER

Purchase price

Selling price
Box 9 Administered price inflation in South Africa is
well above headline inflation
On average, the past five years has seen South Africa’s headline inflation
rate at about 4.5%. Global disinflation and a relatively strong rand have
supported lower inflation outcomes in the domestic economy. When
compared to global peers, however, inflation in South Africa is still too
high. Trading-partner peers averaged 2.6% over the same period.
This box shows that administered prices have risen considerably faster
than headline inflation since 2009. Higher administered prices help
explain South Africa’s higher inflation rate relative to trading-partner
peers. Looking ahead, South Africa may only achieve lasting low inflation
if administered prices are permanently lower.
Between 2009 and 2021 the electricity price rose four-fold and the water
price more than trebled, yet consumer price index (CPI) inflation less
than doubled. The fuel taxes and margins component of the fuel price
Index: Jan 2009 = 100

Administered prices

Sources: Central Energy Fund, Stats SA and SARB

CPI

Administered prices

Fuel taxes and margins

Communication

Education

Electricity

Rates and taxes

Water
Forecast

APRIL 2022
also more than trebled from 2009, underpinned by sharp increases
in the fuel levy, Road Accident Fund levy and dealer margin.1
Overall administered price inflation has moderated somewhat over
time, from 9.5% during 2007–2011 to 6.5% during 2012–2016, and
then to 6.3% during 2017–2021, in large part because of persistently
low communication price inflation – the only component to average
below the 4.5% target midpoint across the three sub-periods.
Higher administered prices not only pull headline inflation up,
reducing real disposable income, but also directly impose a financial
burden on consumers and reduce the resources available to spend
on all other goods and services.
A sustained deviation in targeted inflation from the midpoint could
dislodge inflation expectations, requiring policy to respond more
strongly. Administered goods and services tend to have a low
elasticity of demand, implying that the burden of adjustment would
be borne by the narrower range of demand-sensitive components
of the basket.
A more efficient regulation of administered prices would bring
inflation for this category in line with the rest of the economy. Private
inflation − a measure that strips out all administered prices from
headline CPI inflation − has averaged 4.6% since 2014 and 4.1%
during the period 2017–2021. Public inflation, on the other hand,
has averaged 5.7% since 2014 and 5.3% during 2017–2021.
Improving the regulation of administered prices and lowering their
rate of growth to be consistent with the inflation target of 4.5%
would bring a range of benefits to the economy as a whole. More
cost-effective services would encourage investment in nonadministered price sectors, while helping to keep interest rates for
all borrowers lower.

While the ‘fuel price’ is an administered price, a large part of movements
in the fuel price is exogenous, driven by the rand exchange rate and
global oil prices, hence the focus on ‘fuel taxes and margins’.
Percentage change over 12 months
Large petrol taxes and margins categories

Wholesale
margin
Dealer
margin
Fuel
levy
Road Accident
Fund levy
Source: Central Energy Fund
2007–2011
2012–2016
2017–2021
Per cent
Administered price inflation components: 2007–11
Fuel
Fuel taxes
and margins
Electricity
Communication
Administered
prices
Water
Education
Rates and
taxes
CPI
Sources: Central Energy Fund, Stats SA and SARB


Inflation target midpoint
* Excluding fuel and energy
Administered
prices*

Per cent
Sources: Central Energy Fund, Stats SA and SARB


Inflation target midpoint
Administered price inflation components: 2012–16
Fuel
Fuel taxes
and margins
Electricity
Communication
Administered
prices
Water
Education
Rates and
taxes
CPI
* Excluding fuel and energy
Administered
prices*

Per cent
Fuel
Fuel taxes
and margins
Electricity
Communication
Administered
prices
Water
Education
Rates and
taxes
Administered
prices*

* Excluding fuel and energy
CPI
Sources: Central Energy Fund, Stats SA and SARB


Inflation target midpoint
Administered price inflation components: 2017–21

APRIL 2022
Conclusion
Within a period of 18 months, concerns about the global
economy have shifted from a ‘severe recession’ to a ‘great
inflation’ as growth rebounded sharply. This rebound was led
by the advanced economies, with emerging market economies
recovering at a slower pace. The sharp recovery generated
severe price pressures, with realised inflation more than trebling
the inflation target in several advanced economies, driven by
strong demand, sharply higher oil and food prices, and tighter
labour markets. Decisive policy rate hikes during the course
of this year are likely as central banks fight to keep inflation
expectations anchored. After growing at 6.4% in 2021, the
SARB projects global growth to decelerate to 3.7% in 2022,
and to moderate further over the medium term.70
Like its global counterparts, the South African economy has
achieved substantial gains, growing at 4.9% in 2021 and
recovering to within 2 percentage points of the 2019 output
level. The pace of recovery has not been uniform across sectors,
however. Agriculture; finance; and community, social and
personal services have surpassed their 2019 level of activity,
while others, including transport, tourism and construction
remain severely depressed. A slower recovery of the more
labour-intensive sectors may explain the lacklustre recovery
in employment, despite average earnings recovering to near
pre-pandemic levels. Real GDP growth over the medium term
is projected to average 1.9%, while potential is expected to
average 0.9%.
The continued recovery of the domestic economy, however,
is threatened by inflation, which has risen markedly after
remaining subdued over the past three years. Headline inflation
accelerated sharply to 5.9% in December 2021 and is now
expected to average 5.8% in 2022, before returning to the
target midpoint in 2023.71 Although pressures have primarily
emanated from higher oil and food prices, they have broadened
as core inflation has begun to rise in line with the recovery. Core
inflation is expected to accelerate as second-round effects and
imported inflation manifest. Administered price inflation has
remained high relative to the target midpoint, adding pressure
to headline inflation. With higher headline inflation, the average
surveyed inflation expectations for 2023 have drifted upwards,
recording 5.0% during the first quarter of 2022, up from 4.7%
in the fourth quarter of 2021, and risking a de-anchoring of
expectations from the target. Sharply higher inflation risks are
undermining economic growth further.
After keeping the repo rate unchanged at seven consecutive
meetings since July 2020, the MPC began normalising the
repo rate at the November 2021 meeting with a 25 basis point
increase, and two further hikes of the same magnitude at the
70 The moderation reflects a return to normal trend growth, guided by
the unwinding of policy accommodation, persisting supply constraints,
ongoing COVID-19 waves, and the effects of the Russia−Ukraine war.
71 This is substantially higher than the October 2021 MPR expectation
for headline to average 4.2% in 2022.
R billions
2019 level

Source: Stats SA
GDP level


APRIL 2022
January and March meetings respectively. The real repo rate
has, however, become more accommodative as inflation has
risen faster, reaching a low of -1.9% in March 2022. Such a low
rate is highly stimulatory, adding to demand pressures and a
faster rise in core inflation. The QPM-implied repo projection
sees the nominal repo rate rising to 6.75% by the end of 2024,
closer to its neutral level. Along the path, policy is currently
expected to remain accommodative and supportive of the
economic recovery.
Despite a less supportive global economic environment,
domestic growth can be enhanced through creating a
conducive investment climate. Structural reforms, such as
embedded electricity generation being undertaken in the
energy sector, can enhance efficiencies in key infrastructure
sectors and unlock investment. Stabilising public debt
will lower long-term borrowing costs, further supporting
investment. At the same time, policy should seek to reduce the
impact of administered prices on overall inflation and promote
product market competition, allowing the economy to realise
permanently lower inflation and lower borrowing costs.
SA versus peers: competitiveness indicators
Source: WEF, The Global Competitiveness Report, 2020
Brazil
Chile
India South Africa
Research
and
development6
Markets
of tomorrow5
Progressive
taxation4
Labour laws
and social
protection3
Skills for
tomorrow2
Energy and ICT1

Broaden access to electricity and ICT

Update education curricula and invest in skills needed for jobs in markets of tomorrow

Rethink labour laws and social protection for the new economy

Shift to more progressive taxation for corporations, wealth and labour

Facilitate creation of ‘markets of tomorrow’

Investments in research, innovation and invention

APRIL 2022
Statement of the Monetary Policy Committee
18 November 2021
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the Quarterly Projection Model (QPM) is a trade-weighted average of South Africa’s trading partners. The IMF’s October 2021 World
Economic Outlook global forecast for 2022 sits at 4.9%.

The current account is expected to be in deficit of -1.8% in 2023 (from -0.3%) and -2.5% in 2024.
Steady advances in vaccination rates have sustained
confidence and the global economic recovery this year,
even with further waves of the COVID-19 virus expected.
Recoveries in emerging market and developing economies
will continue to lag those in advanced economies, in large
part due to a slower pace of vaccinations. The virus, however,
remains one of a series of current risks to South Africa’s
economic growth outlook that includes rising inflation,
weaker commodity export prices, stagnant investment, and
the longer-term impact of scarring from the pandemic and
the July unrest.
The International Monetary Fund’s (IMF) forecast for global
gross domestic product (GDP) is 5.9% in 2021, slowing to
4.9% in 2022. The South African Reserve Bank’s (SARB)
forecast for global growth in 2021 now sits at 6.3% (up from
6.2%), and is unchanged for 2022 and 2023, at 4.4% and
3.3% respectively.1 GDP growth in our trading partners in
2024 is forecast to be 2.7%. Global economic conditions are
now less supportive of emerging and developing economies
than in much of this past year.
Although policy settings in advanced economies remain
accommodative, considerably higher global inflation and
rising uncertainty about the normalisation path for interest
rates continue to cause financial market turmoil and capital
flow volatility. Risk aversion in financial markets has increased.
Economies that failed to take advantage of improved global
prospects or to reduce large macroeconomic imbalances
remain vulnerable.
While the domestic economy grew strongly in the first half
of 2021, the second half of the year is expected to show
mixed results. Overall, we forecast the economy to grow by
5.2% this year (from 5.3%), revised down due to the larger
negative effect on output than was previously estimated
from the July unrest and other factors. Our revised estimate
for third-quarter economic growth is -2.5%, compared to the
previous -1.2%. For the fourth quarter, we expect a GDP
outcome of 2.6%, compared to the previous 1.6%.
Despite these quarterly revisions, the annual growth rate
in GDP for 2021 reflects a healthy bounce back from the
economic effects of the pandemic. In the next two years,
economic growth is expected to align with a low rate
of potential growth. GDP is expected to grow by 1.7% in
2022 and by 1.8% in 2023, unchanged from the September
forecast. GDP growth in 2024 is forecast to be 2.0%.
The July unrest, the pandemic and ongoing energy supply
constraints are likely to have lasting effects on investor
confidence and job creation, impeding recovery in labourintensive sectors hardest hit by the lockdowns. High export
prices are expected to fade, perhaps faster than previously
expected. Very weak job creation will moderate household
consumption. Investment will remain constrained by the
high risk of further load-shedding and ongoing uncertainty.
The faster vaccine roll-out presents some upside risk to the
growth outlook.
Overall, and after revisions, the risks to the mediumterm domestic growth outlook are assessed to be to the
downside.
Compared to the September meeting, the output gap is
broadly unchanged over the forecast period.
The current account surplus remains substantial, but is
expected to be significantly smaller than our previous
(September) projection, at 3.8% of GDP in 2021 (from 4.6%).
Prices for important commodity exports such as rhodium,
iron ore, coal and platinum have decreased in recent
months, some sharply. Oil prices have increased by about
68% year to date compared to the 2020 average price.
Alongside higher prices and stronger demand for imported
consumer and investment goods, the commodity and oil
price movements imply a smaller trade surplus. Whereas a
current account surplus of 0.7% of GDP was forecast for
next year (2022), we now expect a current account deficit of
0.6% of GDP.2

APRIL 2022
Although fiscal risk has eased, financing conditions remain
volatile and the yield curve for rand-denominated bonds
remains steep. Ten-year bond yields have shown greater
sensitivity to global and domestic factors, and sit at about
9.5% at present.
For much of the year, generally favourable global financial
and economic conditions and strong commodity export
prices strengthened the currency above its long-run
equilibrium level. In recent months, increased uncertainty
about global inflation and policy settings, with a moderation
in the terms of trade, have however contributed to a weaker
rand exchange rate. Since the September meeting, the rand
has depreciated by about 5.9% against the US dollar and
now sits below its equilibrium level. The implied starting point
for the rand forecast is R15.1 to the US dollar, compared
with R14.47 at the time of the previous meeting.
With ongoing global supply shortages and strong demand,
a wide range of prices continues to accelerate, including
raw materials, intermediate inputs and food.3 Some of these
price increases have passed through to consumer prices in
major economies. Our estimate for inflation in the G3 was
revised higher for 2021 to 2.9% (from 2.4%), to 2.4% for
2022 (from 2.0%) and remains unchanged at 1.8% in 2023.4
For 2024, G3 inflation of 1.6% is forecast.
Oil prices are revised up for this year, and fuel price inflation
is higher at 17.6% (up from 16.1%).5 Local electricity price
inflation for 2021 remains at 10.1%, while the forecast for
2022 and 2023 is revised up to 14.4% (from 11.8%). For
2024, electricity price inflation of 10% is expected.
The SARB’s forecast reflects higher headline inflation for the
fourth quarter, at 5.3% (from 5.0%). For this year and the
next two years, headline consumer price inflation is revised
slightly higher, to 4.5% for 2021 (from 4.4%), to 4.3% next
year (from 4.2%), and to 4.6% in 2023 (from 4.5%). Headline
consumer price inflation for 2024 is expected to be 4.5%.
The forecast for core inflation remains at 3.0% in 2021 and
is slightly lower at 3.7% in 2022 (from 3.8%). Core inflation
is expected to be slightly higher at 4.4% in 2023 (from 4.3%)
and to reach 4.5% in 2024. While the economy continues

World food prices continue to rise. The assumption used for the forecast for world food prices increased from 13.4% in September to 25.4% for the
November meeting.

The G3 comprises the United States, the euro area and Japan.

The forecast for fuel prices in 2022 has been revised higher to 4.6%, up from 3.7% at the September meeting. For 2023 and 2024, fuel price inflation is
expected to be 1.3% and 1.1% respectively. Our assumptions are now for oil prices to average US$71.5 per barrel in 2021, US$73 per barrel in 2022
and US$68 per barrel in 2023. An average price of US$65 per barrel is expected in 2024.

The (Q3) Bureau for Economic Research (BER) survey expectations have not been updated and remain at 4.2% for 2021, 4.4% for 2022 and 4.5% for
2023. Market analysts (Reuters Econometer) in November expect inflation to be unchanged at 4.5% in 2021, higher at 4.5% (from 4.4%) in 2022, and
unchanged at 4.3% in 2023. 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 5.08% for the 5-year (up by 25 basis points since the last meeting) and 6.25% for the 10-year break-even,
while 15-year break-even inflation sits at 6.54%.
to expand over the forecast period, core inflation remains
subdued by low services price inflation, modest unit labour
costs and exchange rates.
The risks to the short-term inflation outlook are assessed
to the upside. Global producer price and food price
inflation continued to surprise higher in recent months and
could do so again. Oil prices have increased sharply, with
current prices well above our forecasted levels for this year.
Electricity prices are higher throughout the forecast and with
other administered prices continue to present short- and
medium-term risks. Given the moderate medium- and longterm inflation projections set out above, a weaker currency,
higher domestic import tariffs and escalating wage demands
present additional upside risks to the inflation forecast.
Average surveyed expectations of future inflation remain at
4.2% for 2021 and 4.4% for 2022. Market-based surveyed
expectations for inflation for 2021 are broadly unchanged.6
While the Monetary Policy Committee (MPC) expects
inflation to stay close to the midpoint over the forecast
period, inflation risks have increased and the level of policy
accommodation remains high.
Against this backdrop, the MPC decided to increase the
repurchase (repo) rate by 25 basis points to 3.75% per
year, with effect from 19 November 2021. Three members
of the Committee preferred an increase and two members
preferred an unchanged stance.
The implied policy rate path of the Quarterly Projection
Model (QPM) indicates an increase of 25 basis points in the
fourth quarter of 2021 and further increases in each quarter
of 2022, 2023 and 2024. 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.
Given the expected trajectory for headline inflation and
upside risks, the Committee believes a gradual rise in the
repo rate will be sufficient to keep inflation expectations
well anchored and moderate the future path of interest
rates. Economic and financial conditions are expected
to remain more volatile for the foreseeable future. In this

APRIL 2022
uncertain environment, 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 second-round effects.
Current repo rate levels reflect an accommodative policy
stance through the forecast period, keeping financial
conditions supportive of credit demand as the economy
continues to recover.7 The SARB has ensured adequate
liquidity in domestic markets and will continue to closely
monitor funding markets for stress. In addition, regulatory
relief provided to banks continues to support lending to
households and firms.
Better anchored expectations of future inflation should
keep interest rates lower for longer and can be realised by
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 will enhance the effectiveness of monetary policy and
its transmission to the broader economy.

This implies a rise in the inflation-adjusted repo rate from -1.1% for 2021, 0.5% for 2022, 1.3% for 2023, and 2.0% in 2024. The real repo rate calculation
here is based on the one-quarter-ahead inflation forecast.
Per cent
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Repurchase rate forecast (November 2021)

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

APRIL 2022
Summary of assumptions: Monetary Policy Committee
meeting on 18 November 2021*
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
1.
Shaded areas indicate forecast assumptions.
2.
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 61 and 62.

APRIL 2022
Summary of selected forecast results: Monetary Policy Committee meeting
on 18 November 2021
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro area,
the US and Japan).
3.
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.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


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
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2022
Statement of the Monetary Policy Committee
27 January 2022
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

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

In the third quarter of 2021, economic growth was -5.8%, compared to our previous estimate of -2.5%. For the fourth quarter, we expect a GDP
outcome of 5.5%, compared to the previous 2.6%. On a not-annualised basis, the quarter-on-quarter growth rate for the third quarter was
-1.5%, compared to our estimate of -0.6%. The fourth quarter is expected to be 1.4%, compared to 0.6%.

Potential growth for 2022 and 2023 is estimated at 0.8%, rising to 1.1% in 2024.

The growth forecast includes expected changes in the policy rate.

The current account surplus is expected to decline in 2022 to about 0.4% of GDP (from 3.8% of GDP in 2021). The current account is expected to be
in deficit of -0.2% in 2023 (from -1.8%) and -0.6% in 2024 (from -2.5%).
Over the past year, rising vaccination rates have sustained
confidence and the global economic recovery, despite the
rapid spread of the Omicron virus. Looking ahead to this
year, global growth will be slower as the rebound from the
pandemic fades. Growth in emerging market and developing
economies will continue to lag that in advanced economies
due to a slower pace of vaccinations and other headwinds.
South Africa’s economy rebounded strongly from the
pandemic in 2021, but going forward the growth rate will,
like global growth, slow and remain subject to various risks.
The International Monetary Fund’s (IMF) forecast for global
gross domestic product (GDP) is unchanged at 5.9% in
2021. Global growth is expected to slow to 4.4% in 2022
(down from 4.9%). The South African Reserve Bank’s
(SARB) forecast for global growth in 2021 sits at 6.2% (down
from 6.3%), and is unchanged for 2022 and 2023, at 4.4%
and 3.3% respectively.1 GDP growth in our trading partners
in 2024 is forecast to be 2.7%. Global economic conditions
are less supportive of emerging and developing economies
now than they were for most of this past year.
Although policy settings in advanced economies remain
accommodative, higher global inflation is likely to accelerate
the normalisation of interest rates and balance sheet
reductions by major central banks. It is less certain how far
the normalisation process will go and the exact timing, and
this uncertainty continues to cause financial market turmoil
and capital flow volatility. Risk aversion in financial markets
has increased. Economies that failed to take advantage of
better global conditions or to reduce large macroeconomic
imbalances remain vulnerable.
Last year saw the ongoing recovery of the South African
economy from the pandemic, but also the damage caused
by the July unrest, cyberattacks and strikes. Those factors
led to a downward revision to the growth forecast for the year
as a whole, from the 5.2% forecast in November to 4.8%.2

This year and next, economic growth will remain well above
a low rate of potential growth.3 GDP is expected to grow by
1.7% in 2022. The deceleration in growth from 2021 to 2022
is primarily a result of the fading rebound from the pandemic,
alongside a climbdown from high export prices. GDP growth
is forecast to be 1.8% in 2023 and 2.0% in 2024.4
With lower export prices, the economy’s future demand
will depend more on investment and household spending.
Sustained low borrowing costs and faster economic growth
have strengthened private sector investment somewhat,
despite ongoing constraints from load-shedding and policy
uncertainty. Household spending remains supportive as a
result of good growth in disposable income, rising asset
prices and more credit demand.
Overall, and after revisions, the risks to the medium-term
domestic growth outlook are assessed to be balanced.
With the downward revision to GDP growth for 2021,
the output gap is more negative over the forecast period
compared to the November meeting. However, as the
economy is forecast to grow faster than potential, the output
gap closes steadily through to 2024.
While important commodity export prices such as for coal,
iron ore, platinum and rhodium generally decreased in the
latter half of 2021, in recent weeks some prices and export
values have been more buoyant. As a result, the current
account surplus of the past year is expected to decline at
a slower pace than at the time of the November meeting.5
The current account deficit in 2023 and 2024 is, at this
stage, forecast to be smaller than previously expected.
Although fiscal risk has eased, financing conditions remain
volatile and the yield curve for rand-denominated bonds
remains steep. Ten-year bond yields remain at about 9.4%.

APRIL 2022
For much of 2021, strong commodity export prices and
generally favourable global financial and economic conditions
strengthened the currency above its long-run equilibrium level.
In recent months, global and domestic factors contributed to
a weaker rand exchange rate and the rand now sits somewhat
below its equilibrium level. The implied starting point for the
rand forecast is R15.60 to the US dollar, compared with
R15.10 at the time of the previous meeting.6
Over the past year and into this year, global supply shortages
and strong demand have caused a wide range of prices to
accelerate, including raw materials, intermediate inputs and
food.7 Some of these price increases have passed through
to consumer prices in major economies. Our estimate for
inflation in the G3 was revised higher to 3.1% in 2021 and
2022 (up from 2.9% and 2.4% respectively), and is revised
slightly lower to 1.7% in 2023.8 For 2024, G3 inflation of 1.6%
is forecast, unchanged from the previous meeting.
Oil prices are revised up for this year, and fuel price inflation
is higher at 13.7% (up from 4.6%).9 Local electricity price
inflation for 2021 was 10.2%, while the forecast for 2022 is
revised up to 14.5% (from 14.4%) and remains at 12.4% in
2023. For 2024, electricity price inflation of 10% is expected,
unchanged from the previous meeting.
Headline inflation in 2021 came out at 4.5%. The SARB’s
forecast of headline inflation for this year is revised higher to
4.9% (from 4.3%). Headline inflation is expected to be 4.5%
in 2023 and in 2024.
Core inflation was 3.1% in 2021 and is forecast to rise to
3.8% in 2022 (up from 3.7%). With the economy expanding
faster than potential over the forecast period, core inflation
is projected to rise to 4.5%, despite a still low rate of
services price inflation and unit labour costs. Core inflation
forecasts for 2023 and 2024 are unchanged at 4.4% and
4.5% respectively.
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 could do so again. Oil
prices increased strongly through 2021 and are up sharply
year to date. Current oil prices sit well above forecasted
levels for this year. Electricity and other administered prices
continue to present short- and medium-term risks. Given the

The rand has appreciated by about 1.5% to the US dollar since the November meeting.

World food prices continue to rise. The assumption used for the forecast for US dollar-denominated world food prices increased from 13.4% in
September to 25.4% for November and to 28% for the January meeting.

The G3 comprises the United States, the euro area and Japan. The latest CPI inflation in the respective components sits at 7%, 5% and 0.6%
respectively.

For 2023 and 2024, petrol price inflation is expected to be -0.1% and 1.7% respectively. Our assumptions are now for oil prices to average
US$78 per barrel in 2022 and US$72 per barrel in 2023. An average price of US$70 per barrel is expected in 2024.
10 The (Q4) Bureau for Economic Research (BER) survey expectations rose above the target midpoint to 4.8% (4.4%) for 2022 and 4.7% (4.5%) for 2023.
Market analysts (Reuters Econometer) in January expect inflation to be higher at 4.8% (4.5%) in 2022, 4.5% (4.3%) in 2023 and 4.4% in 2024.
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 4.8% for the 5-year and 5.93% for the 10-year break-even, while 15-year break-even inflation sits at 6.4%.
moderate medium- and long-term inflation projections set
out above, higher domestic import tariffs, stronger services
inflation and higher wage demands present additional
upside risks to the inflation forecast.
A particular risk arises from the possibility of a faster
normalisation of global policy rates than is currently built
into the forecast, which assumes some rate hikes to begin
around June 2022. Added to this is the risk that quantitative
tightening will occur more quickly than previously expected,
leading to stronger capital flow reversals from riskier assets
such as emerging market debt.
Average surveyed expectations of future inflation have
increased to 4.8% for 2022 (from 4.4%). Market-based
surveyed expectations for inflation have also increased
to 4.8%.10
In the near term, headline inflation increases well above the
midpoint of the inflation target band and returns close to
the midpoint in the fourth quarter of 2022. Some risks to
the inflation outlook, like food and fuel, have been realised,
and other risks, such as currency volatility and capital flow
reversals, have become more pronounced.
Against this backdrop, the Monetary Policy Committee
(MPC) decided to increase the repurchase (repo) rate by
25 basis points to 4% per year, with effect from 28 January
2022. Four members of the Committee preferred an increase
and one member preferred an unchanged stance.
The implied policy rate path of the Quarterly Projection
Model (QPM) indicates gradual normalisation in the first
quarter of 2022, and into 2023 and 2024, given the inflation
forecast. 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.
Given the expected trajectory for headline inflation and
upside risks, the Committee believes a gradual rise in the
repo rate will be sufficient to keep inflation expectations well
anchored and moderate the future path of interest rates.
However, economic and financial conditions are expected
to remain more volatile for the foreseeable future. In this
uncertain environment, 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.

APRIL 2022
Current repo rate levels reflect an accommodative policy
stance through the forecast period, keeping financial
conditions supportive of credit demand as the economy
continues to recover.11 The SARB has ensured adequate
liquidity in domestic markets and will continue to closely
monitor funding markets for stress. In addition, regulatory
relief provided to banks continues to support lending to
households and firms.
Better anchored expectations of future inflation should
keep interest rates lower for longer and can be realised by
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 will enhance the effectiveness of monetary policy and
its transmission to the broader economy.

11 This implies a rise in the inflation-adjusted repo rate from -1.4% for 2021 to 0.0% for 2022, 1.0% for 2023, and 1.8% in 2024. The real repo rate
calculation here is based on the one-quarter-ahead inflation forecast.
Per cent
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Repurchase rate forecast (January 2022)

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

APRIL 2022
Summary of assumptions: Monetary Policy Committee
meeting on 27 January 2022*
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
1.
Shaded areas indicate forecast assumptions.
2.
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 61 and 62.

APRIL 2022
Summary of selected forecast results: Monetary Policy Committee meeting
on 27 January 2022
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro area,
the US and Japan).
3.
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.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


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
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2022
Statement of the Monetary Policy Committee
24 March 2022
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

The International Monetary Fund’s (IMF) January forecast for global growth in 2022 was 4.4%. The April forecast for 2022 will be released in a
few weeks.

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

The January forecast for first-quarter growth was 2.1%, seasonally adjusted and annualised. This has been revised up to 3.2%.

The growth forecast includes expected changes in the policy rate.

Potential growth for 2022 and 2023 is estimated at 0.8%, rising to 1.1% in 2024.

The Brent crude oil assumptions in January were US$78, US$72 and US$70 for 2022, 2023 and 2024 respectively.

In January, the current account surplus was expected to decline in 2022 to about 0.4% of GDP and to be in a deficit of -0.2% in 2023 (from -1.8%) and
-0.6% in 2024 (from -2.5%).
Since January, the Omicron wave of the COVID-19 virus
has transmitted globally, with diverse social and economic
outcomes. Despite the high infection rate, many economies
remained open and, with some exceptions, the economic
costs of the virus continue to fall. Even as the economic
impact of the pandemic fades, the outbreak of war in February
between Russia and Ukraine is expected to reduce global
economic growth and contribute to higher inflation. The war
will likely impair production of a wide range of energy, food
and other commodities, and further disrupt global trade.
The South African Reserve Bank’s (SARB) forecast for global
growth in 2022 is revised down to 3.7% (from 4.4%), and for
2023 is lowered to 2.8% (from 3.3%), as a result of the war
and the ongoing spread of the virus in Asia and elsewhere.1
For 2024, global growth is unchanged at 2.7%.2 Dramatically
higher oil, commodity and food prices, additional constraints
to trade and finance, and rising debt costs create more
adverse economic conditions for most emerging and
developing economies.
Although policy settings in advanced economies remain
broadly accommodative, the onset of policy normalisation
by major central banks and higher inflation has tightened
global financial conditions. Investor appetite for riskier
assets is lower. Economies that failed to take advantage of
better global conditions or to reduce large macroeconomic
imbalances remain vulnerable.
Last year saw the ongoing recovery of the South African
economy from the pandemic, expanding by 4.9% for 2021
as a whole, marginally higher than the 4.8% we had forecast
in January.
The South African economy is expected to grow by 2.0%
in 2022, revised up from 1.7% at the time of the January
meeting. This is due to a combination of factors, including
stronger growth in 2021 and higher commodity export
prices. Growth in output in the first quarter of this year is
likely to be significantly stronger than expected at the time
of the January meeting.3
Gross domestic product (GDP) growth is forecast to be
1.9% in both 2023 and in 2024.4 Economic growth at these
rates remains well above a low rate of potential growth still
constrained by load-shedding and policy uncertainty.5
Investment by the government sector has weakened
significantly in recent years and that of public corporations
is forecast to be very modest. Household spending remains
supportive as a result of good growth in disposable
income, rising asset prices and low interest rates, while
private investment has also proved to be more resilient than
previously expected.
Overall, and after revisions, the risks to the medium-term
domestic growth outlook are assessed to be balanced.
With the low rate of potential growth at present and the
upward revision to GDP growth for 2022 and 2023, the
output gap closes faster over the forecast period compared
to the January meeting. The output gap is expected to turn
positive after the third quarter of 2023.
While important commodity export prices such as for coal,
iron ore, platinum and rhodium generally decreased in the
latter half of 2021, they increased again late in January and
have surged further with the outbreak of hostilities in Europe.
Oil prices spiked to around US$130 per barrel in the early
days of the conflict before easing somewhat. We expect oil
prices to average US$103 per barrel for 2022, US$80 per
barrel in 2023 and US$75 per barrel in 2024.6 South Africa’s
commodity price basket is forecast to rise by 8% for the year
as a whole, keeping the terms of trade elevated, before falling
sharply in 2023. As a result of these export and import price
developments, the current account surplus is expected to
increase to about 3% of GDP this year, before easing to 1.6%
in 2023 and 0.8% in 2024.7
Although fiscal risk has eased, financing conditions remain
tight and the yield curve for rand-denominated bonds is
steep. Ten-year bond yields increased to about 10.3% in late
February, before easing back to around 9.7% at present.
The first two months of this year featured a weaker rand
exchange rate, resting somewhat below its equilibrium level.
Since then, and despite less favourable global conditions,
stronger commodity export prices have appreciated the
currency and helped to dampen price pressures. The implied

APRIL 2022
starting point for the rand forecast is R15.41 to the US dollar,
compared with R15.60 at the time of the previous meeting.8
As the global economy rebounded from the pandemic,
aggressive policy easing and supply shortages have
increased prices of many goods and commodities.9 These
price increases have passed through to services prices,
wages and consumer prices in major economies. Our
estimate for inflation in the G3 is revised higher throughout
the forecast period, to 5.6% in 2022 and to 3.0% in 2023 (up
from 3.1% and 1.7% respectively), before moderating to 2.3%
in 2024 (from 1.6%).10
Oil prices are revised up further for this year, and fuel price
inflation is higher at 26.1% (up from 13.7%). Local electricity
price inflation is revised down to 11.0% for 2022 (from 14.5%)
and to 9.2% in 2023 (from 12.4%). For 2024, electricity
price inflation of 10% is expected, unchanged from the
previous meeting.
As a result of higher global food prices, local food price
inflation is also revised up and is now expected to be 6.1%
in 2022 (up from 4.8%) and 5.1% in 2023 (up from 4.6%).
Food price inflation is forecast to ease to 4.4% in 2024 (down
from 4.6%).
The SARB’s forecast of headline inflation for this year is
revised higher to 5.8% (from 4.9%), primarily due to the higher
food and fuel prices. While food prices will stay high, fuel
price inflation should ease in 2023, helping headline inflation
to fall to 4.6%, despite rising core inflation.
Core inflation is forecast to increase to 4.2% in 2022 (up
from 3.8%) and to 5.0% in 2023 (from 4.4%), before easing
somewhat to 4.7% in 2024 (from 4.5%). Core goods and
services price inflation is forecast higher throughout the
horizon, and services price inflation exceeds the midpoint of
the target by the fourth quarter of this year.
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 could do so again,
particularly if the war in Ukraine persists into the growing
season. Oil prices increased strongly through 2021 and are
up again sharply in the year to date, propelled higher also
by the war and economic sanctions. Electricity and other
administered prices continue to present short- and mediumterm risks. Higher diesel and coal prices may result in upward
revisions to our electricity price forecast for 2023. Given
below-inflation assumptions for public sector wage growth

The rand has appreciated by about 3.4% to the US dollar since the January meeting.

World food prices continue to rise. The assumption used for the forecast for US dollar-denominated world food prices in 2022 is revised higher from
-2.3% to 6.8%.
10 The G3 comprises the United States, the euro area and Japan. The latest CPI inflation in the respective components sits at 7.9%, 5.3% and 0.9%
respectively.
11 The (Q4) Bureau for Economic Research (BER) survey expectations rose above the target midpoint to 5.1% (4.8%) for 2022 and 5.0% (4.7%) for 2023.
Market analysts (Reuters Econometer) in March expect inflation to be higher at 5.5% (5.0%) in 2022, unchanged at 4.4% in 2023 and lower at 4.4%
(4.5%) in 2024.
12 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 6.0% for the 5-year and 6.5% for the 10-year break-even, while 15-year break-even inflation sits at 6.7%.
and higher petrol and food price inflation, considerable risk
attaches to a still moderate nominal wage forecast.
Global financial conditions are more volatile at present, and
with higher-than-expected inflation, have pushed major
central banks to start the normalisation of global policy rates.
On balance, and with some exceptions, capital flow volatility
is expected to remain high for riskier assets such as emerging
market debt and currencies.
Average surveyed expectations of future inflation have
increased to 5.1% for 2022 (from 4.8%). Market-based
surveyed expectations for inflation have also increased to
5.5%.11 Long-term inflation expectations derived from the
break-even rates in the bond market have also increased.12
In the near term, headline inflation has increased well above
the midpoint of the inflation target band, and is forecast to
breach the target range in the second quarter. Headline
inflation then returns close to the midpoint in the second
quarter of 2023, taking into account the policy rate trajectory
indicated by the SARB’s Quarterly Projection Model (QPM).
Some risks to the inflation outlook, like food and fuel, have
been realised, and other risks, such as currency volatility and
capital flow reversals, have become more pronounced.
Against this backdrop, the Monetary Policy Committee (MPC)
decided to increase the repurchase (repo) rate by 25 basis
points to 4.25% per year, with effect from 25 March 2022.
Three members of the Committee preferred the announced
increase and two members preferred a 50 basis point rise in
the repo rate.
The implied policy rate path of the QPM, given the inflation
forecast, indicates gradual normalisation through to 2024. 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, policy decisions will continue to be datadependent 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.
Current repo rate levels reflect an accommodative policy
stance through the forecast period, keeping financial
conditions supportive of credit demand as the economy

APRIL 2022
13 The forecasted trajectory for the repo rate implies a rise in the inflation-adjusted repo rate from -1.5% for 2021 to -0.9% for 2022, 1.3% for 2023, and
2.0% in 2024. The real repo rate calculation here is based on the one-quarter-ahead inflation forecast and are annual average rates.
continues to recover.13 The SARB has ensured adequate
liquidity in domestic markets and will continue to closely
monitor funding markets for stress.
Better anchored expectations of future inflation could
support lower interest rates and can be realised by 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 will enhance
the effectiveness of monetary policy and its transmission to
the broader economy.

Per cent

2017 2018 2019 2020 2021 2022 2023 2024
Repurchase rate forecast (March 2022)

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

APRIL 2022
Summary of assumptions: Monetary Policy Committee
meeting on 24 March 2022*
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
1.
Shaded areas indicate forecast assumptions.
2.
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 61 and 62.

APRIL 2022
Summary of selected forecast results: Monetary Policy Committee meeting
on 24 March 2022
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro area,
the US and Japan).
3.
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.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


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
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2022
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 euro area, 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 euro area, 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 euro area, 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.

APRIL 2022
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.

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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 South African Reserve Bank’s (SARB) forecasts and
discussions refer to headline CPI excluding food, nonalcoholic 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%),
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

APRIL 2022
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.

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Abbreviations
ARS
Argentine peso
BER
Bureau for Economic Research
BRL
Brazilian real
CIT
corporate income tax
CLP
Chilean peso
CNY
Chinese yuan
COP
Colombian peso
COVID-19
coronavirus disease 2019
CPI
consumer price index
CZK
Czech koruna
DM
developed market
EM
emerging market
EMBI+
Emerging Market Bond Index Plus
EU
European Union
Fed
Federal Reserve
FNB
First National Bank
FX
foreign exchange
G3
Group of Three (United States, euro area and Japan)
GDP
gross domestic product
GFC
global financial crisis
GFCF
gross fixed capital formation
Haver
Haver Analytics
HUF
Hungarian forint
ICT
information and communications technology
IDR
Indonesian rupiah
IMF
International Monetary Fund
INR
Indian rupee
JSE
JSE Limited
KRW
Korean won
MOVE (Index)
Merrill Lynch Option Volatility Estimate (Index)
MPC
Monetary Policy Committee
MPIF
monetary policy implementation framework
MPR
Monetary Policy Review
MTBPS
Medium Term Budget Policy Statement
MTEF
Medium-Term Expenditure Framework
MXN
Mexican peso

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MYR
Malaysian ringgit
NAB
non-alcoholic beverages
NEER
nominal effective exchange rate
OPEC
Organization of the Petroleum Exporting Countries
PIT
personal income tax
PLN
Polish zloty
PPI
producer price index
QPM
Quarterly Projection Model
REER
real effective exchange rate
REIPPP
Renewable Energy Independent Power Producer Procurement (Programme)
repo (rate)
repurchase (rate)
rhs
right-hand scale
RUB
Russian rouble
SA
South Africa(n)
SARB
South African Reserve Bank
SGD
Singapore dollar
SIT
services, income and current transfer
SRD
Social Relief of Distress (grant)
SSA
sub-Saharan Africa
Stats SA
Statistics South Africa
THB
Thai baht
TRY
Turkish lira
TWD
New Taiwan dollar
UK
United Kingdom
ULC
unit labour cost
US
United States
VAT
value-added tax
WEF
World Economic Forum
ZAR
South African rand