Monetary Policy Review
October 2018
South African Reserve Bank
Monetary Policy Review
October 2018
Monetary Policy Review October 2018
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ISSN: 1609-3194
Monetary Policy Review October 2018
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 also helps to maintain and improve international competitiveness. The goal
of price stability is quantified by the setting of an inflation target range after consultation with government. 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 as well as other senior officials of the SARB.
The MPC conducts monetary policy to keep inflation within a target range of 3–6%. This inflation-targeting framework is
flexible, meaning that inflation may be temporarily outside the target range, under certain circumstances. The MPC takes
into account the time lags between policy adjustments and economic effects. This provides for interest rate smoothing over
the cycle and contributes towards more stable economic growth. The decision of the MPC, together with a comprehensive
statement, is communicated at a media conference at the end of each meeting.
The Monetary Policy Review (MPR) is published twice a year and is aimed at broadening public understanding of the
objectives and conduct of monetary policy. The MPR covers domestic and international developments that impact on the
monetary policy stance. It takes a forward-looking approach, in contrast to the Quarterly Bulletin which records and explains
recent economic developments. The MPR is presented by senior officials of the SARB at monetary policy forums in various
centres across South Africa in an effort to develop a better understanding of monetary policy through direct interactions
with stakeholders.
Monetary Policy Review October 2018
Contents


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


Monetary Policy Review October 2018
Foreword
We had hoped for a better economic performance in 2018. The previous MPR looked forward to stronger growth, and
inflation near the midpoint of our 3–6% target range. Instead, Statistics South Africa tells us the economy experienced
a technical recession in the first half of the year, and we have had to revise down our growth forecast for 2018 sharply.
Meanwhile, although inflation has been quite well-behaved for much of the year, it has now begun to accelerate, and we
expect it to be over 5% throughout 2019 and 2020.
As usual, there are temporary factors that help explain these disappointments. We are using the r-word only because of
volatility in the agricultural sector, which flattered the economy’s performance last year but is now making it look worse.
The inflation numbers have suffered from a spike in oil prices. Currency depreciation has probably also been magnified by
contagion from crises in Turkey and Argentina, and this overshooting should reverse with time. South Africans, however,
should not take too much comfort in these extenuating factors. The disappointments of 2018 have not all been due to
exogenous shocks. Domestic factors have also contributed.
First, we have become accustomed to a high level of borrowing, which has made us vulnerable to higher global interest
rates. Investors are not as desperate for yield as they used to be. United States interest rates have moved well above zero;
European interest rates probably will not be at zero for much longer. We need to adapt our policies to changed circumstances.
Second, we have spent too much of the year indulging in populism instead of making pragmatic choices. A particular
concern for me has been the amount of time we have squandered discussing Reserve Bank nationalisation. Central banks
can function perfectly well without private shareholders – indeed, most of them do. But no one can explain what South Africa
will gain from this step, or why it would justify the potential costs (both for buying back the shares and paying the inevitable
legal fees). Clearly this subject excites some passion, so we keep talking about it, but it is the wrong priority. If we are serious
about improving South Africa’s economic performance, we need to be more focused in our agenda setting.
At this moment of anxiety about emerging market crises, it is also helpful to reflect on South Africa’s macroeconomic
strengths. Our monetary policy has credibility and inflation expectations are anchored in our target range. Unlike some
other countries, we do not have double-digit inflation. Although we have talked about raising interest rates, we are not
contemplating emergency hikes of hundreds of basis points, like those recently implemented elsewhere. We are also still
holding on to our investment grade status – unlike some of our peers. There is much about our economic performance that
needs improvement, but we have retained a foundation on which to build. Let us talk about that.
E L (Lesetja) Kganyago
Governor of the South African Reserve Bank
Monetary Policy Review October 2018

Looking through volatility,
focusing on fundamentals
Introduction
Global financial volatility has picked up substantially in
recent months. Some emerging markets have been hard hit,
particularly Turkey and Argentina. In South Africa, the policy
framework has performed as designed, with the exchange
rate absorbing much of the shock. Inflation expectations are
below 6%, if still above the 4.5% midpoint of the 3–6% target
range. Inflation has been coming in lower than expected over
the past few quarters, with 12 of the past 14 months under
5%. The latest data show inflation picking up, however, and
it is expected to average 5.7% in 2019 and 5.4% in 2020,
with risks to the upside. Meanwhile, recent gross domestic
product (GDP) numbers have been disappointing and the
output gap has widened. Growth is expected to recover
moderately over the forecast period, reaching about
2% by 2020, but the risks are skewed to the downside. In this
context, the repurchase (repo) rate has been left unchanged
at 6.5%, as policymakers look through volatility and focus on
macroeconomic fundamentals instead.
Global growth has become less synchronised. The United
States (US) economy is growing faster than its trend rate,
boosted by fiscal stimulus. However, both the euro area
and Japan have decelerated this year, after unusually strong
performances in 2017. China’s growth has also eased
somewhat, as the effects of stimulus measures fade. The
outperformance of the US relative to these peer economies
has supported a stronger dollar, with a broad trade-weighted
dollar index up about 8% since January 2018, and about 13%
stronger than its 20-year average.
Inflation in the US is currently in line with the US Federal
Reserve’s (Fed) 2% target, following a protracted period of
below-target inflation. The Fed has been raising rates at a
steady pace over the past two years, which has lifted the Fed
Funds Rate to just over 2% as of September 2018. Markets
anticipate one further rate increase in 2018 and two or three
further increases in 2019, which will bring the Fed Funds
Rate to about 3% – broadly in line with estimates of neutral
(i.e. the interest rate expected to prevail over the longer term,
in the absence of shocks). It is unclear whether the Fed will
then continue to tighten through 2020, or begin to ease policy
again. The Fed’s own projections indicate further increases,
but market-implied rates are stable throughout 2020.
Percentage change over 12 months

Targeted and core inflation
Sources: Stats SA and SARB

3–6% inflation target range
Targeted inflation
Core inflation
Per cent

Inflation expectations
Source: BER

Current year

One year ahead

Two years ahead

Five years ahead

3–6% inflation target range
Midpoint
Index: Jan 1997 = 100

Broad dollar index
Sources: Federal Reserve Bank of St. Louis and SARB

Long-term average
Trade weighted US dollar index (broad)

Monetary Policy Review October 2018
Unlike the Fed, the European Central Bank (ECB) and the Bank
of Japan (BOJ) are still stuck at the (effective) zero lower bound.
The ECB is expected to start a rate hiking cycle in late-2019,
while the BOJ may be in a position to raise rates once in 2020.
This means interest rates in the main advanced economies
will probably be rising throughout the forecast period. Tighter
global monetary conditions will continue to exert pressure on
emerging markets. That said, a smaller interest rate differential
between the US and its peer economies could see the US dollar
trading nearer its longer-run average over the medium term.
Trade wars remain a threat to global growth. In recent months,
trade disputes between the US and its North American and
European partners appear to have been resolved. The US
and European Union reached a preliminary deal in July, while
a replacement for the North American Free Trade Agreement
was announced in early October. However, trade tensions
between China and the US have escalated over the same
period, with both parties extending tariffs to a growing share
of each others’ products. Although both countries’ growth
rates still appear resilient to this shock, reduced trade could
undermine productivity. It could also generate spill-over costs
for the rest of the world economy via supply chains, as well as
through a weakening of the rules-based global trade system.
Although global growth remains quite strong and interest
rates are still low from an historical perspective, conditions
for emerging markets are clearly less benign than they were
six months ago. Higher US interest rates and the stronger
dollar have discouraged capital flows to emerging markets,
weakening emerging market currencies. Rising oil prices have
contributed further to inflationary pressures, with Brent crude
oil rising above US$80 a barrel for the first time since 2014. A
growing share of emerging market central banks have shifted
towards policy tightening, ending a period of widespread
policy easing.
The baseline scenario is still that most large emerging markets
will see better growth over the next two years, following an
extended period of underperformance. Major economies such
as Brazil and Russia are coming off low bases. India is wellplaced to maintain growth of around 7.5%, retaining its status
as the world’s fastest growing major economy. Sub-Saharan
Africa (SSA) is in a rebound phase from its 2016 growth trough.
Although current circumstances are difficult, most emerging
markets are protected by floating exchange rates and more
adequate foreign exchange reserve buffers, which limits the
risk of sudden stops.
Per cent

G3 policy rates
Sources: Global Projection Model Network and SARB


Euro area

US

Japan

G3

Forecast
Per cent

Proportion of emerging market central banks*
increasing interest rates
* Based on 40 largest emerging market economies by GDP
Sources: Haver, IMF and SARB

Percentage change

Global growth*
Sources: Global Projection Model Network and SARB
* South African trade-weighted

average:
3.6
3.5
3.5
Forecast
Monetary Policy Review October 2018

Some emerging markets have proven especially vulnerable
to tightening global financial conditions, specifically those
with weakly anchored inflation expectations and large foreign
currency debt stocks. But these cases are relatively idiosyncratic
and account for a fairly small share of global economic output.
Accordingly, a full-scale re-run of the 1997–1998 emerging
market crisis appears unlikely. Still, even without a crisis,
many emerging markets could fail to escape their multi-year
growth slump if global volatility remains elevated. Continued
slow growth, rather than crisis, is the central threat for many
emerging markets.
South African economic conditions
Since the previous Monetary Policy Review (MPR), published
in April, South Africa’s inflation numbers have come in lower
than expected. Accordingly, the current-year forecasts have
been revised down, with the headline projection easing from
4.9% to 4.8% and core going from 4.6% to 4.4%. At the same
time, fresh shocks have pushed the medium-term forecasts
higher. Headline inflation is now expected to average 5.4%
in 2020, compared with 5.1% as of the April MPR. The core
inflation forecast has been marked up to 5.5% for 2020, versus
4.9% six months ago.
Near-term inflation has been subdued for several reasons.
The primary factor has been food prices, which have been
shaking off the last effects of the 2016 drought. (For a
discussion of the difficulty of forecasting food inflation around
turning points, see Box 3, p 28.) Another is value-added tax
(VAT) effects. The March forecast anticipated the VAT increase
would bump up inflation, in line with international experience.
But inflation for VAT-affected items has been unexpectedly
stable. (This puzzle is addressed in Box 4, p 29.) In addition
to these factors, there have also been surprises in services
prices. In particular, owners’ equivalent rent has been softer
than expected – mainly, it seems, because the Western Cape
housing market is cooling off from its 2014–2017 boom. Finally,
there may still be some pass-through to prices from past rand
appreciation, an effect potentially reinforced by the wider
negative output gap.
Despite the lower starting point for inflation, medium-term
inflation projections have been shifting higher, mainly due to
rand depreciation and higher oil prices. At the March Monetary
Policy Committee (MPC) meeting, the exchange rate appeared
to be 4.3% stronger than its estimated equilibrium value (with the
rand at 11.97 to the US dollar). By the September MPC meeting,
the currency had weakened sharply, leaving it undervalued by
approximately 7.5% (at R14.20 to the dollar for the quarter,
and around R15 during the week of the actual MPC meeting).
This shift followed a broad risk-off swing in financial markets,
with some contagion spreading from Argentina and Turkey to
Percentage change
Headline inflation forecast evolution
Source: SARB


Mar 2018

May 2018

Jul 2018

Sep 2018
4.8
5.7
5.4
Percentage change
Core inflation forecast evolution
Source: SARB

Mar 2018

May 2018

Jul 2018

Sep 2018
4.4
5.6
5.5
Percentage change over four quarters
2017Q1
2017Q2
2017Q3
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
2017Q1
2017Q2
2017Q3
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
Headline and core inflation
* 2018Q3 is a forecast. It includes actual data for the
first month of the quarter only.
Sources: Stats SA and SARB
Headline inflation
Actual*
Mar 2018
Core inflation


Monetary Policy Review October 2018
a number of other countries. The rand has depreciated more
than most peer currencies, which reflects both its wide use in
exchange rate markets as well as adverse domestic factors,
including relatively weak macroeconomic fundamentals.
(The sell-off is discussed in the financial markets chapter.)
Given the exchange rate forecast methodology introduced
with the Quarterly Projection Model (QPM),1 the real exchange
rate is expected to converge gradually on its equilibrium.
This implies the nominal exchange rate will appreciate during
2019. Nonetheless, the exchange rate level is still significantly
more depreciated than it was in March, which lifts the inflation
trajectory relative to six months ago.
The second reason for the higher inflation forecasts is rising
oil prices. Brent crude averaged US$43.60 in 2016 and
US$54.20 in 2017; it is likely to be US$72 this year. (At the
time of writing it is over $80 per barrel.) Some of this increase
has been due to better global demand, while some owes to
supply shortfalls – which includes the Organization of the
Petroleum Exporting Countries’ (OPEC) deliberate cuts as well
as supply problems from countries such as Venezuela and
Iran. As with the exchange rate, the South African Reserve
Bank’s (SARB) assumption is that oil prices will become slightly
more favourable over the medium term, moderating from
US$72 per barrel this year to US$70 in both 2019 and 2020.
However, the entire level of the oil price profile has shifted up
since March, when the oil price was projected at US$63 for
2018 and US$62 for both 2019 and 2020.
As with the inflation data, the growth numbers have surprised
on the downside this year, prompting revisions of the 2018
growth projections – from 1.7% in the April MPR to 0.7%
currently. This lower base has actually prompted an upward
revision for the 2019 forecast, to 1.9% (from 1.5% previously),
while the 2020 growth number has stayed unchanged, at 2.0%.
Although the forecasts anticipated a growth contraction in the
first quarter of the year, they did not indicate a subsequent
negative quarter, so the technical recession in the first half of
2018 came as a surprise. While the forecast errors were mostly
due to unexpectedly weak agricultural sector outcomes,
underlying growth dynamics were nonetheless weak. Year-onyear growth rates are still positive, but not strong (1.4% for the
first quarter of 2018, and 0.5% for the second). The recovery
from the 2016 growth trough is clearly proving slower and
more halting than previously anticipated.

In the QPM, the real exchange rate has an equilibrium value to which it
reverts over time. By contrast, the old Core Model held the real exchange
rate constant across the forecast horizon at the value prevailing during the
latest known quarter.
Implied rand/US$ exchange rate

Exchange rate projections
Source: SARB

Mar 2018
May 2018
Jul 2018
Sep 2018
Actual
US$ per barrel

Evolution of crude oil price forecasts
Source: SARB

Actual

Mar 2018

May 2018

Jul 2018

Sep 2018
Percentage change over four quarters

Real GDP growth forecast evolution
Sources: Stats SA and SARB
Actual
Mar 2018
Sep 2018

Monetary Policy Review October 2018

For monetary policy, the primary growth concern is the output
gap, defined as the difference between what the economy
can produce with sufficient demand and actual output. The
output gap projection has widened since the last MPR, to
about 1.3% of potential GDP for 2018. It narrows through
2019 and 2020, before closing in the final quarter of 2020.
Although output gap estimates are perennially uncertain, the
forecast continues to interpret this as an economy which is
underperforming expectations – even as those expectations
sink lower. The potential growth estimates are now down to
1.0% for 2018, 1.3% for 2019 and 1.4% for 2020, well below
both historical rates and global averages. As before, there is a
case that potential growth will rebound, but this is likely to
require implementation of reforms which improve confidence,
ameliorate macroeconomic imbalances and raise investment.
The forecast entails an expansionary policy stance over the
next two years. The real (inflation-adjusted) interest rate is now
around 1.5%, and the QPM Taylor rule keeps it in a range of
1–2% through 2019 and much of 2020. South Africa’s neutral
real interest rate – which is the basis for characterising policy
as tight or loose – appears to lie close to 2% currently, and is
projected to climb modestly over the next two years, reaching
2.3% by the end of the forecast period as world interest rates
normalise. The real repo gap, which is the difference between
the policy rate and the neutral rate, adjusted for inflation, is
negative for most of the forecast period. This implies policy will
be supportive of higher growth.
The model nonetheless projects higher nominal interest rates,
with the repo climbing from 6.5% to 7.7% by the end of 2020.
This 120-basis point increase serves almost entirely to keep
up with higher inflation and the higher neutral rate. In fact, were
rates to go unchanged, the model would interpret the policy
stance as becoming much looser. The real interest rate gap
bottoms out at about 1 percentage point below neutral around
the beginning of 2019, then narrows gradually over the next
year-and-a-half. By late 2020, the output gap is closed, but
inflation is still above the model’s 4.5% inflation target, so the
endogenous repo finally moves above neutral, implying a real
interest rate slightly over 2%.
Percentage change over four quarters
Percentage points

Potential growth
Sources: Global Projection Model Network and SARB
-3
-2
-1

-3
-2
-1

Forecast
Gap between
South Africa and world
(right-hand scale)

South Africa
World
Per cent

Neutral real repo rate estimates
Source: SARB


May 2018

Jul 2018

Sep 2018

Percentage points

Real repo rate gap
more
contractionary
more
accommodative
Source: SARB

Mar 2018
May 2018
Jul 2018
Sep 2018

Monetary Policy Review October 2018
Overview of the policy stance
This MPR covers the MPC meetings for May, July and
September. The decisions reached at each of these meetings
have been the same, with rates left unchanged at 6.5%. The
key themes of each meeting have also been similar, with broad
agreement both that domestic growth is disappointingly low
and that inflation risks are intensifying. Still, despite three
unchanged decisions, the September verdict was more tightly
poised, given heightened concerns around the risks to the
forecast.
The May meeting followed the March decision to lower the
repo rate from 6.75% to 6.5%. There was evidence conditions
had deteriorated from the previous meeting, and the inflation
risks were judged to be on the upside. The expected path for
US interest rates had shifted higher, contributing to the rand
weakening by 6% against the dollar from its March levels (and
close to 3% on a trade-weighted basis). These shifts more-orless eliminated the rand overvaluation identified at the previous
MPC meeting. Fuel prices had also moved higher and while
the forecast assumed oil prices would average less than
US$70 dollars per barrel for 2018, 2019 and 2020, the spot
price around the meeting date was closer to US$80 per barrel.
Given events since, both the exchange rate and oil price risks
were correctly identified.
In the period between the May and July meetings, Statistics
South Africa (Stats SA) released GDP data for the first quarter,
which showed a larger contraction than expected. The
exchange rate had also depreciated further and oil prices
remained elevated, above US$70 per barrel. The forecast
incorporated this news through a lower 2018 growth projection,
a more depreciated exchange rate path and a higher oil
price assumption. Although the near-term inflation forecast
was actually marked down slightly, given unexpectedly low
consumer price index (CPI) outcomes, the 2019 forecast was
adjusted from 5.2% to 5.6% (mainly on fuel prices) and 2020
went from 5.2% to 5.4% (chiefly because of the exchange
rate pushing up core inflation). These projections struck some
analysts as pessimistic and put the SARB forecasts somewhat
above the Reuters Econometer median forecast (then 5.2% for
2019 and 5.3% for 2020). Nonetheless, the MPC once again
assessed the inflation risks to be on the upside, noting that
electricity prices had joined the exchange rate and oil prices as
a source of potentially higher inflation.
Circumstances became still more difficult at the September
meeting. The inflation forecast deteriorated as currency pressures
intensified. The output gap also widened, given unexpectedly
low growth numbers for the second quarter. The MPC once
again judged inflation risks to be on the upside, with growth
risks moderately to the downside. Four of the seven members
preferred an unchanged stance, in contrast with the previous
two meetings, which had both been unanimous decisions.


Per cent
Taylor-rule decomposition, real repo rate

Residual

Inflation deviation from target midpoint

Real repo rate
Source: SARB

Output gap

Neutral real rate
Forecast
Monetary Policy Review October 2018

Looking back, South Africa has been coming through a
period of lower inflation. This has been mostly due to three
factors: first, relatively low oil prices, at least between late2014 and early-2018; second, moderating food inflation, in
the context of better rainfall conditions; and third, a period
of rand appreciation stretching from early-2016 to early-2018.
Lower inflation, in the context of weak growth, has permitted
the MPC to reduce rates on two occasions over the past year.
However, the MPC has also long been uncomfortable with
inflation expectations fluctuating around the upper end of the
target range, and so lower inflation has also been welcomed
as an opportunity to shift expectations closer to the midpoint
of the 3–6% target range.
At 6.5%, the repo rate is currently about 20 basis points lower
than the endogenous rate in the QPM. Although this is not a
substantial gap, it speaks to some difficult judgements facing
the MPC. One is the problem of gauging unobservables,
especially the neutral interest rate and the output gap. The
model’s endogenous rate is sensitive to these estimates, but
both numbers are intrinsically hard to pin down. A second
issue is calibrating the monetary response when inflation is
higher than desired, but output is also below potential. Where
inflation is coming from excessive demand, the monetary policy
response is relatively straightforward – but this is not the case
now (nor has it been the case for most of the inflation targeting
period). Given these considerations, the repo rate projection is
presented with a fan chart, to convey the uncertainty around
the outlook.
Conclusion
Inflation in South Africa is rising, pushed by both exchange
rate and oil price shocks – a problem shared by many other
emerging markets. Growth is subdued, which is mostly due
to structural issues beyond the reach of monetary policy, but
also reflects some confidence-related demand weakness.
Given a negative output gap, the repo rate projection keeps
policy expansionary over most of the policy horizon, relative
to the estimated neutral rate. This nonetheless suggests a
higher nominal repo, to keep up with rising inflation and the
fact that funding for emerging markets is no longer as readily
available as it used to be (in other words, a higher neutral rate).
This policy stance is calibrated to keep inflation within the target
range over the medium term, while closing the output gap.
Per cent

Repo rate and forecast
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


90%

60%

30%

Repo rate

Monetary Policy Review October 2018
The global economy: getting back
to normal
Since the April MPR, the global outlook has deteriorated.
The cyclical upturn that began in the latter half of 2016 now
appears to have passed its peak. Growth has become less
synchronised, with some countries accelerating (especially the
US) but others slowing. For advanced economies, monetary
stimulus is slowly being reduced as inflation picks up and
output gaps close. In turn, tighter global financial conditions
have squeezed emerging markets, especially those with larger
macroeconomic imbalances.
Less synchronised, more fragile growth
Annual growth among South Africa’s major trading partners
hit 3.6% last year, up from a post-crisis low of 3% in 2016.
The 2018 growth outcome is likely to be about as strong as in
2017. However, in quarterly terms, trade-weighted growth is
already ebbing, with the second half of the year expected to
be weaker than the first half (3.5% versus 3.8%). Moreover, the
synchronisation of growth is starting to wane; of the world’s
50 largest economies, 70% were accelerating last year, but
that figure has fallen to only 46% for this year and will likely
drop below 40% in 2019.
In the US, growth reached 4.2% in the second quarter of 2018,
a three-year high, partly due to (pro-cyclical) fiscal stimulus.
The economy is now at a late stage of the economic cycle, and
given the combination of tightening monetary conditions and
limited scope for further fiscal stimulus, the growth peak for
the current expansion phase is now probably past. Growth is
expected to slow towards the economy’s underlying potential
over the next two years, with output expanding 2.4% in 2019
and 2.1% in 2020, down from 3% this year. There is some
limited evidence of trade war effects in the macroeconomic
data, but these are not yet disrupting growth or employment
(although a portion of the GDP bounce in the second quarter
was traceable to pre-emptive exporting ahead of anticipated
retaliatory tariffs).
In China, growth has cooled slightly to 6.7% in the second
quarter of the year from 6.8% for the preceding three
quarters. There has also been a more marked deceleration
visible in other indicators of economic activity (like the Li
Keqiang Index). Policymakers have introduced some easing
measures to stabilise growth, including looser monetary policy
(through lower required reserve ratios) and more infrastructure
investment. Though fears of a hard landing for the economy
have dissipated, debt dynamics remain problematic. In these
circumstances, further stimulus is likely to be relatively limited.
Per cent

Global growth synchronisation*

Sources: IMF and SARB
* Proportion of 50 largest economies with growth rates accelerating
on an annual basis
Forecast
Percentage change over four quarters

Trade-weighted global growth
Sources: Global Projection Model Network and SARB

Forecast

Percentage of potential GDP
Percentage points

US economic slack
Sources: US Bureau for Labour Statistics, US Fed, IMF and SARB


-1
Unemployment gap
(right-hand scale, inverted)
Output gap
Forecast
Monetary Policy Review October 2018

Growth in the Chinese economy is therefore expected to slow
smoothly over the forecast horizon, settling at 6.3% in 2020.
Growth in other major economies has slowed during the first
half of this year. In Japan, an unusually strong expansion in
2017 (1.7%) has not been sustained into 2018, with forecasts
for the year now at 0.9% (down from 1.4% in the April MPR).
Euro area growth rates have also slumped, from annualised
rates of around 3% for much of 2017 to 1.5% for the first two
quarters of 2018. Although some of this weakness has been
due to temporary factors (unusually cold weather and strikes),
most economic indicators, including Purchasing Managers’
Indices (PMIs) and industrial production figures, have pointed to
a more lasting loss of momentum. Political risk has also picked
up again, especially in Italy, where government borrowing costs
have shifted to higher levels over concerns about the new
government’s fiscal plans. Similarly, in the United Kingdom,
Brexit-related uncertainties have intensified, and the Bank of
England now projects growth at 1.4% for 2018, an eight-year
low. This slowdown has demoted Britain from being the bestperforming economy in the Group of Seven (G7), circa 2014, to
the third worst, ahead of only Italy and Japan.
For emerging markets, excluding China, the risks to growth
have risen. Growth differentials within the emerging market
sphere are also large. Emerging Asia has performed relatively
well, with major positive contributions from Indonesia (where
growth reached a four-year high during the second quarter)
and India (which remains the world’s fastest-growing major
economy). Elsewhere, conditions are less benign.
Many of the major emerging market economies continue to
operate with a high level of slack, including Russia, Brazil
and Nigeria. Although emerging market growth has picked
up since the 2016 trough, the pace of recovery is likely to
be more gradual than that envisioned in the previous MPR.
Growth rates are also projected below longer-term averages.
For instance, the Latin American region is expected to grow by
1.2% in 2018, compared with a 20-year average of 2.6%. The
equivalent numbers for SSA are 3.1% for 2018 versus 4.8%
historically.
In Brazil, a truckers strike early in the year disrupted economic
activity and resulted in government concessions that are likely
to exacerbate fiscal problems (Brazil’s fiscal deficit is already
over 7% of GDP and its debt stock is over 80% of GDP, both
some of the worst numbers in the emerging market space).
In Russia, though the FIFA World Cup propped up growth
in the first half of the year, industrial production remained
muted and sanctions are also affecting growth. In SSA, the
two biggest oil producing countries – Angola and Nigeria –
have not rebounded strongly despite higher oil prices. Crude
production in Angola has declined to its lowest levels since
Index, higher = looser conditions
Index

China’s stimulus and economic activity
Monetary Conditions Index

Li Keqiang Index
(right-hand scale)
Source: Bloomberg

Difference in growth rates, 2017–2018

Change in growth momentum in selected
major economies
* Trade-weighted
Source: SARB
India
Brazil
United States
Russia
World*
China
Turkey
Argentina
Euro area
Japan
United Kingdom
Accelerating growth
Decelerating growth
-4.0
-5.5

Monetary Policy Review October 2018
2007 and the government has turned to the International
Monetary Fund (IMF) for assistance, in the context of foreign
exchange shortages and rising non-performing loans.
The outlook for Nigeria’s economy is somewhat better, but
the economy is making only a gradual recovery from the 2016
recession – its worst in 25 years – with growth rates of around
2% in recent quarters (versus an average annual growth rate
of 6.5% since 2000).
Outside of Venezuela – which is experiencing an extraordinary
economic collapse and hyperinflation – the two most vulnerable
large emerging markets are Argentina and Turkey. Both these
economies are expected to contract in the second half of
this year, although conditions are uncertain and longer-term
forecasts are hard to calibrate.
In Argentina, the initial mistake which snowballed into the
current crisis appears to have been the December 2017
decision to raise the inflation target for 2018 and then cut interest
rates, a step which undermined faith in the government’s
broader reform programme. Credibility suffered further when
the governor of the central bank resigned in June 2018,
along with several senior staff, following a failed intervention
in the foreign exchange market.2 Argentina’s core problem,
however, is a stubbornly large budget deficit – of around 6% of
GDP – which has in recent years been funded mainly through
foreign currency borrowing. These inflows have now largely
dried up, while currency depreciation has raised the value of
the foreign debt stock in local currency terms. In response,
the government has entered an IMF programme with a
US$57 billion credit line and has also raised interest rates to
65% to attract capital inflows.
Turkey shares Argentina’s weakness of extensive foreign
currency borrowing, although these inflows have in the
Turkish case funded a private sector credit boom, chiefly in
real estate, rather than large fiscal deficits. Government debt
levels are quite low, relative to peers, although this metric
could deteriorate rapidly as private debts migrate to the public
balance sheet (as they did in countries such as Spain or Ireland
when real estate bubbles burst). Imbalances in the Turkish
economy have been building up for some time, and the central
bank had been unable to respond substantively with interest
rates, given political pressure to keep rates low. The result is
likely to be a sharp growth deceleration, as the current account
deficit closes abruptly and exchange rate depreciation keeps
inflation in double digits. (Some lessons from the Turkish case
are discussed further in Box 1, p 13.)

His immediate successor has since also resigned, having held the post
from June to September 2018.
Percentage change
Emerging market growth rates
Sources: IMF and SARB
* Commonwealth of Independent States
-1

Asia excl.
China
SSA
CIS* and Europe
2000–2017 Average
Latin America

Percentage change against the US$ since 1 Jan 2018


Emerging market currency changes
Sources: Bloomberg, IMF and SARB
Current account
surplus countries
Current account deficit countries
Saudi Arabia
Thailand
Nigeria
Malaysia
China
Russia
Mexico
Egypt
Colombia
Poland
Philippines
Indonesia
Pakistan
Chile
India
South Africa
Brazil
Turkey
Argentina
Monetary Policy Review October 2018

From a global perspective, the risks posed by these two
countries are manageable: trade linkages are limited and
financial exposures appear manageable. The broader concern,
however, is shifting sentiment towards emerging markets as a
whole. A full-scale repeat of the 1998 emerging market crisis
is unlikely: most emerging markets have manageable foreign
exchange liabilities, better current account financing, higher
reserves and more realistic exchange rate valuations than they
did two decades ago. However, contagion effects from Turkey
and Argentina may worsen the outlook for countries with
more vulnerable metrics, in a scenario reminiscent of the 2013
‘taper tantrum’.
More inflation and higher interest rates
Advanced economy inflation has recovered from the deflation
scare of a few years ago. In the US, inflation has returned to
target, while in the euro area and Japan inflation rates are still
well below 2%, but at least more clearly in positive territory.
In the US, headline inflation is over 2%, with the headline
personal consumption expenditure deflator at a six-year high
in July (at 2.34%, moderating slightly to 2.22% in August). The
surge is partly due to energy prices, but core inflation has also
recently reached 2%, for the first time since 2012. Importantly,
while inflation has returned to target, it is unlikely to overshoot
by much, given in particular modest wage gains to date.3
Policy rates have moved steadily higher as the US economy
has achieved and then surpassed full employment, with the
Fed Funds Rate now over 2% (from practically zero in 2015).
Based on the Fed’s ‘dots’, interest rates will continue to rise
towards their longer-term equilibrium levels, of around 3%, with
a possibility of some additional tightening in 2020.
Since 2013, labour utilisation in the euro area has improved.
Unemployment is now at its lowest levels since 2008, at 8.1%
compared with a trough of 7.3% pre-crisis, and there are
signs of labour shortages in some parts of the currency bloc.
Although tighter labour markets have supported some nominal
wage growth, core inflation remains muted. While the ECB has
indicated its willingness to leave its key policy rate unchanged
until inflation materially nears its target, it is likely that its asset
purchasing programme will conclude by the end of this year
and a hiking cycle may commence as soon as the third quarter
of next year.
Japan’s inflation remains subdued despite the BOJ’s
extraordinary efforts at raising inflation expectations. There are
some signs of accelerating wage growth in the context of ultralow unemployment, yet core inflation has eased again in recent
months. There are chances inflation may pick up enough to
justify one rate hike by the end of 2020, but monetary policy in
Japan will remain loose relative to the US and the euro area for
the foreseeable future.

See J H Powell (August 2018), ‘Monetary Policy in a Changing Environment’,
Board of Governors of the Federal Reserve System: ‘While inflation has
recently moved up near 2 percent, we have seen no clear sign of an
acceleration above 2 percent, and there does not seem to be an elevated
risk of overheating.’

Percentage change
2016 2017 2018 2016 2017 2018 2016 2017 2018
G3 core inflation
Source: Haver
United States
Euro area
Japan
Percentage change
Emerging market inflation forecasts
* Argentina replaced its inflation target with a money supply target on
1 October 2018.
** Midpoint of inflation target range.
Sources: Haver and SARB

Target range/tolerance band

2019 inflation

Point target
Poland
Indonesia
Brazil
Russia
Chile
Hungary
Colombia
Peru
Mexico
South Africa**
India
Philippines
Turkey
Argentina*
Percentage change

G3 nominal wage growth
Sources: Haver and SARB
United States
Euro area
Japan


Monetary Policy Review October 2018
Tighter monetary conditions in the advanced economies have
depressed emerging market currencies and raised inflation
profiles, a problem exacerbated in the short term by higher
energy prices. Consensus forecasts now suggest that inflation
rates will be above central bank targets (or target midpoints)
for most major emerging markets for 2019. In this context,
emerging market monetary policies have entered a new
tightening phase, after a period during 2017 in which almost
no emerging market central banks were raising rates.
Conclusion
Over the medium term, global growth is unlikely to be as strong
or as synchronised as it was between late 2016 and early 2018.
As the US economy has outpaced its peers, the dollar has
appreciated and monetary conditions have tightened. This has
exposed vulnerabilities in some parts of the emerging market
space, particularly among countries with weak fundamentals.
Although global growth is forecast to remain fairly robust over
the next two years, the risks to the emerging market outlook
have clearly risen.
Percentage change over 12 months

Turkey inflation
Sources: Bloomberg and CBRT

Tolerance band

Inflation target

Inflation
Box 1 Lessons from Turkey’s crisis

See, for instance, A Samson ‘Lira falls after Erdogan calls interest
rates ‘mother of all evil’’ Financial Times, 11 May 2018, available at:

Turkey has been at the centre of a financial market storm recently.
The spillover consequences for emerging markets are discussed
elsewhere in this Monetary Policy Review (MPR). However, the Turkish
case itself teaches some useful lessons for emerging markets. This box
highlights three such lessons.
Insisting on low interest rates is a good way to get high interest rates
The Central Bank of the Republic of Turkey (CBRT) has been under
considerable pressure not to raise rates.1 This has led to rising inflation,
and therefore higher interest rates. The connection between higher
inflation and higher interest rates is often missed by critics of inflation
targeting, who assume that higher inflation targets would permit lower
interest rates, which in turn would be more growth-friendly. As Turkey’s
experience demonstrates, however, tolerating more inflation actually
means accepting higher interest rates, not lower ones.
The mechanism linking higher inflation to higher interest rates is inflation
expectations. As lenders realise inflation is rising, they charge higher
interest rates to protect the future buying power of their funds. Because
inflation also becomes less predictable as the central bank’s target
becomes less credible, lenders require a bigger inflation risk premium,
which raises interest rates further. This explains why Turkey’s two-year
government bond climbed to a high of 26.6% (as of August), while
the 10-year bond peaked at 20.7%. It also explains why longer-term
rates moderated when the central bank finally hiked its policy rate by
625 basis points to 24%: that step signalled resolve to tackle high
inflation, helping reduce Turkey’s inflation premium.
Monetary Policy Review October 2018

Unorthodox measures are not a game-changer, and can be
a distraction
Over the past decade, Turkey has used a variety of novel instruments in
an attempt to shape capital flows and enhance its economic resilience.
For instance, the central bank deployed an unusually complex mix
of interest rates to conduct policy and deliberately created volatility
in short-term interest rates to scare off ‘hot money’ investors. Some
researchers claimed a variety of successes for these measures,
including rebalancing demand and reducing exchange rate volatility.2
But these claims have not held up well over the past few years.
Turkey has done less to rebalance its current account than any other
major emerging market, while inflation expectations have shifted well
above the 5% target. Currency volatility has been high, relative to peer
countries. At best, this suggests that the new policy tools were of
limited effectiveness. They may also have distracted from using more
conventional means to tackle Turkey’s imbalances.
The quality of growth also matters
In recent years, Turkey has had strong growth despite persistently
weak macroeconomic fundamentals. (In 2017, it had the highest
growth rate in the Group of Twenty (G20), but also the biggest current
account deficit and the second highest inflation rate.) At face value,
Turkey’s mix of high growth and shaky fundamentals could appear
more attractive than the alternative, of lower growth and stronger
fundamentals. In fact, Turkey’s economy has some important
strengths, and its growth recorded since the crisis of 2001 teaches
several abiding lessons. These include the importance of prudent
fiscal management and transparent procurement structures, as well
as the advantages of broadening growth beyond the most modernised
cities.3 However, the boom of the past few years has been of much
lower quality than that of the 2000s. In particular, it has been premised
on rapid debt accumulation, chiefly by the private sector, much of it
funded by overseas lenders and denominated in foreign currency. This
particular aspect of its growth model now appears to be collapsing,
with gross domestic product (GDP) forecast to contract by 6.5% in
the third quarter of 2018 and by a further 3.1% in the fourth quarter.
The lesson is that both the pace and sustainability of growth matter.
2 Y Akçelik, E Basci, E Ermisoglu and A Oduncu, ‘The Turkish Approach to
Capital Flow Volatility’, Central Bank of the Republic of Turkey Working Paper
No. 13(6), February 2013.
3 .For a useful discussion, see D Acemoglu and M Ucer, (2015) ‘The Ups and
Downs of Turkish Growth, 2002–2015: Political Dynamics, the European
Union and the Institutional Slide’, National Bureau of Economic Research
Working Paper Series No. 21608, October 2015.
Per cent

Turkey government bond yields
Source: Bloomberg

2-year bond yields
10-year bond yields
Per cent

Turkey policy rate*
Sources: Bloomberg and SARB
-5

Policy rate
Ex-post real interest rate
* Weighted average cost of CBRT funding.

Monetary Policy Review October 2018
Global financial markets:
the tide goes out
Global financial conditions have changed markedly since the
start of the year. The outstanding features of the landscape
early in 2018 were a softer dollar, low volatility and emerging
market resilience. Now the dollar is unusually strong, volatility
has rebounded – especially for emerging market currencies –
and analysts are contemplating parallels with the 1997–1998
emerging market crisis. South Africa has been buffeted by
these changes, with significant rand depreciation and a large
spike in sovereign risk. While this partly reflects the usual
overreaction of South African asset prices to shifts in global
sentiments, markets are also differentiating between countries
based on their macroeconomic fundamentals.
Much as the US economy has diverged from other major
economies in terms of growth this year, so US financial markets
have also outperformed their peers. The US S&P 500 index
has repeatedly pushed on to new record highs, achieving
its longest bull market4 on record. Excluding the US, global
equities have been on a downtrend, and emerging market
equities have slumped into a bear market.
US interest rates have also risen, in line with higher growth and
inflation rising back to the Fed’s target. The US 10-year rate
has reached 3% for the first time since 2013’s ‘taper tantrum’,
from less than 1.5% in mid-2016. Shorter-term rates have
risen even more, following the Fed’s steady normalisation of
its policy rate, and market expectations have shifted up in line
with the Fed’s own projections – the ‘dots’ – although there is
still a gap between market and Fed projections for 2020. The
strong rise in short-term rates has caused the US yield curve
to flatten, with the gap between 2-year rates and 10-year rates
narrowing to as little as 18 basis points in August. Although
the flattening curve has provoked some speculation about an
oncoming recession, the yield curve has not yet inverted. It
is also unclear whether yield curve inversion is still a reliable
indicator of recessions, as it has been over the past 50 years,
given how far term premia have fallen (in part due to the Fed’s
own holdings of longer-dated securities acquired through
quantitative easing).5

The broad definition of a bull market is a sustained period of price
increases. One commonly accepted definition is a 20% rise in
prices; conversely, a bear market is a 20% decline in prices from a
bull market peak. Based on this measure, the current bull market
in the S&P 500 reached 3 495 days on 3 October 2018, making it
the longest on record and eclipsing the one that ran from October
1990 to March 2000. Despite the recent decline in US equity prices,
the S&P 500 index has risen more than 300% since reaching a
bottom during the global financial crisis on 9 March 2009.

For a sceptical account, see B Bernanke, ‘Bernanke warns against
reading wrong yield curve signal’, available at
content/e72fdf28-8a1c-11e8-bf9e-8771d5404543. The subject is also
discussed in the July 2018 FOMC minutes, available at:
federalreserve.gov/monetarypolicy/files/fomcminutes20180801.pdf.
Indices: Jan 2017 = 100 (both scales)
Jan

Mar May
May
Jul
Jul
Sep
Sep
Nov
Nov
Jan Mar
Global equities
Sources: Bloomberg and SARB

MSCI World

MSCI Emerging Markets

MSCI US (right-hand scale)

Per cent
Fed median dots (Sep 2018)
Federal funds futures (26 Sep 2018)
US Fed dot plot and market expectations
Source: Bloomberg
Dec 2021
Dec 2020
Dec 2019
Dec 2018

Per cent
Years to maturity
Oct 2017
Apr 2018
Sep 2018
US Treasury yield curves
Source: Bloomberg

6m
3m

Monetary Policy Review October 2018

In other major advanced economies, interest rates have been
much less buoyant. Markets have shifted expectations for the
start of the ECB’s hiking cycle back to late-2019, given weakerthan-expected growth in the euro area and still-subdued
core inflation. Government bond yields remain extremely low
– Germany’s are still barely above zero – although rates are
appreciably higher in some countries, particularly Italy, given
more elevated fiscal and political risks. In Japan, rates are even
more subdued, with no prospect of a BOJ hike in 2019 and
monetary policy also practising ‘yield curve control’ to keep
longer-term rates at zero, too.
Divergence between the US and other major economies
has driven a substantial appreciation of the dollar. The dollar
moved below EUR/US$1.15 in early August, around 9% below
its longer-run average. The stronger dollar has in turn been a
major cause of disruption across global financial markets this
year. Emerging markets in particular have been vulnerable, in
part because last year’s dollar depreciation had compounded
US dollar returns on higher-yield emerging market assets,
encouraging banks and fund managers to raise their exposure
to these instruments. Dollar appreciation has compromised
this strategy, prompting a sharp reversal of capital flows.
Over the medium term, the dollar could revert to more normal
values. Although US rates are still rising, interest rates in other
major economies are further below neutral, and are therefore
likely to rise more rapidly in future. The US will also be running
large twin deficits for the foreseeable future, a pattern which
has historically been associated with a somewhat more
depreciated dollar. In the shorter term, however, the dollar
could appreciate further, with likely triggers including further
trade tensions and a repricing in US Fed futures.
So far, 2018 appears to be the toughest test for emerging
markets since the 2013 taper tantrum. Emerging market
currencies have experienced steep losses, on a scale
comparable to previous emerging market crises. The
JPMorgan Emerging Market Currency Index has fallen by
10.7% so far this year, and real effective exchange rates
are below long-term (20-year) averages in a range of large
emerging markets, including Brazil, Malaysia, Mexico
and Russia. Depreciation pressures have been more
concentrated in countries with large external financing needs
(current account deficits and elevated external debt levels),
while countries with the weakest policy frameworks have
experienced full-blown currency crises. (The Argentinean
peso has lost 49.1% of its value since the start of the year
and the Turkish lira has lost 34.6%.) In these circumstances,
emerging market central banks, including Argentina,
India, Indonesia, Turkey, the Philippines and Russia have
raised rates.
Cumulative US$ billions
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Emerging market portfolio flows (excluding China)
Sources: Institute of International Finance and SARB
-40
-20

Indices: 2 Jan 2017 = 100
Jan

Mar May Jul
Sep Nov Jan Mar May Jul Sep Nov
US dollar strength
Sources: Bloomberg and SARB

US$ Broad Index

JPMorgan Emerging Market Currency Index

US$ Narrow Index (Advanced economies only)

Stronger US$

Per cent, year to date
Emerging market currency depreciation*
*Against the US dollar
Source: Bloomberg
Argentine peso
Turkish lira
South African rand
Indian rupee
Brazilian real
Russian rouble
JPM EMCI
Indonesia rupiah
Chilean peso
Philippine peso
Hungarian forint
Polish zloty
Chinese renminbi
Colombian peso
Malaysian ringgit
Thai baht
Mexican peso


Monetary Policy Review October 2018
Domestic financial market
developments
South African assets have experienced a marked downward
correction over the past six months, as early-2018’s euphoria
has given way to more difficult external conditions and a
less optimistic local narrative. The rand has lived up to its
reputation for volatility, fluctuating in a range between R11.55
and R15.42 to the dollar over the past six months. Year to date,
it has by depreciated by 12%, one of the poorer performance
in the emerging market space. (The decline from the peak in
February has been 18%.)
Sovereign risk has risen, with the country’s Emerging Market
Bond Index Plus (EMBI+) spread having risen by about 100
basis points from its January low.6 (This compares with
previous spikes of this measure of around 80 basis points
during the 2013 taper tantrum episodes and 130 basis points
at the time of the December 2015 cabinet reshuffle.) The South
African yield curve has also steepened and shifted higher. The
sell-off in the medium to longer end of the curve, however,
has been more muted than at the time of the taper tantrum.
This may reflect benign inflation readings so far in 2018, as
well as the role played by domestic investors – who appeared
willing to ‘buy on dips’ rather than adopt a more conservative
strategy and increase cash holdings at the expense of both
bonds and equities. Meanwhile, at the short end of the market,
forward rate agreements (FRAs) have risen sharply with market
expectations switching from rate cuts to rate hikes. The FRA
market has fully priced in the probability of a 25 basis point
rate hike by early-2019, whereas in early-2018, FRA pricing
indicated additional easing during 2018.
In conditions of heightened global risk aversion, South African
assets are always prone to underperform. The rand in particular
is used as a proxy trade for emerging markets more generally,
and therefore tends to sell off more than peer currencies
during moments of market stress. However, South Africa’s
macroeconomic fundamentals are also a source of some
vulnerability, with relatively high reliance on foreign sources of
funding to cover current account and fiscal deficits (although
this funding tends to be rand-denominated – see Box 2,
p 18). This frames rand depreciation as a response to domestic
weakness, and not simply a market overreaction.

The EMBI+ spread for South Africa reflects the difference in yields
between liquid US-dollar dominated South African sovereign debt and US
equivalents.
Basis points

2012 2013

2017 2018
EMBI+ South Africa
Source: JPMorgan

Per cent
2 Jan 2018
10 Apr 2018
3 Sep 2018
18 Sep 2018
Forward rate agreements


Maturities
Source: Bloomberg
21X24
18X21
15X18
12X15
9X12
8X11
7X10
6X9
5X8
4X7
3x6
2x5
1x4

Per cent
Basis points
Years

Yield curve developments in 2018

Change: 10 Apr – 18 Sep 2018 (right-hand scale)

10 Apr 2018

18 Sep 2018

Source: Bloomberg
Monetary Policy Review October 2018

Box 2 South Africa’s external position: resisting
‘original sin’
its 2002 default. Argentina’s NIIP will probably look different when 2018 data
become available, given extensive government dollar borrowing and rapid
peso depreciation in 2018.
2 The border between FDI and equities can be hard to delineate. For statistical
purposes, equity investment worth more than 10% of a company is
classified as FDI.
3 Since 2016, liabilities have declined by about R100 billion, while assets have
increased by roughly R900 billion.
The paradox of South Africa’s external position is that the stock
of foreign assets is worth more than the stock of liabilities, despite
sustained borrowing from the world (as expressed in persistent current
account deficits). Although the Net International Investment Position
(NIIP) has been negative over most of the past two decades, it crossed
into positive territory in 2015 and has remained there since.
It is unusual for an emerging market to have a positive NIIP, and the few
countries that share this characteristic tend to have either excessive
savings (like China) or limited access to foreign capital markets (like
Russia and Argentina).1 South Africa fits neither of these descriptions:
it is a low saving economy which imports large quantities of capital.
This box explains why the NIIP has turned positive and considers some
implications of this shift.
Decomposed by investment type, the swing to a positive NIIP has
been driven by outward-bound foreign direct investment (FDI),
with a supporting contribution from portfolio equities.2 It has
been partially offset by large purchases of government bonds by
foreign investors. The category of ‘Other’ investment, which includes
instruments such as bank loans, has become slightly more negative
(i.e. a larger net liability), but it is small relative to the other categories.
The large increase in outgoing FDI by South African companies has
both positive and negative aspects.3 It is positive in that it reflects the
competitiveness of South African firms in overseas markets, as well
as a prudent diversification of domestic investment portfolios into
other regions. However, it also connotes some pessimism about local
business conditions.
The increase in foreign investment reflects n ot o nly a l arger fl ow of
outbound investment by South African residents, but also valuation
and price effects. South Africa’s foreign investments have generally
performed well. Meanwhile, the exchange rate has been unusually
depreciated for much of the past four years, magnifying the value of
foreign currency assets relative to rand assets. This matters because
South Africa’s overseas assets are mostly denominated in foreign
currency, while its liabilities are mainly denominated in rands. In this
sense, South Africa has avoided ‘original sin’ – the long-standing
emerging market vulnerability of being unable to borrow long term in
local currency.
Unfortunately, the improvement in the NIIP has not led to South Africa
drawing a higher income from its foreign assets. The flow through the
income account of the balance of payments has remained negative and
roughly stable since 2015, at around -2.7% of GDP. This is because
yields on South African assets (held by foreigners) are lower than
those for its liabilities (held domestically). One reason for this is South
Africa’s higher inflation rate, which requires a correspondingly higher
nominal interest rate on rand-denominated assets. Foreign assets
also do not generate income flows inasmuch as profits are retained
for investment or capital gains have not been realised and repatriated.
1 Argentina restored access in 2016, after settling with hold-out creditors from
Percentage of GDP
Colombia
Net international investment position, 2017
* 2016
Sources: Haver and SARB


Peru
Brazil
Poland
Turkey
Mexico
Indonesia
Chile
India*
Hungary
Thailand
Malaysia
Argentina
South Africa
Russia
China*
Percentage of GDP
Structure of South Africa’s external position
between 2000 and 2016
Source: SARB


Net FDI
liabilities
Net portfolio
debt assets
Net portfolio
equity assets
Net other
investment
assets
Percentage of GDP
2000 2002 2004 2006 2008 2010 2012 2014 2016
South Africa’s net international investment position
Source: SARB


Monetary Policy Review October 2018
The real economy: and slow
it goes
South African growth remains subdued, with an underlying
trend of roughly 1% amid significant quarterly volatility. Recent
growth disappointments have made the output gap more
negative, and demand remains weak, with only a slight uptick
in private sector credit extension. Macroeconomic imbalances
are nonetheless quite large, relative to peer countries, both in
terms of current account and fiscal deficits. The causal link
between big deficits and low growth goes both ways. Tax
revenue has repeatedly fallen below expectations, in part
because the economy is underperforming. This has led to
higher levels of borrowing, with foreigners funding much of
the new debt. In turn, a heavier debt burden has necessitated
higher taxes and driven up long-term interest rates, crowding
out the private sector. Absent reforms, South African growth
is likely to stay muted over the medium term, reaching about
2% in 2020.
Why have the recent data
been so weak?
South Africa unexpectedly dipped into a technical recession in
the second quarter of 2018 (using the rule-of-thumb definition
of two consecutive quarters of negative growth, measured
quarter on quarter). This is the first recession since 2009, given
that the recession recorded in 2017 has since been revised out
of the data by Stats SA. On a year-on-year basis GDP growth
slowed from 1.4% in the first quarter of 2018 to 0.5% in the
second quarter, the lowest growth rate in two years.
In broad terms, this poor performance reflects a mix of policy
uncertainty, weak demand and some large sector-specific
shocks. In particular, agricultural production declined in both
the first and second quarters (-33.6% quarter to quarter in
the first quarter and -29.2% quarter to quarter in the second
quarter), due to a combination of adverse weather conditions
in some regions (especially the Western Cape) as well as base
effects from 2017’s bumper crop. Excluding agriculture, growth
was fractionally positive in the second quarter. Nonetheless,
agriculture is only a small portion of total output (around 2%), and
other sectors also performed poorly. Mining and construction
were both negative in the first quarter, while transport was
negative in the second quarter and manufacturing as well as
trade contracted in both quarters.
Viewed from the demand side of the economy, there was
weakness across the different components of domestic
spending. In particular, household consumption expenditure
slowed to 1% quarter to quarter in the first quarter and fell by
1.3% in the second quarter, after rising by an average of 2.2%
in 2017. This was despite a very strong increase in consumer
confidence, which rose to a new multi-decade high – a shift
not matched by a greater willingness to consume, given both
Percentage change over four quarters

Real GDP growth
Sources: Stats SA and SARB
-2
-1

-2
-1

Percentage change from quarter to quarter

Real GDP growth
Sources: Stats SA and SARB
Seasonally adjusted and annualised rates
-3
-2
-1

GDP
GDP excluding agriculture
Indices (both scales)

Business and consumer confidence
Source: BER

-30
-20
-10

Business confidence
Consumer confidence
(right-hand scale)
Monetary Policy Review October 2018

subdued employment growth and still quite elevated debt
levels. In year-on-year terms, however, household consumption
grew at about the same rates achieved in 2017, up 2.7% in the
first quarter and 1.4% in the second – compared with 2.2% for
2017. The disjuncture between the year-on-year and quarteron-quarter numbers testifies to the strength of household
consumption growth in the last two quarters of 2017 – rates
which could not be sustained into 2018.
Gross capital formation contracted throughout the first half of
the year, extending a protracted period of weakness for this
category. In fact, the level of fixed investment in real terms
during the second quarter of 2018 was only 0.8% higher than
for the same quarter in 2013 – half a decade earlier. Although
there was some improvement in business confidence in early
2018, this was not nearly as marked as it was for consumers,
and by the third quarter of the year it had mostly dissipated. The
Bureau for Economic Research’s (BER) manufacturing sector
survey offers some insight into this trend, suggesting that
perceptions of the political climate bolstered sentiment in the
early part of the year but detracted from confidence in the third
quarter. Meanwhile, capital outlays from public corporations
and general government have been falling since 2016 due to
the completion of various large infrastructure projects as well
as fiscal consolidation efforts.7
Expenditure components of real GDP
Annual percentage change
Actual
SARB forecast


Note: March 2018 forecasts are in brackets.
Sources: Stats SA and SARB

See National Treasury (2018, February) ‘Appendix D: Public Sector
Infrastructure Update, available at:
documents/national%20budget/2018/review/Annexure%20D.pdf.
Percentage change over four quarters

Real household income and credit growth
Source: SARB


Real credit
Real disposable income
Percentage change


Total QLFS employment

Employment growth

Average (2011–2018)
*
* Only first two quarters available
Sources: Stats SA and SARB

Ratios (both scales)

Household debt and debt service costs to
disposable income
Source: SARB

Debt service cost
(right-hand scale)
Household debt

Monetary Policy Review October 2018
Growth in government consumption expenditure moderated
slightly, to 0.7% (quarter on quarter, annualised) in the
second quarter of 2018, from 1.4% in the previous quarter.
Nevertheless, the increase in government outlays for the first
half of 2018 was slightly stronger than the average for 2017
(+0.6% annualised).
Net exports provided a boost to the second quarter growth
numbers, contributing 2.8 percentage points to quarter-onquarter growth, from -3.3 percentage points in the first quarter
of the year. Parsing the recent trade data shows improvements
in exports of agricultural and manufactured products, with
mining exports relatively flat. Manufactured import volumes
are still extremely subdued, in the context of weak investment,
which is flattering the contribution of net exports to growth
but undermining investment and therefore potential growth.
(Manufactured imports include capital goods used for
investment projects.)
Potential growth and the output gap
South Africa’s estimated potential growth rate has slumped
in the post-crisis period, from around 4% before the global
financial crisis to about 1% currently. The weak global recovery
from the crisis has played some role in this decline. However,
potential has continued to weaken even as global growth has
rebounded, which puts the spotlight on domestic factors.
At first glance, it is difficult to reconcile a low level of potential
growth with South Africa’s large number of unemployed
workers. However, constraining factors such as skills
mismatches, insider-outsider dynamics, spatial dislocations
and low labour productivity have kept many people on the
sidelines of economic activity. Potential has been further
constrained by a stagnant stock of capital in the economy
(measured as a ratio of GDP). Although some of this is
endogenous in weak demand, the collapse in investment
dates clearly to the ‘Nenegate’ shock of late-2015, pointing to
the responsibility of political uncertainty in constraining capital
formation. Investment has also been affected by high costs,
and intermittent shortages, affecting inputs like electricity.
Potential growth could recover given appropriate reforms, such
as those outlined in the National Development Plan, or more
recently, in the 2018 Budget Review.8 However, progress in
implementing these reforms has been gradual and some of the
specific reform details for the next few years remain unclear.
Accordingly, the potential growth estimates for 2019 and 2020
do not assume significant changes and potential growth rises
only slightly, from 1% in 2018 to 1.4% in 2020. (Note that these
projections were finalised before the announcement of a new

National Treasury (2018, February), Budget Review, especially p 6, available
at:
review/FullBR.pdf.
Percentage change over four quarters

Private consumption expenditure
Sources: Stats SA and SARB


Durable goods

Semi-durable goods

Non-durable goods

Services

Personal consumption expenditure
Indices: 2013 = 100
2012 2013
2010 2011
2014 2015

Real gross fixed capital formation
Source: SARB

Total

Private business enterprises

Public sector
Percentage of GDP (both scales)

Fixed capital stock
Sources: Stats SA and SARB

Total fixed capital stock
Manufacturing (right-hand scale)
All private business enterprises
Monetary Policy Review October 2018

stimulus package in September. Some of the measures in that
package are likely to raise potential over time, but this effect
will feed into the potential growth estimate gradually, given the
estimation techniques employed.)
Since actual growth has been disappointing, even when
compared with unusually low levels of potential, the output
gap is also still negative. This implies that the economy can
grow faster than potential for a limited period of time, without
hitting a capacity constraint. The forecast anticipates this will
permit growth slightly above trend for 2019 and 2020, closing
the output gap towards the end of 2020.
On a disaggregated basis, household consumption remains
the main contributor to growth over the forecast, as befits its
large share of overall demand (slightly over 60%). The rebound
in 2019 GDP growth, however, is led by a rise in net export
growth, given a negative base in 2018 as well as support
from an undervalued real exchange rate and robust global
demand. Meanwhile, growth for household and government
consumption expenditure remains close to 2018 rates.
The outlook for 2020 sees the exchange rate undervaluation
dissipating and domestic demand growth accelerating. Net
exports turn negative again, but investment is somewhat higher
as investment rates normalise. Household consumption also
improves in the context of moderating inflation and persistent
real wage gains.
The twin deficits
South Africa has run large twin deficits – on the current and
fiscal accounts – for 10 consecutive years. These deficits
reflect a mismatch between savings and investment, with
the excess investment demand funded externally. Although
current account deficits can also be driven by private sector
borrowing, as in the late 2000s, the deficits of recent years
have been driven largely by dissaving within the public sector.
As funding from abroad has become less abundant, from
2013 onwards, the private sector has borne the burden of
adjustment, increasing its net rate of saving.
Weighted percentage of respondents
BER manufacturing sector survey

Output below
capacity
Sources: BER and Haver
Insufficient demand
constraint
Political climate
constraint

2018 (ytd)

2018 (ytd)

2018 (ytd)

Percentage change over four quarters

Domestic growth
Sources: Stats SA and SARB
-3
-2
-1

-3
-2
-1

Forecast

GDP growth

Potential growth

Output gap (percentage of
potential GDP)


Labour

Total (right-hand scale)
Percentage points
Percentage change
-2
-1

Potential growth and productivity

Capital

Total factor productivity

-2
-1

Sources: Stats SA and SARB
Forecast

Monetary Policy Review October 2018
The current account
South Africa’s current account deficit narrowed between
2013 and 2017 – from 5.8% of GDP to 2.4% – largely as a
consequence of an improved trade balance. The switch from a
negative to a positive trade balance was caused by a substantial
terms of trade uplift, driven mainly by a fall in oil prices, as well
as import compression in the context of a slowing economy
and weaker exchange rate. While price effects dominated
underlying volume changes, export volume changes (+2.2%)
did, on average, exceed import growth (+1.5%) over the fiveyear period.
After narrowing to 2.4% of GDP in 2017, which is a six-year
low, the current account deficit has widened again in 2018.
This deterioration largely reflects renewed trade weakness, as
the positive price and volume effects of the recent past have
started to unwind. South Africa’s terms of trade are likely to
weaken further through the rest of 2018 and into 2019, despite
the brief recovery of the second quarter of 2018 – mainly due to
weaker export commodity prices. The trade balance (inclusive
of services) is therefore expected to decline from 1.4% of GDP
in 2017 to 0.2% in 2018 and -0.1% in 2019.
The persistence of the current account deficit, despite trade
surpluses, is due to a persistent services, income and current
transfers (SIT) deficit ranging between 3–4% of GDP. The
income portion of SIT captures returns paid/received on
investments abroad. This item reflects large and rising interest
payments by the public sector to foreign holders of domestic
debt, as well as significant dividend payments to foreign
shareholders of domestically domiciled firms. The fact that
South Africa has run a large current account deficit (incurring
foreign liabilities) for many years means that servicing these
liabilities has become a structural feature of the current account.
Meanwhile, the transfers item reflects ongoing payments to the
Southern African Customs Union (SACU). Trade in services,
despite being relatively important to the economy, tends to
be balanced. The trends in the SIT account are expected to
remain broadly intact going forward, with deficits of 4% and
3.7% of GDP forecast for 2018 and 2019 respectively.

Net exports

Gross capital formation

Government consumption


Household consumption

GDP growth (right-hand scale)

Percentage points
Percentage change
-2
-1

Contributions to GDP growth
-2
-1

-2
-1

Forecast
Sources: Stats SA and SARB
Percentage of GDP
Current account and net lending/borrowing
Source: SARB


2000 2002 2004 2006 2008 2010 2012 2014 2016

General government

Households and firms

Current account balance


Index: 2010 = 100

Terms of trade
Forecast
Source: SARB

Monetary Policy Review October 2018

The combination of a relatively stable trend in the SIT accounts
alongside a deterioration in the trade balance implies a
widening of the current account deficit, from the -2.4% of
GDP outcome of 2017 to -3.8% in 2018 and 2019. However,
the current account deficit is not likely to approach the levels
recorded a few years ago, when it exceeded 6% of GDP in
some quarters.
Fiscal policy
Following the 2008/09 recession, fiscal policy became more
expansionary, with expenditure increasing strongly and tax
revenue growth moderating. However, this move into deficit
territory has turned out to be a structural shift, not simply good
countercyclical policy. As a result, the government has run a
persistent budget deficit, averaging 4.5% of GDP between the
fiscal years 2010–2017, and government’s gross debt-to-GDP
ratio has more than doubled, from 26% in 2008/09 to 53.3%
in 2017/18.
A large structural budget deficit provides support to domestic
demand and would be expected to help close a negative output
gap. In theory, the right kind of spending can also ‘crowd in’ the
private sector, for instance through investment in infrastructure
or human capital. However, high and persistent growth in real
government spending can also become a drag on growth,
crowding out the private sector. In the South African case,
rapid debt growth has prompted a sequence of credit rating
downgrades over the past three years, which have pushed
up borrowing costs for the sovereign and the private sector
alike. This has diverted public spending into debt service costs
and sharply curtailed the fiscus’s capacity to stimulate the
economy during downturns. It has also required higher taxes,
via a 1% increase in the VAT rate, a larger fuel levy, an additional
top income bracket and insufficient adjustment for bracket
creep,9 among other measures. Given this mix of stimulatory
and contractionary elements, fiscal policy is perhaps best
described as having one foot on the brake and the other on
the accelerator.
The 2018 National Budget Speech targeted a budget deficit of
3.6% of GDP for 2018/19. If achieved, this forecast outcome
would be an improvement on the 4.6% of GDP deficit in
2017/18. The consolidation is then forecast to slow after the
current fiscal year, with a largely unchanged budget deficit
over the next two fiscal years. Accordingly, National Treasury’s
projections indicate gross public debt will continue to rise until
2022/23, and stabilise at 56.3% of GDP.10

Income tax brackets are specified in nominal rands. If these brackets are
not fully adjusted for inflation each year, then taxpayers will automatically
move into higher tax brackets over time, even if their real (inflation-adjusted)
incomes are unchanged. Rough estimates suggest this has raised
the average effective tax rate by around 2 percentage points over the past
five years.
10 This data are based on the 2018 National Budget Speech as the
2018 Medium Term Budget Policy Statement data were not available at
the time of publishing.
Forecast
Percentage of GDP


Current account balance

Trade and services

Income and current transfers

Current account balance

Source: SARB
Percentage of GDP

Goverment revenue and expenditure
Sources: Haver, National Treasury and SARB

Expenditure
Revenue
Non-interest expenditure
Percentage of GDP

General government debt
Sources: National Treasury and SARB

Net loan debt
Gross loan debt
Forecast

Monetary Policy Review October 2018
There are significant risks to this fiscal outlook which could
force a longer time horizon for debt stabilisation. These risks
include more bailouts for state-owned enterprises, additional
credit rating downgrades, and further downside surprises to
GDP growth. Furthermore, the larger than expected public
sector wage agreement announced earlier this year will push
expenditure above Treasury’s forecasts, unless spending cuts
are undertaken in other areas.
Conclusion
Notwithstanding the recent growth disappointments, growth is
likely to improve in the second half of the year, and accelerate to
about 2% by 2020. Nevertheless, this will be a cyclical rebound
rather than a meaningful increase in the productive capacity of
the economy. The risks are also tilted to the downside. As a
precondition for higher growth, fiscal sustainability will have to
be protected. Recent initiatives to improve governance in the
public sector are also critical. Reaching even higher growth
rates will require deeper structural reforms, as well as a marked
reduction in the extent of policy uncertainty facing participants
in the South African economy.
Monetary Policy Review October 2018

Price developments: inflation
back above the midpoint
Inflation has been relatively muted since the middle of last year,
dipping into the lower half of the 3–6% target range during
the first five months of 2018. This episode of relatively low
inflation has been mostly due to favourable shocks, particularly
slowing food prices and exchange rate appreciation. More
recently, however, renewed rand depreciation has begun to
affect import prices, and fuel prices are also accelerating. As a
result, the SARB’s medium-term inflation forecasts have been
marked up steadily over the past six months. The forecasts now
indicate headline inflation at 5.4% in 2020, with core at 5.5%.
Although inflation remains within the target range throughout
the forecast period, it peaks at 5.9% – very close to the upper
bound of the target range. These inflation forecasts are also
contingent on a higher repo rate over the next two years.
Why are the near-term inflation
projections lower?
Since the start of this decade, South African inflation has
averaged 5.3%. It has been below this level since the middle
of 2017, however, averaging 4.6% over this period, with a low
of 3.8% in March 2018. Although the medium-term inflation
forecasts have been marked up over the past six months,
recent inflation outcomes have actually been lower than
expected. These downside surprises to inflation have been felt
across all major components of the headline basket, except for
fuel, with the largest errors for food inflation, followed by core
goods and then services.
There are a number of explanations for this outcome. The first,
and perhaps most important, is the difficulty of forecasting
turning points for food prices. It has been clear for some
time that food prices would decelerate from their 2016
drought-induced peaks, but the exact point at which food
disinflation would cease proved hard to pin down in advance.
(This longstanding problem is explored in detail in Box 3,
p 28.) It now appears the trough was in the second quarter of
2018, with food inflation running at 3.6%. Food inflation has
also stayed quite low in the third quarter, remaining under 4%
– confounding earlier projections that the trough would be 4%
in the first quarter, and that food inflation would be over 6% in
the third quarter.
A second important reason for the low inflation surprises is
that VAT effects have been smaller than anticipated. On closer
inspection this also appears to have been food-related, with
meat disinflation masking much of the VAT shock. (A detailed
disaggregation of the inflation response to the VAT change is
provided in Box 4, p 29.)
Percentage change over four quarters

Targeted inflation* forecast
* CPI for all urban areas
Sources: Stats SA and SARB

3–6% inflation target range

Percentage change over four quarters
2018Q3 inflation forecast*
* September 2018 forecast includes actual data for the first month
of the quarter.
Sources: Stats SA and SARB

Headline
Core
Core goods
Services
Food

Mar 2018

Jul 2018

Sep 2018


Net balance
2010 2011

Direction of price changes by retail firms
Sources: BER and SARB
-20
-10

+ more firms raising prices
- more firms dropping prices

2014 2015

Monetary Policy Review October 2018
Core goods have also moved less than expected. This may
be due to some belated pass-through from the 2016–2018
exchange rate recovery, potentially corroborating the ‘not lower
but slower’ exchange rate pass-through hypothesis, which has
been a staple of policy discussions in the emerging market
central bank community. Another – potentially complementary
– hypothesis is that firms have been reluctant to raise prices
in conditions of weak demand. The output gap for 2018 now
appears to be 0.6 percentage points wider than estimated six
months ago, and there is evidence of retailers cutting back on
price increases to maintain sales volumes.
Services inflation has broadly been tracking inflation
expectations, as usual. However, there have been some
downside surprises in recent data, mainly from housing (via
both rental pricing and owners’ equivalent rent). On close
inspection, this reflects two overlaping explanations. Housing
costs in most parts of South Africa have been slowing for
several years. The big exception has been the Western Cape,
where prices diverged from the rest of the country around
2014 and kept climbing rapidly into 2017. (The province has a
weight of 14.2% in the OER index.) Western Cape prices have
now also slowed, for reasons that appear to include a large
Net balance

Retailers reporting changing sales volumes
Sources: BER and SARB


+ higher sales volumes
- lower sales volumes
Actual
Four quarter
moving average
Consumer food price inflation (September 2018 forecasts)
Percentage change over 12 months, March 2018 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2009–17

2018Q1
2018Q2
2018Q3
2018Q4
2019Q1
2019Q2
Food and non-alcoholic

Bread and cereals....


Sources: Stats SA and SARB
Indices: Jan 2008 = 100

House prices by province
Sources: FNB and SARB

Gauteng

Western Cape

Other

Average

Monetary Policy Review October 2018

increase in the housing stock11 and some drought effects.
As the distorting influence of the Western Cape dissipates,
price moderations elsewhere have become more visible, with
inflation for owners’ equivalent rent slowing from an average
of 4.8% over the past five years to 3.7% in the most recent
data. Of course, service price dynamics are not driven solely
by housing – other sectors like education and hotels have also
come in below longer-term averages – but housing has been
the largest contributor to disinflation, given its large weight in
the CPI basket (about 17%, nearly as much as the food and
non-alcoholic beverages category).
11 See J Muller, ‘Why Cape Town property sales are drying up’ Financial
Mail, 2 February 2018, available at:
features/2018-02-02-cape-town-property-sales-dry-up/ and J de Villiers,
‘For the first time in years, Cape Town rental properties are standing
empty and getting cheaper’ Business Insider South Africa, 21 June 2018,
available at:
staying-open-and-getting-cheaper-for-the-first-time-in-years-2018-6.
Percentage change over four quarters

Owners’ equivalent rent (all urban areas)
Source: Stats SA

Box 3 Unpacking food inflation
1 Food inflation refers to food and non-alcoholic beverages inflation. This
category has a weight of 17.24% in the CPI.
2 Specifically, the ‘Evolution of food and non alcoholic beverages inflation
forecasts’ chart shows recursive out-of-sample one-year-ahead forecasts of
CPI food inflation (year on year) from a small multivariate model.
Food price inflation has slowed this year.1 Some of the South African
Reserve Bank’s (SARB) forecasts have understated the full extent of
this disinflation, causing near-term inflation to be overestimated. This
box unpacks these errors and discusses some of the reasons for the
food price surprises.
Food inflation had always been expected to ease this year. South
Africa experienced one of its worst-ever droughts in 2016, which saw
food inflation peak at almost 12% (some components accelerated
by as much as 25%). Given better conditions, food prices had to
slow from this high base. Meat prices in particular still had scope to
decelerate into 2018, having lagged other food prices. (This is because
the drought directly slowed meat price inflation, as farmers brought
more animals to market rather than lose them to water shortages. As
conditions improved, farmers then withheld stocks to rebuild herds, so
meat inflation peaked in 2017, the year after the drought.)
Food price inflation has fallen from 4.5% in January to 3.5% in August.
Meat, which is about a third of the food basket and 5.46% of headline,
slowed from 13.4% to 5.3%. By contrast, at the January MPC meeting
food inflation was projected at 5.2% for the year; this has since been
revised down to 3.9% (as of September).
Generally, forecasting a volatile series like food inflation is difficult. This
is in part due to the difficulty of forecasting the dynamics of supply side
factors that affect food prices such as drought, pests, disease and other
natural disasters. An even greater challenge, however, is anticipating
the timing and magnitude of turning points. Indeed, forecast errors for
one of the SARB’s food price models (pictured in the accompanying
chart) show these errors are largest around turning points.2
Percentage change over four quarters

Owners’ equivalent rent
Sources: Stats SA and SARB

Western Cape
Gauteng
Other provinces
Percentage change over 12 months

Model-generated food and non-alcoholic beverages
inflation forecasts

Sources: Stats SA and SARB

Monetary Policy Review October 2018

Box 4 Understanding value-added tax effects
1 These series are constructed using fine-grained data sourced directly from
Statistics South Africa (Stats SA), whose contribution to this research we
gratefully acknowledge. Stats SA began publishing this data on its website
on 20 August 2018.
International experience shows that value-added tax (VAT) changes
have a distinctive effect on inflation rates. There is typically a clear
increase starting in the month of the VAT adjustment, followed by a
decrease 12 months later when the base effect comes into play. This
pattern was also visible in the South African Reserve Bank’s (SARB)
March 2018 inflation forecasts, which were the first to include the
VAT increase announced in the February Budget Speech. However,
subsequent forecasts have taken a flatter shape, given apparently
weak VAT pass-through to inflation. This box takes a closer look at
the data and finds much of the VAT effect has actually been passed
through to consumers. Pass-through has appeared to be low mainly
because of masking effects from slowing meat price inflation. In this
sense, the food explanation for downside inflation surprises detailed in
Box 3 (see p 28) also applies to VAT.
The VAT increase was implemented in April. In that month, inflation
accelerated to 4.5%, from 3.8% in March, and it has risen further
in subsequent months, averaging around 5% in the third quarter of
the year. Most of this increase, however, came from energy prices,
especially petrol and diesel, which are not subject to VAT. (These goods
attract other taxes instead.) Disaggregating the consumer price index
(CPI) into VAT and non-VAT items shows the pattern clearly: there is a
small uptick in the VAT series after March, but a large increase in the
non-VAT series.1
Part of the surprise in food inflation has been due to the exchange
rate and world food prices (in US dollar terms). The currency followed
an appreciating trend for most of 2016 and into the first half of 2017,
but this trend reversed late in 2017. The January 2018 forecast used
a relatively depreciated exchange rate projection, but the actual
exchange rate kept appreciating over the next two months. Together
with lower-than-expected global food inflation, imported food prices
were therefore much more favourable than expected. (Food PPI has
averaged -0.5% in 2018 to date; the change in the FAO food price
index, denominated in dollars, has averaged -1.7% so far this year.)
Tax effects were also smaller than anticipated. In the 2018 Budget
Review, the Minister of Finance announced a 1-percentage point
increase in the value added tax (VAT) rate as well as a new sugar
tax. Both these adjustments were incorporated into the March 2018
MPC forecast and were expected to push up food price inflation from
prevailing levels. However, prices kept decelerating, while tax passthrough appears to have been lower than initially expected.
Food prices bottomed out in the second quarter of the year and are
now beginning to accelerate (second quarter food inflation was 3.6%;
and is projected at 3.8% and 4.4% for the third and fourth quarters).
This is in part due to higher import prices, given a weaker exchange
rate. Meat prices will also likely pick up again as base effects diminish.
Food prices are therefore expected to peak at 5.9% in the second
quarter of next year, before moderating again as the VAT effect falls
out of the base.
Percentage change over four quarters

Evolution of food and non-alcoholic beverages
inflation forecasts
Sources: Stats SA and SARB


Actual

Nov 2017

Jan 2018

Mar 2018

May 2018

Jul 2018

Sep 2018
Sugar
tax
VAT and
sugar tax

t24
t12
t0
t-12
t24
t12
t0
Advanced economies
Emerging economies
t–12
Percentage change (both scales)
VAT hikes and inflation outcomes
Sources: Haver and SARB

Simple average of 20
emerging economies
(right-hand scale)
Simple average of 24
advanced economies
Monetary Policy Review October 2018

Excluding fuel from the non-VAT series flattens the line out almost
entirely. Superficially, the VAT increase was a minor part of the inflation
acceleration over the past six months.
However, fuel is not the only outlier in the data. Meat inflation has
decelerated sharply in recent months, as the last effects of the 2016
drought finally dissipate. Correcting the VAT series for this outlier makes
the effects of the VAT increase become much clearer. Inflation for this
index was 3.3% in April. Given its recent trend, 2.6 percentage points
of this increase can be attributed to ‘normal’ inflation. If the difference
between these numbers (0.7 percentage points) is treated as the VAT
pass-through, then pass-through has been close to 80% so far. (100%
pass-through would have been 0.9 percentage points.) This makes the
VAT contribution to headline CPI 0.36 percentage points.2
Pass-through of about 80% is lower than the initial projections of 100%,
but higher than subsequent forecasts which assumed VAT passthrough was minimal. Based on four months of data, it is not yet clear
whether the rest of the VAT effect is still coming or if firms will absorb
some of the increase. It is also not yet clear if there will be substantial
indirect effects from the VAT increase, commensurate with the original
forecasts which anticipated an extra 0.1 percentage points on headline
inflation in 2019 as firms and workers adjust to higher costs. However,
the fact that we can observe a jump in the base in April 2018 implies an
offsetting decline in inflation in the second quarter of 2019.
2 Correcting for sugar tax effects slightly reduces the impact of VAT, but only
by about 0.04–0.05 percentage points.
Percentage change over 12 months
Headline, VAT and non-VAT inflation
Sources: Stats SA and SARB

Non-VAT
Headline
VAT
Dec
Jan
Feb Mar
Apr
May
Jun
Jul
Aug Sep

Percentage change over 12 months
Underlying VAT and non-VAT inflation

Non-VAT (excluding fuel)
VAT (excluding meat)
Sources: Stats SA and SARB
Dec
Jan
Feb Mar
Apr
May
Jun
Jul
Aug Sep

Percentage points
Changes in non-VAT items’ inflation contributions*
* Reflects the change in the inflation rate contribution for the respective
component for the April–July average versus the January–March average.

Fuel
Super maize
Tomatoes
Potatoes
Levies
Rice
Full cream milk (fresh)
Cooking oil
Fish (tinned)
Taxi fares
Special maize
Apples
Peppers
Sweet potatoes (fresh)
Pumpkin
Education
Cucumber
Powdered milk
Long distance bus fare
Low fat milk (fresh)
Paraffin
Low fat milk (long life)
Domestic workers
Lettuce
Bananas
Peanuts
Whiteners
Bus
Railway
Full cream milk (long life)
Beans
Creches and nurseries
Cabbage
Maas
Brown bread
Seasonal fruit
Root crops
Eggs
Actual rentals housing
Owners’ equiv rent
Insurance (health)
Sources: Stats SA and SARB

Monetary Policy Review October 2018
Higher inflation from mid-2018 onwards
There are several factors driving inflation higher over the
forecast period. Some of these were included in earlier
forecasts. In particular, electricity prices have long been
expected to rebound from unusually low levels in 2016/17.
Food prices should also normalise as the last base effects
from the 2016 drought dissipate. The latest forecasts, however,
have been pushed higher by two new large shocks, affecting
the exchange rate and fuel prices.
As of the third quarter, the exchange rate appears to be
significantly undervalued. It is 15.5% more depreciated
than projected six months ago, and the rand overvaluation
diagnosed then seems distant now. The forecasts do not
assume the rand will stay this undervalued over the medium
term. Instead, the rand is expected to track back towards its
equilibrium value as fundamentals re-assert themselves –
meaning risk premiums normalise and market overshooting
corrects. As a result, the currency is forecast to appreciate
from R15.00 to the dollar in September to an average of
R14.50 per dollar in the fourth quarter of 2018, and just over
R14 in mid-2019.12
12 These projections are based on real effective exchange rates.
The dollar values are implied; they are provided here because
dollar rates tend to be more familiar than index points.
Percentage points
Changes in VAT items’ inflation contributions*
* Reflects the change in the inflation rate contribution for the respective
component for the April–July average versus the January–March average.
Sources: Stats SA and SARB

Electricity
Communication (services)
Non-alcoholic beverages
Restaurants
Foods (other)
Household contents and services
Alcoholic beverages and tobacco
Vehicles
Water
Recreation
Insurance (dwelling)
Air transport
Insurance (transport)
Financial services
Culture
Car rental
Insurance (other)
Spares
Clothing
Cereal
Vehicle operation
Cake flour
Tuna
Fish
Yoghurt
White bread
Cheese
Other processed vegetables
Flavoured milk
Hot cereals
Mageu
Maintenance of dwelling (goods)
Health (services)
Rusks
Communication (goods)
Ready mix flour
Condensed milk
Bread flour
Fish fingers
Bread rolls
Fresh cream
Corn chips
Savoury biscuits
Potato chips (frozen)
Potato crisps
Maintenance of dwelling (services)
Margarine
Frozen vegetables
Custard
Sweet biscuits
Pasta
Cakes
Health (goods)
Miscellaneous
Sweets
Funeral services
Meat
Percentage points

Real effective exchange rate gap forecast*
* Starting points will not be exactly the same over time given the
model's filtering process
Source: SARB


Actual

Mar 2018

May 2018

Jul 2018

Sep 2018
Values >0 imply undervaluation
Monetary Policy Review October 2018

However, the weaker overall level of the exchange rate adds
a significant inflationary impetus to the forecast. Relative to
the March MPC forecasts, for example, core goods inflation is
now expected to be on average 1.3 percentage points higher
in 2019, at 4.8%, and 0.8 percentage points higher in 2020,
at 5.0%. The exchange rate also affects food prices, and has
some smaller spillovers into services via inflation expectations,
raising the inflation projections for those categories too.
The second new inflation shock has been rising fuel prices.
Petrol prices, to take the largest component of fuel, have
risen by 332 cents per litre since March 2018, from R13.76 to
R17.08 a litre (for Gauteng 95 unleaded). The Brent crude oil
price increased by almost US$14 per barrel over this period,
a 21% increase – and the rand equivalent has increased even
more, up 51%, due to currency depreciation. This increase in
rand-denominated oil prices accounts for nearly 80% of the
increase since March; specifically, it has added 265 cents a
litre to the basic fuel price. A further 67 cents per litre has come
from higher taxes and margins, which is mostly for the fuel levy
and the road accident fund.
Over the forecast period, the oil price assumption moderates
slightly, to an average of US$70 per barrel in both 2019 and
2020, from US$74 for the third quarter of 2018.13 This is
consistent with market pricing and close to other analysts’
forecasts. Coupled with the projected recovery in the exchange
rate, this means fuel inflation has a benign impact on the longer
end of the forecast. Instead, the pressure is concentrated in
the near-term, chiefly in the second half of 2018.
13 The actual number, confirmed only after the forecast was finalised, was
US$75.60 for the third quarter. The fourth quarter assumption for the
September MPC forecast was US$72.80, which is below prevailing prices.
Percentage points

Fuel price contribution to headline inflation
Sources: Stats SA and SARB

Forecast
Rand per litre

Fuel price
Sources: Department of Energy and SARB


Actual

Mar 2018

Sep 2018
Forecast

Monetary Policy Review October 2018
Targeted inflation (September 2018 forecasts)
Percentage change over 12 months. March 2018 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2009–17

2018Q1
2018Q2
2018Q3
2018Q4
2019Q1
2019Q2

CPI excluding food, non-alcoholic beverages, fuel and electricity
**
Combines actual rentals and owners’ equivalent rent
Sources: Stats SA and SARB
Box 5 Are petrol prices really at an all-time high?
1 Wages and salaries also tend to keep up with inflation, for which reason
both the Quarterly Employment Statistics and Quarterly Labour Force Survey
also indicate that nominal remuneration has never been higher.
2 Constant October 2018 prices. Where actual values were not available,
forecasts from SARB models were used.
In nominal terms, the petrol price – at R17.08 per litre – has never been
higher. However, South Africa has a 3–6% inflation target, which means
the prices of most goods and services should be trending steadily
upwards over time. As a result, the prices of more than half the items in
the consumer price index (CPI) basket are currently at an all-time high,
and more than three-quarters have reached a peak during this year.1
For this reason, the observation that petrol is at an all-time high is less
remarkable than it first appears.
How high are petrol prices, compared to the prices of other goods and
services? In real terms, the current petrol price is still 7% below the
record set in July 2008 (R18.32 per litre in 2018 rands), as well as the
post-crisis peak of April 2014 (R18.05 per litre).2 It is nonetheless about
30% above its longer run average (in real terms), of R13.12 per litre for
the period 2000 to date.
To understand what has driven the petrol price to these elevated levels,
we disaggregate the pump price into two components, the basic fuel
price (BFP; that is, the rand cost of importing a litre of oil) as well as
margins and taxes.
Rand per litre

Unleaded 95 octane petrol
Sources: Department of Energy and SARB

Nominal
Real
Monetary Policy Review October 2018

The real BFP is currently 24% above its long-run average, but well
below earlier peaks (by more than 30%). The BFP has two drivers: the
world oil price and the rand exchange rate. Real oil prices are actually
close to their US$76 long-run average at the moment, compared with
US$154 in July 2008. By contrast, the real exchange rate of the rand
is around 16% weaker than its average.3 The real BFP is therefore
unusually high because of the depreciated exchange rate more than
the underlying dollar price of oil. (Of course, that dollar price has risen
substantially this year, which helps explain high petrol inflation – but this
box is focused on the level of petrol prices.)
Margins and taxes are 37% above their long-run average, at R8.57
per litre. The average is relatively meaningless for this category,
however, as real margins and taxes have climbed steadily higher since
2000, exceeding headline inflation by an annual rate of 3.1 percentage
points per year.4 For this reason, margins and taxes are the petrol
price component now closest to an all-time high. (In fact, the peak
was in April this year, when the new rates announced in the Budget
Speech took effect. The real value of this component has since been
slightly eroded by inflation, which is why it is slightly lower now.) This
also explains why petrol prices in neighbouring countries, including
those whose currencies are pegged to the rand, are lower than in
South Africa.
In sum, petrol prices are not at record highs in real terms, but they
are unusually elevated. This is mostly due to a weak exchange rate
and historically high rates and margins. By contrast, while world oil
prices have increased rapidly in recent months, they are still close to
long-term real averages.
3 The real rand exchange rate is nonetheless some distance from its historical
trough, which was in December 2001, at R20.81 to the dollar, in inflationadjusted terms.
4 Compound growth over the period January 2000 to October 2018.
Rand per litre
Fuel price components (real terms)
Sources: Department of Energy and SARB

Basic fuel price
Taxes and margins

Petrol price and its components
In constant October 2018 prices
Unleaded
95 petrol
Taxes and
margins
Basic fuel
price
Brent
(US$)
Rand/
US$
Average

Lowest value

Highest value

Current

* Current (October 2018) value of the basic fuel price is based on September
Brent oil price in rand.
Sources: Bloomberg, Department of Energy and SARB

Monetary Policy Review October 2018
A striking characteristic of the recent inflation data is that
headline CPI excluding administered prices is still low, at 3.7%
in August, even as headline itself is closer to 5%. Part of this
gap is explained by fuel, which is classified as an administered
price even if its dynamics are largely determined by international
energy and exchange rate markets. Administered prices
have also been affected by unusually high inflation for rates
and taxes, driven to a large extent by property valuation reassessments in Johannesburg.14 The other big contributor
to administered price inflation, however, is electricity prices.
Inflation in this category has actually been unusually low
over the past few quarters, with an increase of just 2.2%
for the 2017/18 period – compared with an average of 11%
for the previous five years. However, electricity inflation has
rebounded lately, with the National Energy Regulator of South
Africa (NERSA) permitting a 5.2% tariff increase for 2018/19,
and actual electricity CPI inflation printing at 7.6% in July. (The
number is above the NERSA guideline due to additional markups by some municipalities.15)
The forecast assumption is that electricity inflation will be 8%
for 2019 and 2020. This rests on two judgements. First, NERSA
is unlikely to grant a basic tariff increase of more than 6% for
the new multi-year price determination (MYPD4) programme,
given its concerns over a ‘utility death spiral’, in which higher
rates reduce demand, leaving an ever-smaller customer base
paying higher costs, provoking further reductions in demand.16
Second, this increase is likely to be supplemented by claw
backs from the recently approved Regulatory Clearing Account
(RCA) balance.
The outlook for 2020 (and beyond)
Headline inflation is expected to rise until the middle of 2019,
with a peak of 5.9%, and then decelerate to 5.4% by the end of
2020. During this period, oil prices are expected to moderate
marginally and the exchange rate is projected to recover from
its current overshoot. There are also some favourable base
effects in play, as the VAT and sugar price shocks fade. Aside
from these relatively transient factors, the longer-run inflation
forecast is based mainly on wages and inflation expectations.
These factors permit inflation to stabilise within the target range
in the medium term, albeit in the upper portion of that range.
Wage effects in the QPM now come through a unit labour cost
(ULC) measure (as discussed in Box 6, p 37). This is more
helpful than an average wage measure, as used previously,
since it adjusts for productivity gains. The forecast indicates
real ULC growth slowing as productivity ticks up into 2020.
Nonetheless, real ULC growth remains positive, at 1.4% in
2019 and 1.2% in 2020, which implies continued upward
14 For this reason, the ‘water and other services’ component of the CPI
recorded inflation of 11% in July, from 7.1% in June. In Gauteng, inflation
for this component increased from 6% to 13.3% (year on year).
15 Cape Town’s increase was 8.1% and Nelson Mandela Bay’s was 8.3%.
16 As reported in T Creamer, (5 March 2018) ‘Eskom still studying
NERSA report warning of utility ‘death spiral’’, available at:
engineeringnews.co.za/article/eskom-still-studying-nersa-reportwarning-of-utility-death-spiral-2018-03-05.
Percentage change over 12 months

South African inflation
Source: Stats SA

Headline excluding administered prices
Headline inflation
Percentage change over four quarters
2019Q1
2019Q2
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
2019Q1
2019Q2
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
Unit labour cost projections
Source: SARB
Real ULC gap
Contributions to inflation
>4.5%

Direct ULC contributions
Other contributions
Terawatt hours
2005/6
07/08
15/16
Eskom approved sales forecasts and actual sales
Source: Eskom, NERSA and SARB
* The most recent actual sales number is a near-term projection

Single year

MYPD1
Single year

MYPD2
MYPD3
Actual sales*

Monetary Policy Review October 2018

pressure on inflation across the forecast period. Some of this
pressure could be absorbed without affecting prices, either
through firms reducing profit margins, in the context of a
negative output gap or via job losses. However, it is unlikely
that consistent wage increases above productivity gains would
have no inflationary impact, and the forecast is therefore higher
because of this wage pressure.
The other important driver of the longer-term forecast is
inflation expectations. In recent quarters, the BER survey
has shown expectations moderating to levels narrowly over
5%, after a protracted period of being closer to 6%. These
measures have deteriorated in the latest survey, however, with
average expectations for two years ahead currently at 5.6%,
and expectations over five years edging up to 5.5% (from a
trough of 5.3% in the first quarter).
Break-even rates, which reflect the spread between plain and
inflation-protected government bonds, have also deteriorated
lately. The 10-year measure has recently shifted back over 6%,
while the five-year measure appears to have stopped just short
of that level. Break-evens are volatile, and their fluctuations
should not be overinterpreted. The latest readings, however,
are consistent with other evidence that inflation expectations
are broadly in line with the SARB’s target range, but closer to
the upper bound of that range than the 4.5% midpoint.
The model treats inflation expectations as a blend of the
inflation target (specified as 4.5%) and surveyed expectations
(using the BER’s two-year ahead measure) – as discussed in
Box 6 (see p 37). This puts longer-term inflation expectations
at 5.4% currently, moderating only gradually to 4.5% several
years beyond the end of the published forecast period. As
actual expectations converge on the 4.5% target, the forecasts
will begin showing inflation reaching that target and stabilising
there – but this is not plausible while expectations are stuck at
higher levels.
Conclusion
Despite better-than-projected near-term outcomes, the
forecast for inflation has deteriorated. Both the headline and
core inflation rates are projected to remain within the 3–6%
target range over the medium term, but they will be consistently
above the 4.5% midpoint of that range. In part, higher inflation
reflects temporary shocks, especially higher oil prices and
exchange rate overshooting. However, inflation is expected to
remain above the midpoint in the longer term given that inflation
expectations remain in the upper half of the target range.
Per cent

Break-even inflation rates
Source: Bloomberg

10-year break-even
5-year break-even

Per cent

Inflation expectations*
* Total, combining expectations of labour, business and analysts
Source: BER

Two years ahead
Current year

Percentage change over four quarters

Core inflation and its components
Sources: Stats SA and SARB

3–6% inflation target range
Forecast
Core inflation
Core goods
Services

Monetary Policy Review October 2018
Box 6 Updates to the Quarterly Projection Model

For a detailed discussion on the changes to the QPM, see ‘Update to the Quarterly Projection Model’, South African Reserve Bank Occasional
Bulletin of Economic Notes No. 1802, September 2018.

It states that the expected change in the exchange rate is equal to the difference between local and foreign interest rates.
This box covers four updates to the Quarterly Projection Model (QPM).
The first two changes improve the model’s accuracy, through a better
treatment of inflation expectations and the adoption of a more reliable
wage measure (discussed separately in Box 7, p 38). The other two
reduce complexity, by simplifying the uncovered interest parity (UIP)
specification and removing the model’s old relative price structure (such
that all prices now come to 4.5% inflation at equilibrium).1 In this refined
version of the model, inflation is somewhat less persistent, which is
mainly due to the abandonment of the relative price structure and the
exchange rate changes. This is a desirable feature because the previous
version entailed implausibly persistent shock effects, sometimes lasting
almost eight years.
Inflation expectations
Gap models like the QPM normally assume inflation expectations
converge on the inflation target. Expectations are therefore forwardlooking, focused on what the central bank is targeting, rather than
backward-looking, based on past inflation. This poses problems,
however, where observed expectations are not well aligned with the
model target, and where they appear to have a substantial backwardlooking component. In South Africa, inflation expectations have
moderated in recent quarters, in line with lower inflation, but they appear
to be stuck above 5%, higher than the QPM target of 4.5%. Given
this context, the QPM will henceforth treat expectations as an equallyweighted blend of model-consistent and survey components, with the
latter drawn from the Bureau for Economic Research (BER). This means
that the QPM can account for both where we are – a perceived target
above 4.5% and backward-looking inflation expectations – and where
we want to go – forward-looking price-setters and inflation at 4.5%.
The relative price structure
The published model assigned different inflation steady-states (or
targets) to different components of the consumer price index (CPI) (the
so-called ‘relative price structure’). For example, electricity had a target
of 8%, while food and petrol both had targets of 5.5%. These numbers
were based on historical averages. The advantage of this system was
that inflation could come to 4.5% at equilibrium without electricity
inflation being 4.5%. However, this created problems of its own. For
overall CPI to have a target of 4.5%, core inflation had to have a target
of 4%, well below its historical average of 5.3%. This actually took the
model further from historical inflation patterns, because core is 75% of
the inflation basket – whereas food, petrol and electricity are just 25%.
It also implied that as headline inflation came down to 4.5%, inflation for
food, petrol and electricity would actually accelerate, relative to the rest
of the basket. The relative price targets have therefore been removed in
favour of a single 4.5% target for all components.
The exchange rate
The exchange rate projection in the model basically follows a UIP
specification,2 modified to account for South Africa’s risk premium.
Earlier versions of the model added several supplementary conditions.
One of these – an adjustment for recent inflation differentials – has not
improved the forecasts, and has therefore been removed. The model
continues to factor in a longer-term purchasing power parity condition,
which aligns exchange rate movements with price levels between
countries. It also makes some provision for short-term movements in
exchange rate markets.
These model updates were implemented in the period between the May
and July MPC meetings. They had some marginal effects on the July
and September forecasts. However, those forecasts also incorporated
more depreciated exchange rate assumptions, lower starting points
for inflation and more negative output gap estimates, relative to the
May forecast. These factors had much more significant effects on the
evolution of the growth, inflation and repo rate projections than the
QPM updates did.
Monetary Policy Review October 2018

Percentage points*
t-4
t
t+4
t+8
t+12
t+16
Repurchase rate


Published model

Updated model
t+20
t+24
Percentage points*
t-4
t
t+4
t+8
t+12
t+16
Real effective exchange rate


Published model

Updated model
t+20
t+24
Per cent
2001 2003 2005 2007 2009 2011 2013

Two-year ahead inflation expectations

BER

SARB

Average expectations

Percentage points*
t-4
t
t+4
t+8
t+12
t+16
Headline inflation


Published model

Updated model
t+20
t+24
Box 7 Which wage measures produce the best
inflation forecasts?
Economic theory suggests there should be a robust connection
between wages and inflation, given that labour is a major component
of production costs. For this reason, monetary policymakers
throughout the world pay close attention to wage data. However,
South Africa has various measures of wages which, unfortunately,
sometimes give different messages. For instance, the unit labour
cost (ULC) measure which uses remuneration from the Quarterly
Employment Survey (QES) has diverged from the equivalent measure
based on economy-wide remuneration. Such inconsistencies
pose interpretive challenges, and also raise questions about which
measure should be singled out for use in the South African Reserve
Bank’s (SARB) forecasts. This box describes recent research which
tries to resolve these puzzles.

Percentage change* over four quarters

Wage trends
Sources: Stats SA and SARB
QES ULC
* Four quarter moving average
National Accounts ULC
Dotted lines indicate unsmoothed year-on-year changes
* Response to a 1 percentage point core inflation shock
Sources: BER and SARB

Monetary Policy Review October 2018

Comparing forecasts with different wage measures
There are at least five different labour cost measures available:
i.
ULC derived from National Accounts (NA);
ii.
ULC from the QES;
iii.
average of ULC NA and ULC QES;
iv.
average wages using QES compensation and employment
(average QES); and
v.
average wages per worker using QES employment, but with
compensation from the NA (the measure originally used in the
Quarterly Projection Model (QPM)).
A technique for choosing between these measures is to test which
one has been the most reliable predictor of past inflation. Specifically,
the results reported here use a Bayesian Vector Autoregressive
model to project core inflation, by successively including each wage
measure as well as real GDP, past core inflation, the repo rate, and the
nominal effective exchange rate. Scores are expressed as root meansquared forecast errors (RMSFE) for one- to eight-quarter-ahead
forecasts, over 32 consecutive quarters, starting in the first quarter
of 2010. The results therefore reflect the scale of the forecast errors
at each quarter over the two-year forecast horizon. For instance, the
ULC NA value of 1 at four-quarters-ahead means that forecast tends
to be off by 1 percentage point for one-year ahead (i.e. inflation is
forecast at 5%, but comes out at either 4% or 6%).
The results show that QES data forecast inflation better than NA
data and ULCs tend to perform better than average wages (total
compensation over total employment). The results are not improved
by averaging the QES and NA measures. That said, aside from the
NA average wages, all these measures perform similarly.
For the QPM, this motivates moving away from NA average wages
to a ULC measure. The specific measure used will henceforth be the
NA ULC, given that the QPM’s sister Core Model already uses the
NA ULC data. The economy-wide data also has a better theoretical
pedigree than the QES measure (which omits agricultural and informal
sector wages, as well as other forms of remuneration like bonuses).
A further advantage of ULCs is that they allow for productivity gains
– whereas an average wage measure cannot distinguish between
more expensive labour (which is inflationary) and more productive
labour (which is not).
What about the public/private sector wage divergence?
Recent data have shown public sector wages growing faster than
private sector wages. Some analysts have interpreted this as evidence
that wage pressures on inflation are actually weaker than they appear
in the headline numbers, on the grounds that private sector wages
affect inflation more than public sector wages. Although this might
be true at present, our method suggests public sector wages are
generally better inflation predictors than the private sector kind.
Root mean squared forecast error

Forecasting performance of the five measures of
labour costs
Forecast horizon
Source: SARB


ULC NA

ULC QES

ULC Mean

Average wages NA

Average wages QES

Root mean squared forecast error

Forecasting performance of public and private
labour cost measures
Forecast horizon
Source: SARB


ULC NA Public

ULC NA Private

ULC QES Public

ULC QES Private

ULC Mean Public

ULC Mean Private

Monetary Policy Review October 2018

Conclusion: monetary policy
and the macroeconomics
of stagnation
Over the past six months, global conditions have become
significantly more difficult for emerging markets. Much of this
reflects contagion from two idiosyncratic cases – Turkey and
Argentina. In these countries, inflation levels are in double
digits, and central banks lack the independence necessary to
credibly promise low inflation in future. These characteristics,
however, are not shared by most other large emerging markets.
The implication is that spillovers from Turkey and Argentina
will not be persistent, and markets will start pricing emerging
market assets more in line with fundamentals over time.
Emerging market fundamentals, however, also present some
problems. Given these vulnerabilities, the recent sell-off is not
just noise but also a signal. Advanced economies are gradually
moving towards ‘normal’ interest rates, after a protracted
recovery from the global financial crisis. The US 10-year Treasury
yield has doubled over the past two years, from around 1.5%
to 3%, while the yield for 2-year bonds has more than tripled
(from 0.8% to 2.7%). This reduces the attractiveness of riskier
assets. For emerging markets which have been reliant on capital
inflows, this is a profound shift, not mere market volatility.
South Africa is less reliant on foreign capital inflows than
it was a few years ago, when the current account deficit
approached 6% of GDP and the fiscal deficit was over 4% of
GDP. Nonetheless, it continues to have among the largest twin
deficits of the big emerging markets. The fiscal deficit is still
above 3% of GDP and the current account deficit is in similar
territory (it was 3.3% of GDP in the second quarter). These
imbalances make South Africa relatively more vulnerable to
changing global financial conditions.
A further problem is that much of the adjustment from the
unsustainable imbalances of 2013 was borne by the private
sector, which helps explain why growth has been so subdued
in the subsequent period. As an economic principle, if a country
is to narrow a current account deficit, then saving has to rise or
investment has to fall. Although the fiscal deficit is now slightly
smaller than it used to be, this consolidation was achieved
through higher taxes. Government spending has continued to
rise, in real terms, throughout the post-crisis period. To pay
these higher taxes, and cope with the reduced availability
of foreign savings, firms and households have been obliged
to save more and invest less. This is sometimes interpreted
as an investment strike by business, but it is perhaps better
understood as ‘crowding out’.
In these circumstances, it is difficult to see how the economy
can return to its longer-term growth trend, of around 3%.
The SARB’s potential growth estimate is accordingly low –
under 1.5% – and the growth outlook is similarly subdued,
Percentage change over 12 months
Argentina
Turkey
Philippines
South Africa
Mexico
Romania
Brazil
India
Hungary
Indonesia
Colombia
Russia
Chile
Czech
Poland
China
Thailand
Korea
Peru
Malaysia

Emerging market inflation rates (latest data point)
Source: Haver
China
Colombia
Indonesia
Hungary
Malaysia
Peru
South Korea
Thailand
Poland
India
Brazil
Romania
Mexico
South Africa
Philippines
Turkey
Argentina
Czech Republic
Chile
Russia

Monetary Policy Review October 2018
at barely 1% for this year and only 2% by 2020. Growth
could be higher, but this will require reforms which redirect
scarce savings into more productive investments. In fact, the
prospects for upside growth surprises are quite good, if only
because the current growth forecasts are so subdued, relative
to history. Still, the technical recession in the first half of this
year is a reminder that the economy will not simply return to
its old growth path without some deeper macroeconomic
recalibrations.
Over the past year or so, lower inflation has created some
space for monetary policy. This permitted an interest rate
cut at the March 2018 MPC meeting, and has allowed rates
to remain unchanged since, a stance the MPC considers
expansionary. Over the forecast period, the nominal interest
rate in the model rises somewhat, as the output gap narrows
and inflation rises. The model nonetheless indicates inflation
will stay within the 3–6% target range, while real rates remain
below neutral through 2019 and into 2020.
-15
-10
-5

Percentage of GDP
Emerging market fiscal and current account
balances, 2017
Source: IMF
Thailand
Hungary
Czech Republic
South Korea
Malaysia
Russia
Poland
Philippines
Mexico
China
Chile
Indonesia
South Africa
Turkey
Colombia
Brazil
Argentina
India
Romania
Peru
Fiscal account
Current account
Total
Monetary Policy Review October 2018

Statement of the Monetary Policy Committee
24 May 2018
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria
In recent weeks, the resurgent United States (US) dollar and
higher US long-bond yields have led to sharply lower capital
flows to the emerging markets. These developments,
coupled with persistently rising international oil prices,
have contributed to the reversal of some of the recent rand
strength, tilting the balance of risks to the domestic inflation
outlook to the upside. Nevertheless, inflation is expected
to remain within the inflation target range over the entire
forecast period.
The domestic economic growth outlook has improved
moderately amid rising business and consumer confidence,
despite a disappointing first-quarter performance in a
number of key sectors.
The year-on-year inflation rate, as measured by the
consumer price index for all urban areas, reached a sevenyear low of 3.8% in March 2018 before increasing to 4.5%
in April, as the impact of the value-added tax (VAT) increase
and other levies became evident. Goods price inflation
increased from 2.6% to 3.5% while services price inflation
increased from 5.1% to 5.3%. The South African Reserve
Bank’s (SARB) measure of core inflation – which excludes
food, fuel and electricity – increased from 4.1% to 4.5%.
Year-on-year producer price inflation for final manufactured
goods declined from 4.2% in February to 3.7% in March.
The headline inflation forecast of the SARB is more or less
unchanged since the previous meeting of the Monetary
Policy Committee (MPC), despite the upward adjustments
to the international oil price assumption and the weaker
starting point for the trade-weighted exchange rate. The
impact of these adjustments on the inflation forecast was
offset in part by a lower food price forecast and a lower
starting point. This follows a succession of downside
surprises in core goods and food price outcomes. The
forecasts for 2018 and 2019 are unchanged at 4.9% and
5.2% respectively, while the forecast for 2020 is marginally
higher at 5.2% compared with 5.1% previously. The peak of
5.5% is still expected in the first quarter of 2019, before the
impact of the VAT increase largely dissipates.
The forecast for core inflation is marginally lower, at 4.5% for
2018, but has deteriorated somewhat more than headline
inflation in the coming two years, to 5.1% in both years,
from 4.9% previously. A peak of 5.2% is expected in the first
quarter of 2019.
The implied starting point for the rand in the forecast is
R12.37 against the US dollar compared with R11.97 at the
time of the previous MPC meeting. Food prices, by contrast,
are expected to increase by 4.9% in 2018 and by 5.5% in
2019, lower than in the previous forecast. There is a degree
of uncertainty regarding the likely impact of the VAT increase
and the sugar tax on food, and the extent to which these
increases will be absorbed by manufacturers and retailers.
Following persistent increases in international oil prices since
February, the assumptions for Brent crude oil in the SARB’s
Quarterly Projection Model (QPM) were revised upwards by
US$7 per barrel to US$70 for 2018 and by US$5 per barrel,
to US$67, for the next two years. Both the futures markets
and the consensus forecasts indicate some moderation of
prices over the next two years.
The inflation expectations of market analysts reflected in
the Reuters Econometer survey have moderated somewhat
since March. In the May survey, median inflation was
expected to average 4.9% in 2018, rising to 5.3% in 2020,
compared with 5.0% and 5.5% respectively in the March
survey. Expectations implicit in the break-even inflation rates
(i.e. the yield differential between conventional and inflationlinked government bonds) are more volatile and more
sensitive to exchange rate movements. These expectations
show some increase following the recent rand weakness.
While the longer-term expectations are back above 6.0%,
the five-year break-even rate remains within the target
range. The next Bureau for Economic Research (BER)
inflation expectations survey will be published in July.
The global economic backdrop has become more
challenging amid continuing trade policy tensions between
the US and China as well as other geopolitical risks.
Although the economic growth outlook in the advanced
economies generally remains positive, there are signs that
the momentum may be slowing. Global inflation remains on
a moderate upward trend, but still at low levels. However,
the rising international oil prices could derail the relatively
benign global inflation prognosis.
Since the previous meeting of the MPC, the rand has
depreciated significantly, against the US dollar in particular,
reversing much of the overvaluation seen at that time. Since
then, the rand has depreciated by 6.0% against the US
dollar, by 0.7% against the euro, and by 2.8% on a tradeweighted basis.
The main driver of this recent rand weakness has been
developments in the US financial markets, where Treasury
yields exceeded 3.0% for the first time since July 2011.
This was in response to wider fiscal deficits, rising inflation
expectations and expectations of further US monetary

Monetary Policy Review October 2018
policy tightening – a key risk highlighted in the previous
MPC statement. As a consequence, a number of emerging
markets have experienced capital outflows and currency
depreciation, with those with wider current account
deficits and other macroeconomic imbalances being most
vulnerable. Month-to-date in May, non-residents have been
net sellers of South African government bonds to the value
of R33.6 billion, contributing to the sharp increase in longterm domestic bond yields.
At this stage, the likelihood of further sustained dollar
strengthening is unclear. Apart from US domestic issues, it
is likely to be influenced by geopolitical risks, trade conflicts
and expectations of changes in monetary policy in other
advanced economies. In the near term, the rand is expected
to remain volatile, with movements dominated by the
changing assessment of these global trends. Domestically,
an expected moderate widening of the current account
deficit, a result of deteriorating terms of trade, could also
weigh on the rand.
The domestic growth outlook remains challenging,
although growth is still expected to outperform recent year
outcomes. This is despite the possibility of a contraction
in gross domestic product (GDP) in the first quarter of this
year, following negative growth in both the mining and
the manufacturing sectors. The SARB’s forecast for GDP
growth is unchanged at 1.7% for 2018, but has been revised
up from 1.5% to 1.7% for 2019. The forecast for 2020 is
unchanged at 2.0%. The forecast remains consistent with
a closing of the negative output gap by 2020, but at a
slightly faster pace than before. The continued increase in
the composite leading business cycle indicator confirms the
upward momentum in the economy.
The growth outlook is underpinned by strong recoveries
in both business and consumer confidence. The Rand
Merchant Bank (RMB)/BER Business Confidence Index,
while still below the neutral level, increased by an unusually
large 11 index points from 34 in the fourth quarter of
2017 to 45 in the first quarter of 2018. This is expected
to be supportive of higher growth in gross fixed capital
formation, particularly by the private sector. The recent
signing by government of the Independent Power Producer
programme has added to the improved outlook.
The First National Bank (FNB)/BER Consumer Confidence
Index surged from negative territory to an all-time high in
the first quarter, driven mainly by the positive reaction to
domestic political developments. However, there is a general
expectation that this move may represent an overshoot and
some correction is likely in the coming quarter. Nevertheless,
consumption expenditure by households is expected to
be the main driver of growth going forward and the likely
trend over the forecast period is stronger than previously
expected. This is despite headwinds from the VAT and
petrol price increases, as well as slow employment growth.
Consumption expenditure growth is forecast to remain
below 2.0% in both 2018 and 2019, but is expected to reach
2.5% in 2020, compared with 2.1% previously.
Apart from improved confidence, this positive prognosis
is supported by lower near-term inflation, lower interest
rates, positive wealth effects and real wage growth.
Although growth in bank credit extension to households
remains subdued and negative in real terms, a moderate
upward trend has been evident since the beginning of 2017,
alongside an improvement in household balance sheets.
Nominal wage growth trends remain more or less
unchanged and upward pressure on inflation from this
source is therefore expected to persist. Nominal average
wage growth is expected to be sticky around the 7.0% level
over the forecast period. Real wage increases are expected
to remain positive and in excess of productivity growth.
The outcome of the public-sector wage negotiations is still
unclear.
Employment trends remain a cause for concern. According
to the Quarterly Labour Force Survey of Statistics South
Africa, over the year to the first quarter of 2018, employment
increased by 165 000, mainly in the informal sector of the
economy. While unemployment declined from 27.7%
to 26.7%, this was partly due to a marked increase in
discouraged workers, underlining the lack of employment
prospects.
The MPC noted the relative stability of the inflation forecast,
despite changes in a number of the key assumptions. As
expected, the bottom of the inflation cycle has been reached
and the trajectory of headline inflation is forecast to remain
within the target range. The April inflation outcome was in
line with the SARB’s short-term forecast and reflected a
relatively moderate pass-through from the higher VAT and
sugar tax. The full impact of the VAT increase may still be felt
in the coming months.
In contrast with the previous meeting, the MPC assesses the
risks to the inflation forecast to have moved to the upside.
This change is mainly due to global developments. A key
uncertainty relates to the outlook for the dollar, which has
appreciated against most currencies. The spillover effects
on emerging markets could become more severe in the
event of further significant increases in US bond yields.
Oil prices also pose an upside risk to the inflation forecast.
Current spot prices are significantly above the levels
assumed in the QPM. Furthermore, a slight moderation in
prices followed by a flat trajectory is assumed in the coming
two years. There may be a degree of upside risk to this
assumption.
Greater clarity with regard to electricity tariffs is expected
in June when the National Energy Regulator of South Africa
(NERSA) is scheduled to respond to Eskom’s application
for an increase in the order of 30%. The SARB’s current
assumptions are for an 8.0% increase from mid-2019 and
Monetary Policy Review October 2018

a further similar increase in mid-2020. The possibility of an
increase in excess of these assumptions poses an upside
risk to the SARB’s inflation forecast.
The upside risks identified above are supply-side shocks.
As has been noted in the past, the MPC attempts to ‘look
through’ the first-round effects of such shocks and to
react to second-round effects. The evolution of inflation
expectations and wage settlements will be important
indicators in this regard.
The growth forecast has improved moderately, mainly for
2019, but remains too low to make serious inroads into the
unemployment rate. The risks to the forecast remain on
the upside, but slightly less so than at the previous MPC
meeting. The weak first-quarter growth outcome is not
expected to derail the upward trend and does not yet reflect
the renewed business and consumer optimism. Despite
the stronger expected trend in household consumption
expenditure, there is still evidence of slack in the economy
and demand pressures in the economy are not assessed to
pose a risk to the inflation outlook.
In light of the change in the balance of risks to the inflation
outlook, the MPC unanimously decided to keep the
repurchase rate unchanged at 6.5% per annum.
At these levels, the MPC still assesses the stance of
monetary policy to be accommodative and appropriate
given the forecast inflation trajectory and the current state
of the economy. However, with risks and uncertainties at
high levels, the MPC will maintain its vigilance to ensure that
inflation remains well within the inflation target range and will
adjust the policy stance should the need arise.
The implied path of policy rates generated by the SARB’s
QPM reflects one increase of 25 basis points during the
final quarter of this year and a similar increase in mid-2019.
Two further increases are indicated in 2020. The generated
path remains a broad policy guide and the extent to which
the MPC follows it will be determined by, among other
things, the MPC’s assessment of the balance of risks to
the forecast.


Per cent

Repurchase rate forecast
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

90%

60%

30%

Repo rate

Monetary Policy Review October 2018
Summary of assumptions: Monetary Policy Committee
meeting on 24 May 2018*
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 55 and 56.
Monetary Policy Review October 2018

Selected forecast results (annual)
Actual
Forecast


(-2.8%)
(-3.5%)
(-3.6%)
Notes
1.
The nominal effective exchange rate is based on the bilateral exchange rates of our 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 is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the tradeweighted CPI of the euro area, the US and Japan).
3.
The real exchange rate gap signifies the extend 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.
Summary of selected forecast results: Monetary Policy Committee meeting
on 24 May 2018
Selected forecast results (quarterly)
Year-on-year percentage change


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


2. Core inflation
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.

Monetary Policy Review October 2018
Statement of the Monetary Policy Committee
19 July 2018
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria
Since the previous meeting of the Monetary Policy
Committee (MPC), several risks to the inflation outlook have
begun to materialise. While headline inflation is comfortably
within the inflation target band, indications are that we have
passed the low point of the current cycle. Developments in
the international environment have placed upward pressure
on the inflation trajectory, while the domestic growth outlook
remains challenging.
The year-on-year inflation rate, as measured by the
consumer price index (CPI) for all urban areas, was 4.4%
in May 2018 and accelerated to 4.6% in June. Goods price
inflation increased to 4.2% (up from 3.5% in May), while
services price inflation moderated to 4.9% (down from
5.3%). The South African Reserve Bank’s (SARB) measure
of core inflation – which excludes food, fuel and electricity
– declined to 4.2% in June. Producer price inflation for final
manufactured goods increased marginally to 4.6% in May.
Despite remaining within the target band throughout the
forecast period, the SARB’s model projects an increase
in headline inflation, peaking at levels closer to the upper
end of the target range. Thus far, the impact of the valueadded tax (VAT) increase appears to have been less than
anticipated. However, the weaker rand exchange rate and
the higher oil price assumptions result in a more elevated
inflation trajectory. Headline inflation is now expected to
average 4.8% in 2018 (down from 4.9%) before increasing
to 5.6% in 2019 and decreasing again to 5.4% in 2020 (up
from 5.2% in both years). Headline CPI inflation is expected
to peak at around 5.7% in the first and second quarters
of 2019, before declining to 5.3% at the end of 2020. The
forecast for core inflation is 4.6% in 2018 (up from 4.5%),
5.5% in 2019 and 5.3% in 2020 (up from 5.1% in both years).
Inflation expectations, as reflected in the survey conducted
by the Bureau for Economic Research (BER) during the
second quarter of 2018, are largely unchanged in the near
term, averaging 5.2% in 2018, 5.4% in 2019 and 5.5% in
2020. Five-year-ahead inflation expectations are at a
historical low of 5.4%. Expectations implicit in the break-even
inflation rates (i.e. the yield differential between conventional
and inflation-linked government bonds) declined marginally
across all maturities.
While the global economic outlook has remained broadly
favourable, expectations are that world growth will begin to
slow in the third quarter of 2018. In addition, escalating trade
tensions are contributing to uncertainty around global trade.
World trade volumes contracted sharply in April 2018 – the
worst performance since May 2015. The global inflation
outlook remains benign, but is on a moderate upward path,
largely due to the rising oil prices. The prices of most other
commodities have been retreating.
Since the previous meeting of the MPC, the rand has
depreciated by 7.2% against the US dollar, by 6.2% against
the euro and by 4.9% on a trade-weighted basis. At
current levels, the SARB’s model assesses the rand to be
undervalued. It is likely that the local currency, along with
other emerging market currencies, will remain volatile. The
implied starting point for the rand is R13.40 against the US
dollar compared with R12.37 at the time of the previous
MPC meeting.
A key external risk to the rand remains the possibility of tighter
global financial conditions. However, the pace of monetary
policy normalisation in the advanced economies continues
to be gradual. At this stage, further policy tightening by
the United States Federal Reserve (US Fed) is expected to
follow a measured path in the absence of significant inflation
or growth surprises. Higher-than-expected US fiscal deficits
could result in a stronger monetary policy response.
The domestic economic growth outlook for this year is
weaker than we had expected in May. Following the broadbased contraction of 2.2% in the first quarter and early
indications of modest growth in the second quarter, the
SARB’s forecast now indicates a growth rate of 1.2% for
2018 compared with 1.7% previously. The forecast for 2019
is 1.9%, marginally higher than the previous forecast of
1.7%, while the forecast for 2020 is unchanged at 2.0%. At
these growth rates, the negative output gap is wider in the
near term but is still expected to close in 2020.
The composite leading business cycle indicator declined for
the second consecutive month in April, consistent with a
deteriorating outlook. Business confidence, as reflected in
the Rand Merchant Bank (RMB)/BER business confidence
index, decreased to 39 index points in the second quarter.
In this context, gross fixed capital formation contracted by
3.2% in the first quarter and is expected to remain weak in
2018.
Consumption expenditure by households, although slightly
weaker than last year, is expected to be positively impacted
by the improved consumer confidence and the increase in
households’ disposable income. In the near term, however,
consumption expenditure is likely to be constrained by the
VAT increase and other tax changes, weak employment
growth as well as subdued growth in credit extension to
households. Although credit extension to households
increased earlier in 2018, year-on-year growth remains low.
Monetary Policy Review October 2018

Average wage growth is expected to remain elevated at
around 7% over the forecast period. This is particularly a
concern if labour productivity growth continues to decline.
Much of the upward pressure on wage inflation arises from
the public sector wage settlement, which is at levels above
headline inflation.
Higher international oil prices will contribute to petrol
price inflation in 2018. The impact on headline inflation is
somewhat moderated by lower food price inflation. Annual
food price inflation is expected to remain within the target
range over the forecast period and is not seen as a major risk
to the inflation outlook. This is largely driven by an adequate
supply of grains over the near term, alongside moderating
meat price increases.
The MPC noted the rising inflation trajectory which, while
remaining within the target range, is moving closer to the
upper end of the range.
Key uncertainties in the global environment remain. The
continued strength of the US dollar (which has appreciated
against most currencies), any sustained elevation of oil
prices, escalating trade tensions as well as geopolitical
developments continue to pose risks to the inflation outlook.
The rand will remain sensitive to changes in global monetary
policy settings and investor sentiment towards the emerging
markets.
The MPC assesses the risks to the inflation forecast to be
on the upside. A number of key risks and uncertainties
highlighted in recent meetings persist. Electricity prices
continue to pose a further upside risk.
The growth forecast has deteriorated and the outlook
remains constrained. Demand pressures in the economy
are not assessed to pose a risk to the inflation outlook. The
MPC assesses the risks to the growth forecast to be more
or less balanced. A firm commitment to credible structural
policy initiatives and implementation is required to make a
marked impact on employment and potential output.
The MPC unanimously decided to keep the repurchase
rate unchanged at 6.5% per annum. At these levels, the
MPC still assesses the stance of monetary policy to be
accommodative and appropriate given the current state of
the economy. However, the MPC has noted the deteriorating
inflation outlook, driven mainly by supply-side factors. The
approach of the MPC continues to be one of looking through
the first-round effects and focusing on the second-round
effects. With risks and uncertainties at higher levels, the MPC
will continue to be vigilant and will not hesitate to act should
there be second-round effects that take us significantly away
from the midpoint of the inflation target range.
The implied path of policy rates generated by the Quarterly
Projection Model has changed since the previous MPC
meeting. Whereas previously four increases of 25 basis points
each by the end of 2020 were indicated, five increases of
25 basis points are now implied. As emphasised previously,
the implied path remains a broad policy guide which can
and does change in either direction between meetings in
response to new developments and changing risks. The
MPC does not mechanically respond to changes in the path
and the assessment of the balance of risks to the forecast
cannot be done by the model.

Per cent

Repurchase rate forecast
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


90%

60%

30%

Repo rate

Monetary Policy Review October 2018
Summary of assumptions: Monetary Policy Committee
meeting on 19 July 2018*
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 55 and 56.
Monetary Policy Review October 2018

Selected forecast results (annual)
Actual
Forecast


(-3.0%)
(-3.6%)
(-3.8%)
Notes
1.
The nominal effective exchange rate is based on the bilateral exchange rates of our 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 is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the tradeweighted CPI of the euro area, the US and Japan).
3.
The real exchange rate gap signifies the extend 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.
Summary of selected forecast results: Monetary Policy Committee meeting
on 19 July 2018
Selected forecast results (quarterly)
Year-on-year percentage change


1. Headline inflation
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

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.

Monetary Policy Review October 2018
Statement of the Monetary Policy Committee
20 September 2018
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria
Since the previous meeting of the Monetary Policy Committee
(MPC), risks to the inflation outlook have continued to
materialise and the inflation outlook has deteriorated in
response to both domestic and external developments. The
impact of elevated oil prices and a weaker exchange rate
on domestic fuel costs is increasingly evident. At the same
time, domestic growth has weakened further.
The year-on-year inflation rate as measured by the consumer
price index (CPI) for all urban areas was 5.1% in July and
declined to 4.9% in August. Goods price inflation was
5.0% (down from 5.3% in July), while services price inflation
was unchanged at 5.0%. The South African Reserve Bank’s
(SARB) measure of core inflation, which excludes food,
fuel and electricity, declined to 4.2% in August (down from
4.3%). Producer price inflation for final manufactured goods
increased to 6.1% in July (up from 5.9% in June).
Despite remaining within the inflation target range throughout
the forecast period, the SARB’s model projects an increase
in headline inflation, peaking at levels closer to the upper
end of the target range. Headline inflation is now expected
to remain at an average of 4.8% in 2018, before increasing
to 5.7% in 2019 (up from 5.6%) and moderating to 5.4% in
2020. Headline CPI inflation is expected to peak at around
5.9% in the second quarter of 2019. The forecast for core
inflation is 4.4% in 2018 (down from 4.6%), 5.6% in 2019 (up
from 5.5%) and 5.5% in 2020 (up from 5.3%). The impact of
the value-added tax (VAT) increase continues to be muted.
The more elevated headline inflation trajectory is explained
by the weaker rand exchange rate and higher oil prices.
Average wage growth is expected to remain elevated at
around 7% over the forecast period. Much of the upward
pressure on wage inflation arises from the public sector
wage settlements, which are at levels above headline
inflation. Wage growth is an important driver of services
price inflation.
Elevated international oil prices will contribute to fuel price
inflation. Other administered prices are expected to increase
at rates above the upper end of the inflation target range, as
water and electricity tariffs rise, alongside rates and taxes in
major metros. The impact on headline inflation continues to
be moderated by lower food price inflation.
Inflation expectations, as reflected in the survey conducted
by the Bureau for Economic Research (BER) during the
third quarter of 2018 are marginally higher, averaging
5.3% in 2018 and 5.6% in 2019 and in 2020. Five-year
inflation expectations have increased marginally to 5.5% (up
from 5.4%). Expectations implicit in the break-even inflation
rates (i.e. the yield differential between conventional and
inflation-linked government bonds) have continued to edge
upwards across all maturities.
While the global economic outlook is expected to remain
broadly favourable over the short term, medium-term risks
are tilted to the downside due to elevated policy uncertainty.
This uncertainty arises from escalating trade tensions and
tightening global financial conditions. The global inflation
outlook is on a moderate upward path, largely due to rising
oil prices and higher gross domestic product (GDP) growth
rates in some advanced economies.
Since the July MPC, the rand has depreciated by
7.3% against the US dollar, by 8.1% against the euro and
by 7.1% on a trade-weighted basis. At current levels, the
SARB’s model assesses the rand to be undervalued.
The implied starting point for the rand is R14.20 against
the US dollar, compared with R13.40 at the time of the
previous meeting.
Tighter global financial conditions and the change in
investor sentiment towards emerging markets remain key
external risks to the rand and it is likely that the rand, along
with other emerging market currencies, will remain volatile.
However, the pace of monetary policy normalisation in the
advanced economies continues to be gradual and further
policy tightening by the United States Federal Reserve (US
Fed) is expected to follow a measured path in the absence
of significant inflation or growth surprises.
The domestic economy has entered a technical recession,
following two consecutive quarters of contracting economic
activity. Quarter-on-quarter GDP contracted by 0.7% in
the second quarter and GDP data for the first quarter was
revised down from -2.2% to -2.6%. However, on a year-onyear basis, GDP growth in the first quarter was 0.8% and
0.4% in the second quarter.
The SARB now forecasts growth in 2018 to average
0.7% (down from 1.2% in July). The forecast for 2019 and
2020 is unchanged at 1.9% and 2.0% respectively. At these
growth rates, the negative output gap is wider in the near
term, but is still expected to close by the end of 2020 as
GDP growth rates exceed potential growth.
The SARB composite leading business cycle indicator
increased in June, largely reflecting an improvement in the
measures of external sector activity. However, business
confidence, as reflected in the Rand Merchant Bank (RMB)/
BER business confidence index, decreased to 38 index
points in the third quarter. Growth in gross fixed capital
formation is expected to remain weak.
Monetary Policy Review October 2018

Household consumption expenditure contracted by 1.3% in
the second quarter, declining for the first time in two years.
In the medium term, the increase in disposable income is
expected to be supportive of consumption expenditure.
However, household consumption expenditure is likely to
be constrained by recent tax changes, weak employment
growth as well as subdued growth in credit extension to
households. Although credit extension to households has
been increasing during 2018, year-on-year growth remains
low.
The MPC noted the rising inflation trajectory which, while
remaining within the target range, is moving further away
from the mid-point of the target range.
The MPC assesses the risks to the inflation outlook to
be on the upside. The Committee remains concerned
about growing risks to the inflation outlook, mainly due to
exchange rate risks related to both domestic and external
factors, elevated international oil prices and the possibility of
higher electricity tariffs. However, demand pressures in the
economy are not assessed to pose a significant risk to the
inflation outlook.
The MPC assesses the risks to the growth forecast to be
moderately on the downside. The Committee continues to
be of the view that current challenges facing the economy
are primarily structural in nature and cannot be solved by
monetary policy alone. Commitment to credible structural
policy initiatives and implementation thereof is required to
make a marked impact on the cost structure of the economy,
potential output and employment. Monetary policy is most
effective in addressing cyclical growth.
The MPC has decided to keep the repurchase rate
unchanged at 6.5% per annum. Four members preferred an
unchanged stance and three members preferred a 25 basis
points increase.
The Committee continues to assess the stance of monetary
policy to be accommodative. However, the MPC remains
concerned about the deteriorating inflation outlook, driven
mainly by multiple supply-side factors. The approach of the
Committee continues to be to look through the first-round
effects and focus on the possible second-round effects.
With risks and uncertainties at higher levels, the MPC will
continue to be vigilant and will not hesitate to act should it
become necessary.
The implied path of policy rates generated by the Quarterly
Projection Model is for five rate hikes of 25 basis points by
the end of 2020. As emphasised previously, the implied path
remains a broad policy guide which can and does change
in either direction between meetings in response to new
developments and changing risks.

Per cent

Repo rate and forecast
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


90%

60%

30%

Repo rate

Monetary Policy Review October 2018
Summary of assumptions: Monetary Policy Committee
meeting on 20 September 2018*
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 55 and 56.
Monetary Policy Review October 2018

Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate is based on the bilateral exchange rates of our 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 is the nominal effective exchange rate deflated by the consumer price differential (between South Africa and the tradeweighted CPI of the euro area, the US and Japan).
3.
The real exchange rate gap signifies the extend 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.
Summary of selected forecast results: Monetary Policy Committee meeting
on 20 September 2018*
Selected forecast results (quarterly)
Year-on-year percentage change


1. Headline inflation
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

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.

Monetary Policy Review October 2018
Foreign sector assumptions
1. Trading-partner gross domestic product (GDP) growth
is broadly determined using the Global Projection Model
(GPM). The model permits individual country forecasts
for nine major economies, including the euro area, the
United States (US), Japan and China, with the remaining
trading partners incorporated through a ‘Rest of
Countries’ bloc. Average world growth is expressed on
a South African trade-weighted basis.
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 (EIA), 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 an
aggregate 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.
Monetary Policy Review October 2018

Domestic sector assumptions
1. The electricity price is an administered price measured
at the municipal level with a weight of 3.75% 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 (MYPD) 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, WP/14/08).
4. The inflation target range midpoint is the middle of the
official inflation target range of 3–6%.
5. The neutral real interest rate 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.

Monetary Policy Review October 2018
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, 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 transfer account.
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 that is released monthly 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.
Median: This is a statistical term used to describe the
observed number that separates ordered observations in half.
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 (29.26%), the Chinese yuan (20.54%),
the US dollar (13.72%), the Japanese yen (6.03%), and the
British pound (5.82%). Index: 2010 = 100. See also ‘Real
effective exchange rate’ on the next page.
Output gap / potential growth: Potential growth is the
rate of GDP growth that could theoretically be achieved if
all the productive assets in the economy were employed
in a stable inflation environment. The output gap is the
difference between actual growth and potential growth,
which accumulates over time. If this is negative, then the
Monetary Policy Review October 2018

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.
Producer price index (PPI): This index measures changes
in the prices of goods at the factory gate. Stats SA currently
produces five different indices that measure price changes
at different stages of production. Headline PPI is the index
for final manufactured goods. PPI measures indicate
potential pressure on consumer prices.
Productivity: Productivity indicates the amount of goods
and services produced in relation to the resources utilised
in the form of labour and capital.
Purchasing power parity (PPP): PPP is based on the law
of one price, assuming that, in the long run, exchange rates
will adjust so that the purchasing power across countries
is approximately the same. It is often used to make crosscountry comparisons without the distortionary impact of
volatile spot exchange rates.
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’ on the previous page.
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.
Taper tantrum: The term ‘taper tantrum’ is widely used to
describe the strong reaction of global financial markets to
comments made by the US Federal Reserve (Fed) chairman
in May 2013 that the Fed would likely start to reduce (or
‘taper’) the pace of its asset purchases later that year.
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.

Monetary Policy Review October 2018
Abbreviations
BER
Bureau for Economic Research
BFP
basic fuel price
CPI
consumer price index
CBRT
Central Bank of the Republic of Turkey
ECB
European Central Bank
EIA
Energy Information Administration
EMBI+
JPMorgan Emerging Market Bond Index Plus
FAO
Food and Agriculture Organization
FDI
foreign direct investment
Fed
United States Federal Reserve
FNB
First National Bank
FRA
forward rate agreements
FX
foreign exchange
G3
Group of Three
G7
Group of Seven
GDP
gross domestic product
GPM
Global Projection Model
Haver
Haver Analytics
IMF
International Monetary Fund
MPC
Monetary Policy Committee
MPR
Monetary Policy Review
MYPD
multi-year price determination
NEER
nominal effective exchange rate
NERSA
National Energy Regulator of South Africa
NIIP
Net International Investment Position
NRIR
neutral real interest rate
OPEC
Organization of the Petroleum
Exporting Countries
PMI
Purchasing Managers’ Index
PPI
producer price index
PPP
purchasing power parity
QES
Quarterly Employment Statistics
QLFS
Quarterly Labour Force Survey
QPM
Quarterly Projection Model
RAF
Road Accident Fund
RCA
Regulatory Clearing Account
REER
real effective exchange rate
repo (rate) repurchase (rate)
RMB
Rand Merchant Bank
RMSFE
Root mean-squared forecast errors
SACU
Southern African Customs Union
SARB
South African Reserve Bank
SIT
services, income and current transfers
SSA
sub-Saharan Africa
Stats SA
Statistics South Africa
UIP
uncovered interest parity
ULC
unit labour cost
UN
United Nations
US
United States
VAT
value-added tax