Monetary Policy Review
Chris Loewald
Head: Policy Development and Research
Pretoria ∙ 17 April 2019
April 2019 review: towards permanently lower inflation
2019‐04‐17

• Global growth slowdown, monetary tightening deferred
• SA growth modestly higher over medium term, but trend rate low
• Near‐term inflation slower, largely due to helpful shocks
• Interest rate path keeping longer‐term inflation close to midpoint
Global economy slowing again
2019‐04‐17

Abrupt China deceleration, stimulus response
2019‐04‐17

Defaults blunting stimulus – lenders avoiding risk
2019‐04‐17

Number of defaults
Chinese corporate defaults (onshore)
Source: Wind Info

%
China corporate 5yr bond yields
Spread
5‐year AA‐
5‐year AAA
Source: Bloomberg
Spillovers to Europe
2019‐04‐17

... exacerbated by temporary shocks
2019‐04‐17

Brexit uncertainty also a problem
2019‐04‐17

ECB postponing tightening plans
2019‐04‐17

US stimulus has faded, growth already slowing
2019‐04‐17

US inflation undershooting target (again)
2019‐04‐17

Fed pause helping loosen financial conditions
2019‐04‐17

Easier environment for EMs
2019‐04‐17

EM inflation lower, central banks generally cautious
2019‐04‐17

Sample countries comprise: Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia,
Mexico, Nigeria, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand and Turkey
Sources: Haver, Bloomberg and SARB

2H 2018
1H 2019
2H 2019
Number of countries
Hiking
On Hold
Cutting
Emerging market policy rate forecasts
Big growth and current account adjustments for some
2019‐04‐17

India & Brazil have achieved significant disinflations
2019‐04‐17

No obvious growth sacrifice for disinflation
2019‐04‐17

2010Q1–2017Q2
2017Q3–2018Q4
2010Q1–2013Q4
2014Q1–2018Q4
Brazil
India
%
GDP growth, before & after disinflations
Source: Haver
Some scope for EM acceleration, against global trend
2019‐04‐17

SA still waiting for the recovery
2019‐04‐17


Y/Y, (%)
South African growth
Actual
Mar 2018
Mar 2019
Sources: Stats SA and SARB
Growth disappointments widening output gap
2019‐04‐17

Nov 2017:
1.2%
Mar 2018:
1.7%
Actual:

Mar‐16
Nov‐16
Jul‐17
Mar‐18
Nov‐18
%
Evolution of 2018 GDP forecast
Date of meeting
Sources: Stats SA and SARB
‐2
‐1.5
‐1
‐0.5

0.5

2014 2015 2016 2017 2018 2019 2020 2021
% of potential GDP
Evolution of output gap estimates
March 2018
March 2019
Source: SARB QPM
Forecast
Primary sector, public investment negative in 2018
2019‐04‐17

‐4.4
‐12.5
‐0.8
2.1
‐0.5
1.4
‐14
‐12
‐10
‐8
‐6
‐4
‐2

Before revisions
(Jan 2019 forecast)
After revisions
(actual)
%
General government
Public corporations
Private businesses
Total
Gross fixed capital formation
Sources: Stats SA and SARB


%
Real GDP growth
Total GDP
GDP excluding primary sector
Sources: Stats SA and SARB
Mild growth pick‐up in forecast
2019‐04‐17

1.3
1.8
2.0

‐2
‐1

Percentage points
Contributions to GDP growth
Households
Government consumption
GFCF
Inventories and residual
Net exports
GDP growth (percentage change)
Sources: Stats SA and SARB
...but risks to the downside again
(see MPR Box 1)
2019‐04‐17


%
Energy availability factor
Includes RMB Morgan Stanley estimate for 2019 ytd
Sources: Eskom and RMB Morgan Stanley
‐1.0
‐0.7
‐0.5
‐0.4
‐1.3
‐1.1
‐0.9
‐0.5
‐0.4
‐1.5
‐1.2
‐0.9
‐0.6
‐0.3
0.0
HSRC (2008)
Cameron & Rossouw (2012)
RMB Morgan Stanley (2019)
NWU (2014)
National Treasury
SARB
Goldman Sachs
Old Mutual
Free Market Foundation*
10% power cut
loss
GDP lost in 2019
Percentage points
Estimated GDP growth response to power supply cuts
Sources: Various institutions and SARB
* Estimate for the first half of 2019
Growth problems mainly structural...
2019‐04‐17

50‐year average:
2.5%

1970s
1980s
1990s
2000s
2010s
%
Long‐term real GDP growth
Sources: Stats SA and SARB
1.5

%
Potential growth
Trend growth
Source: Stats SA and SARB
Potential GDP, adjusted for supply shocks
... falling potential growth key to GDP forecast errors
2019‐04‐17

‐2
‐1

%
Underestimated
Overestimated
GDP average errors
Sources: Stats SA and SARB
Low growth despite extra investment, large CAD?
2019‐04‐17

% of GDP
Gross fixed capital formation
Sources: Stats SA and SARB
Post‐democracy average
‐7
‐6
‐5
‐4
‐3
‐2
‐1

% of GDP
Current account balance
Sources: Stats SA and SARB
Post‐democracy average
Higher government debt and lower national savings
2019‐04‐17

% of GDP
General government debt
Sources: Stats SA and SARB
‐10
‐5

% of GDP
National net savings
General government
Households
Corporations
Total
Sources: Stats SA and SARB
Investment expenditure unproductive
2019‐04‐17

‐0.4
‐2
‐1

2001 2003 2005 2007 2009 2011 2013 2015 2017
y/y (%)
Factors of production
Labour force (working age population)
Capital stock
Implied total factor productivity
Source: SARB

y/y (%)
Potential growth scenarios
Actual
TFP at pre‐crisis average
TFP at 2009‐2013 average
Source: SARB
Higher risk and rising long‐term rates
2019‐04‐17

Argentina
Turkey
South Africa
Brazil
Russia
Mexico
Colombia
Indonesia
Malaysia
China
Chile
Thailand
Basis points
5y CDS spreads
(2019ytd average)
Source: Bloomberg

South Africa's long‐term borrowing costs*
*10‐year government bond yields; 9‐year yields used where 10‐year yields were unavailable.
Source: Bloomberg
CAD adjustment helped stabilise rand
2019‐04‐17

Core goods inflation mostly following exchange rate
2019‐04‐17

‐2

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
%
Contributions to core goods inflation
Vehicles
Clothing
Other core goods
Household contents
Alcohol and tobacco
Core goods
Sources: Stats SA and SARB
Oil outlook revised down in 2019
2019‐04‐17

73.0
65.0

US$/bbl
Actual
Nov 2018
Jan 2019
Mar 2019
Evolution of crude oil price forecasts
Sources: Reuters and SARB
‐10
‐5

Y/Y (%)
Fuel price inflation
Fuel price inflation
Forecast
Sources: Stats SA and SARB
Food inflation staying lower for longer
2019‐04‐17

y/y (%)
Actual
Sep 2018
Nov 2018
Jan 2019
Mar 2019
Evolution of food and non‐alcoholic beverages
inflation forecasts
Sources: Stats SA and SARB

‐1

2009‐17
average

2019f
%
Food & NAB inflation
Bread and cereals
Meat
Vegetables
Other
Food & NAB inflation
Sources: Stats SA and SARB
Substantial near‐term forecast revisions
2019‐04‐17

5.5
4.7
‐0.3
‐0.2
‐0.2
‐0.1
‐0.9
‐0.8
‐0.7
‐0.6
‐0.5
‐0.4
‐0.3
‐0.2
‐0.1
0.0

November
MPC
March MPC
Contributions
to forecast
change
Percentage points
%
Evolution of 2019 inflation forecasts
Services
Food
Energy
Core
goods
Source: SARB QPM


Y/Y (%)
Actual
Nov 2018 MPC forecast
Mar 2019 MPC forecast
Sources: Stats SA and SARB
Changes to the SARB's inflation forecasts
Weak demand part of disinflation – but not central
2019‐04‐17

2010 2011 2012 2013 2014 2015 2016 2017 2018
%
Cyclical and acyclical inflation
Procyclical components
Acyclical components
Core CPI
Sources: Stats SA & SARB


2010 2011 2012 2013 2014 2015 2016 2017 2018
%
Contributions to core CPI inflation
Procyclical components (Dec. 2016 weight 37%)
Acyclical components (Dec. 2016 weight 63%)
Sources: Stats SA and SARB
2020 inflation ↑on petrol, food, then back to 4.5%
2019‐04‐17

Y/Y, (%)
Headline and core CPI
Inflation target range
Headline CPI
Core CPI
Midpoint of inflation target
Source: SARB QPM
Wages moderating, ULC gap closing
2019‐04‐17

‐2

Y/Y (%)
Wage growth rates
Nominal wages
Real wages
Source: SARB QPM
‐4
‐3
‐2
‐1

Y/Y (%)
Real unit labour cost gap
Sources: Stats SA and SARB
(+) Inflationary
(‐) Disinflationary
SA getting used to lower inflation
2019‐04‐17

%
Inflation expectations
Current year
One year ahead
Two years ahead
Five years ahead
Source: BER
‐‐‐‐ 3–6% inflation target range

%
Source: SARB
QPM inflation expectations*
*A blend of short‐term model expectations and medium‐term BER expectations
Repo path lower in nominal terms
2019‐04‐17


%
Nov 2018 MPC
Mar 2019 MPC
Source: SARB
Repurchase rate
Policy stance expansionary
2019‐04‐17

‐1.5
‐1.0
‐0.5


Real repo rate
Accommodative
Neutral
Contractionary
Note: The real repo rate is the nominal repo deflated by a 4q moving average of year‐on‐year headline inflation
Source: SARB
Chance to lock‐in lower inflation without tight policy
2019‐04‐17

Same as median
‐1

10 11 12
Turkey
Ghana
Mexico
Russia
Kenya
Brazil
Indonesia
China
Botswana
Median
South Africa
India
Nigeria
Malaysia
Colombia
Zambia
Thailand
Peru
Chile
Poland
EM real ex ante policy rates*
* Nominal policy rates less 2020
CPI inflation forecast
%
Sources: Bloomberg, Consensus Economics, Haver and SARB


Y/Y, (%)
Median EM headline CPI
SA headline CPI
SA period averages
EM median
EM countries comprise of: BRA, CHL, CHN, COL, IND*, IDN, MYS, MEX, PER, PHL,
POL, RUS, ZAF, THA & TUR. *CPI data for IND starts in Jan 2002.
Sources: SARB, Haver and Bloomberg
Conclusions
• Weaker global economy, pick‐ups for some emerging markets
• SA potential growth low – no quick fixes
• Inflation at 4.5%; repo path about keeping it there
• Path undemanding so long as shocks are favourable
2019‐04‐17

Get in touch with us
2019‐04‐17

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