MPC Statement January 16th, 2020


South African Reserve Bank
PRESS STATEMENT
EMBARGO DELIVERY
16 January 2020


STATEMENT OF THE MONETARY POLICY COMMITTEE

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank

Since the November meeting of the Monetary Policy Committee (MPC), global
economic indicators improved somewhat and global inflation remained low. Central
banks in advanced economies provided more monetary accommodation, helping to
ease global financing conditions, but further easing appears less likely. While
downside risks from trade tensions and geo-political developments remain, the global
slowdown appears to be bottoming out.
The domestic economic outlook remains fragile. Despite a rebound in local GDP in
the second quarter of 2019, GDP contracted in the third quarter. The fourth quarter is
expected to show some positive growth.
Recent monthly inflation has been lower than the mid-point of the inflation target range.
The year-on-year inflation rate, as measured by the headline consumer price index
MPC Statement January 16th, 2020


(CPI) was 3.6% in November (down from 3.7% in October). Goods price inflation in
November was 2.8% (down from 3.1% in October), while services price inflation
remained at 4.2%. Food and non-alcoholic beverage price inflation was stable at 3.5%
(down from 3.6%). The Bank’s measure of core inflation, which excludes food, fuel
and electricity decreased slightly to 3.9% (from 4.0% in October). Producer price
inflation for final manufactured goods decreased to 2.3% in November (from 3.0% in
October).
The medium-term inflation outlook has been revised significantly lower compared to
the November forecast. The inflation forecast generated by the SARB’s Quarterly
Projection Model (QPM) averages 4.1% in 2019 (down from 4.2%), 4.7% for 2020
(down from 5.1%) and 4.6% for 2021 (down from 4.7%). The Bank’s forecast for
headline CPI inflation for 2022 is 4.5%. Headline CPI inflation is now expected to peak
at 4.9% in the final quarter of 2020 and settle at 4.5% in the third quarter of 2021 (one
quarter earlier). The forecast for core inflation for 2019 is unchanged at 4.2%, is 4.3%
in 2020 (down from 4.5%) and 4.4% in 2021 (down from 4.6%). The Bank’s forecast
for core inflation for 2022 is 4.5%. Food price inflation continues to surprise to the
downside on a monthly basis, and is revised from 5.8% to 4.7% for 2020.
Inflation expectations have continued to moderate gradually. According to the Bureau
for Economic Research (BER) fourth quarter survey, expectations for headline inflation
are down slightly for 2019 to 4.5% (from 4.6%). Expectations for 2020 declined to 4.8%
(from 5.0%) and to 5.0% (from 5.1%) for 2021. Five-year-ahead inflation expectations
also eased to 4.9% (from 5.0%).
MPC Statement January 16th, 2020


The inflation expectations of market analysts in the December 2019 Reuters
Econometer survey are generally lower, at 4.2% (from 4.3%) for 2019, 4.6% (from
4.7%) for 2020 and 4.7% (from 4.8%) in 2021.
Market based expectations implicit in the break-even inflation rate (the yield differential
between conventional and inflation-linked bonds) have moderated somewhat since
the previous MPC. Five-year break-even rates are currently about 4.1% and ten-year
break-even rates are 5.3%.
Global GDP is expected to average 3.0% in 2019, rising to about 3.4% in 2020. In
recent months, global trade and manufacturing indicators have exhibited signs of
stabilisation, and, alongside resilient services, suggest that global growth rates will
hold up. However, a range of downside risks to growth remain. These include geopolitical developments, trade tensions, further oil price shocks, and high levels of
corporate and sovereign debt.
Inflation outcomes and inflation expectations in most advanced economies remain
below target levels. Barring significant shocks, monetary policy in major advanced
economies will remain accommodative over the medium term.
Since the November MPC, the rand has appreciated by 2.6% against the US dollar,
and by 1.8% against the euro. The implied starting point for the rand is R14.60 against
the US dollar, compared with R14.94 at the time of the previous meeting. While the
rand has benefited from improvements in global sentiment, high long-term bond yields
reflect concerns about domestic growth prospects and fiscal risks.
The GDP growth outcome for the third quarter confirmed that the economy remains
weak and vulnerable to idiosyncratic shocks and poor sectoral performances. While
MPC Statement January 16th, 2020


growth in the fourth quarter is expected to have picked up, electricity supply constraints
will likely keep economic activity muted in the near term. Public sector investment
continues to be weak and export growth remains lacklustre, despite strong terms of
trade. Government and household consumption, and private investment, continue to
grow, albeit modestly.
Business confidence remains weak. The RMB/BER Business Confidence Index
improved to 26 points (from 21), while the Absa Purchasing Managers’ Index fell to
47.1 points in December (from 47.7). The SARB’s composite leading business cycle
indicator also continued to trend lower, while the coincident indicator increased
marginally month-on-month.
The forecast of GDP growth for 2019 is revised lower to 0.4% (from 0.5%). The
forecasts for 2020 and 2021 have also decreased to 1.2% (from 1.4%) and 1.6% (from
1.7%), respectively, due to lower growth than previously expected in the third and
fourth quarters. The GDP forecast for 2022 is 1.9%.
The MPC assesses the risks to the growth forecast to be to the downside. Escalation
in global trade tensions, geo-political risks, further domestic supply constraints and/or
sustained higher oil prices could generate headwinds to growth. Public sector
financing needs have risen, increasing risk premiums and pushing borrowing costs for
the broader economy higher. Implementation of prudent macroeconomic policies and
structural reforms that lower costs and increase investment, potential growth and job
creation, remains urgent.
The overall risks to the inflation outlook are assessed to be balanced. Demand side
pressures remain subdued and house rental prices are expected to increase at only
moderate rates. Global inflation should also remain low. Food price inflation has
MPC Statement January 16th, 2020


continued to surprise to the downside, although rising imported food prices create
some caution about the future price trajectory. While the currency has strengthened
relative to the November meeting, the risk remains that domestic shocks generate
more capital flow volatility and put pressure on the exchange rate and inflation. Other
upside risks to the inflation outlook remain, including from fuel, electricity and water
prices, and from nominal wage growth.
The MPC welcomes the lower inflation outcomes and continued moderation in inflation
expectations. While the Committee would like to see inflation expectations anchored
closer to the mid-point of the inflation target range on a sustained basis, the lower
inflation forecast and improved risk profile opens some space to provide further policy
accommodation to the economy.
Against this backdrop, the MPC decided to reduce the repurchase rate by 25 basis
points. The decision was unanimous.
Monetary policy actions will continue to focus on anchoring inflation expectations near
the mid-point of the inflation target range in the interest of balanced and sustainable
growth. In this persistently uncertain environment, future policy decisions will continue
to be highly data-dependent, sensitive to the balance of risks to the outlook, and will
seek to look-through temporary price shocks.
The implied path of policy rates over the forecast period generated by the Quarterly
Projection Model indicated two repo rate cuts of 25 basis points each in the first and
fourth quarters of 2020. This remains a broad policy guide which could change in either
direction from meeting to meeting in response to new developments and changing
data and risks.
MPC Statement January 16th, 2020


Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be released on 19th March
2020.

Contact person:
Ziyanda Mtshali
012 399 7966