MONETARY POLICY
REVIEW
OCTOBER 2021
OCTOBER 2021
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ISSN: 1609-3194
Produced by the Publishing Section of the South African Reserve Bank
OCTOBER 2021
i
Preface
The primary mandate of the South African Reserve Bank (SARB) is to achieve and maintain price stability in the interest of
balanced and sustainable economic growth. In addition, the SARB has a complementary mandate to oversee and maintain
financial stability.
Price stability helps to protect the purchasing power and living standards of all South Africans. It provides a favourable
environment for investment and job creation, and supports international competitiveness. The goal of price stability is
quantified through an inflation target, which is set in consultation with government. The target is a range of 3–6%, which has
been in place since 2000.
The SARB has full operational independence. Monetary policy decisions are made by the SARB’s Monetary Policy Committee
(MPC), which is chaired by the Governor and includes the Deputy Governors and other senior officials of the SARB.
The inflation-targeting framework is flexible, meaning that policymakers will seek to look through temporary shocks, thereby
avoiding excessive volatility in interest rates and economic output. The MPC takes a forward-looking approach to account for
the time lags between policy adjustments and economic effects. MPC decisions are communicated at a press conference at
the end of each meeting, accompanied by a comprehensive statement.
The Monetary Policy Review (MPR) is published twice a year and is aimed at broadening the public’s understanding of
the objectives and conduct of monetary policy. The MPR covers domestic and international developments that affect the
monetary policy stance.
In normal circumstances, the MPR is presented by senior officials of the SARB in major centres across South Africa. However,
due to COVID-19, this MPR will be launched virtually.
Questions about the publication may be directed to Marlene Hugo at
OCTOBER 2021
Contents
Beyond the recovery: rebuilding policy space

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

OCTOBER 2021
Beyond the recovery:
rebuilding policy space
Executive summary and
overview of the policy stance
The Monetary Policy Committee (MPC) has left the repurchase
(repo) rate unchanged at 3.5% for over a year, since July 2020,
extending meaningful support to the economy as it recovers
from the pandemic and lockdown. Low interest rates, financial
regulatory easing, fiscal support measures and less stringent
COVID-19 restrictions have supported economic activity. The
domestic economic recovery has additionally benefitted from
stronger global growth, spurred by expansionary policy settings
and wide-spread vaccination in advanced economies. The
terms of trade reached record highs, sharply raising national
income. However, stronger growth momentum has been held
back, in large part by uncertainty and electricity shortages. In
the absence of broad improvements to the investment climate,
growth momentum will slow into 2022 even as risks to the
inflation outlook rise. While headline consumer price inflation
remains generally well-contained, the medium-term forecast
implies the need for gradual normalisation to keep inflation
around the midpoint of the target and longer-term interest
rates low.
The global economy continues to exhibit a robust recovery
from the COVID-19-induced recession of 2020, strengthened
by widespread vaccination roll-outs and accommodative
fiscal and monetary policy settings in advanced economies.
Indicators of economic activity in some major global economies
are now above their pre-COVID trend. As of September, the
SARB estimates trade-weighted global growth of 6.2% in 2021,
in part due to stronger outcomes in Europe and the United
States (US), with medium term growth forecasts of 4.4% and
3.4% in 2022 and 2023 respectively.1, 2
Although global growth remains strong overall, that of emerging
market and developing economies has decelerated (IMF WEO
Update, July 2021). This slowing in growth and increasing
divergence with advanced economies reflects differences in
available fiscal and monetary policy space early in the timeline
of the pandemic, and importantly, differences in vaccination
rates. Economies that have achieved widespread vaccination
have reopened and eased restrictions more quickly than

The €800 billion NextGenerationEU stimulus package, to be
implemented from the summer of 2021, should further support
eurozone growth into 2022.

In its July 2021 World Economic Outlook (WEO) Update, the International
Monetary Fund (IMF) projects global growth to reach 6% in 2021,
unchanged from the April 2021 WEO, and a stronger 4.9% in 2022
(4.4% previously).
Percentage change
Trading-partner GDP growth
-4
-2

Source: SARB
Sub-Saharan Africa
Rest of the world
Total
United States
Eurozone
China
India
Forecast
Index: 2010 = 100
Evolution of trading-partner GDP forecasts*

Source: SARB
Actual
Sep 2020
Jan 2021
May 2021
Sep 2021
* Dotted lines indicate forecasts

Percentage change
IMF growth projections
Source: IMF

World
output

Advanced
economies

Emerging market
and developing
economies
Apr 2021
Jul 2021

OCTOBER 2021
others, supporting progressive normalisation of economic
activity. Those with lower vaccination rates (mostly developing
economies) continue to exhibit sluggish economic activity
levels, including in relation to medium-term projections.
One consequence of the sharper global recovery is rising
global price pressures, created by strong demand for goods,
higher food and oil prices, and supply bottlenecks associated
with slow reopening of services and logistics sectors.3 Major
global central banks currently perceive these price pressures
to be transitory, suggesting that gradual policy normalisation
would proceed as expected, beginning in 2023. Despite this
relatively benign analysis, rising global inflation and greater
uncertainty about the path of interest rates has contributed
to financial market and capital flow volatility over the past
six months. This reflects in part risks of overheating as
policy accommodation remains extensive, as well as risk
aversion toward emerging markets with weaker growth and
higher inflation. Most emerging market economies face the
prospect of sustaining recoveries and rebuilding fiscal and
monetary policy space even as global conditions become
less supportive.
South Africa’s own recovery from the sharp contraction in the
second quarter of 2020 has been unusually strong, especially
by the growth standards of the post global financial crisis
(GFC) period. Domestic growth benefitted from favourable
global and domestic conditions and the momentum of the
second half of 2020 carried through to this year. Gross
domestic product (GDP) rose by 4.2% in the first quarter
of 2021 on an annual basis and by 4.7% in the second
quarter, taking GDP to within 1.1 percentage points of the
pre-pandemic output level.4 Until the growth momentum
was interrupted by the July riots, looting and disruption
of supply chains that rocked the KwaZulu-Natal (KZN),
Gauteng and Mpumalanga provinces, the economy was on
track to recoup most of the GDP losses by the end of 2021.
The latest projections suggest the economy will contract by
1.2% in the third quarter, with growth averaging 5.3% in 2021.
Medium-term growth is forecast somewhat lower at 1.7% and
1.8% in 2022 and 2023 respectively, on substantially lower
investment.
On a sectoral basis, the recovery remains uneven. Scarring
from the pandemic and associated lockdowns is visible in
some parts of the secondary and tertiary sectors, while others
have recovered or moved beyond pre-pandemic levels of
output. Agriculture remained largely unscathed and continues
to expand. The sector grew at 13.4% in 2020 and is expected
to grow by 11.8% in 2021, benefitting from favourable weather

Bottlenecks include shortages of semi-conductors, shipping
containers and vessels.

Throughout this report we use quarter-on-quarter seasonally
adjusted and annualised growth rates, unless stated otherwise.
Percentage points
Contributions to GDP growth*
-4
-2

2020Q4
2021Q1
2021Q2
2021Q3
* Quarter-to-quarter percentage change at seasonally adjusted
annualised rates.
Sources: Stats SA and SARB
Construction
Electricity
Manufacturing
Mining
Agriculture
Taxes-subsidies
Community and social services
Finance
Transport
Trade
Forecast
Percentage change over four quarters

Real GDP growth*
Sources: Stats SA and SARB


* The bands around the central
projection show confidence
intervals of 10%, 30%, 50%
and 70%.
This chart shows seasonallyadjusted data, as used in the
Quarterly Projection Model.

Index: 2019Q4 = 100
Gross value added

Agriculture

Mining


Manufacturing

Electricity

Construction

Trade

Transport

Finance

Services*
Sources: Stats SA and SARB
* Government and social services

OCTOBER 2021
and demand conditions. Mining production has recovered
to the pre-pandemic level, supported in part by sharply
higher commodity prices. The secondary sector has moved
sideways since the third quarter of 2020, weighed down in
particular by the low level of construction activity. Construction
is the least recovered of all sectors (operating at 79% of its
pre-pandemic level). Idiosyncratic factors have weighed on
growth in manufacturing, which has remained around 95%
of its pre-pandemic level since the fourth quarter of 2020.
The tertiary sector is back to its 2019 level, lifted by finance
and community and social services, despite transport and
trade remaining depressed, reflecting the lingering effects
of the COVID-19 waves and the associated lockdowns,
particularly for the tourism subsector.
Despite the exceptionally strong recovery in GDP, job creation
has been weak, reflecting the poor growth performance
of the more labour-intensive sectors such as construction,
transport and trade. Firms have intensified the use of
overtime work to meet growing demand, delaying hiring of
workers. At the same time, labour force participation has
improved, rising to 57.5% in the second quarter of 2021, as
job seekers previously discouraged from seeking jobs return
to active search. Consequently, unemployment reached a
new record high of 34.4% in the second quarter. Despite
weak employment growth and rising unemployment, average
earnings have largely recovered to their pre-pandemic levels.
Turning to the demand side, real household spending has
been resilient and has, in part, underpinned the recovery
in GDP. Consumption benefitted from a faster recovery in
worker earnings, growth in net wealth, record low borrowing
costs and increased social transfers. The extension of the
COVID-19 social relief of distress (SRD) grant should further
support household consumption.

Number (millions)
Unemployment

Sources: Stats SA and SARB
45–54 years
55–64 years
Total
15–24 years
25–34 years
35–44 years

Index: 2019 = 100
Real average earnings by industry

Mining


Manufacturing

Construction

Electricity

Trade

Transport

Finance

Source: SARB
Percentage change
Final consumption expenditure of households


2018 2019 2020 2021 2022 2023
Source: SARB
Forecast
May 2021
Jul 2021
Sep 2021

OCTOBER 2021
Despite the strong recovery in household consumption and
also production levels, gross fixed capital formation remains
weak. Over the period under review, forecasts for investment
have shifted to being less negative, but investment growth is
still projected at -0.3% in 2021, before improving to 0% in 2022
and 1.8% in 2023. Weak investment appetite also marked the
pre-pandemic economy, as electricity supply was constrained,
and with the extraordinary uncertainty associated with the
pandemic helps explain the slow recovery in investment
spending expected over the medium term. The July unrest
further dented investor confidence.
The drag on growth from weaker investment has been
partially offset by commodity exports, which have played a
central role in South Africa’s macro adjustment over the past
year. Sharply higher export commodity prices have aided the
economic recovery, improved the fiscal position and helped
turn a current account deficit into surplus. The export price
trajectory has facilitated the financing of the extraordinary fiscal
deficits of the pandemic period, in part by raising income and
in part by keeping the currency appreciated and the cost of
borrowing lower than it might have been. The current account
swung into surplus in the third quarter of 2020 and is projected
to remain in surplus for this year, at 4.6% of GDP. As economic
activity levels, imports and export prices normalise in 2022 and
beyond, a deficit is expected to re-emerge.
An important macroeconomic feature of the commodity price
surge has been its fiscal effects, with the strong terms of
trade pushing nominal GDP higher, buoying government tax
revenues, reducing fiscal deficits, and slowing the projected
rise in public debt.5 This has made it possible for government
to implement COVID-19-related social transfers, adjust the
public sector wage offer and provide relief to businesses
impacted by the July riots, while preserving the integrity of the
fiscal framework. The better-than-expected fiscal outcomes,
together with more buoyant projections for global growth, have
eased South Africa’s fiscal risk, benefitting the risk premium,
which has declined back towards its long-run equilibrium.
Nonetheless, the yield curve for rand-denominated bonds
remains steep, reflecting concerns around fiscal credibility.

The fiscal deficit and debt-to-GDP ratio have also benefitted from the
recent benchmarking and rebasing of GDP. These benefits, however,
are temporary.
-5

Percentage of GDP
Gross capital formation: private business enterprises

Net capital formation

Gross capital formation
Sources: Stats SA and SARB

Consumption of fixed capital

Index contributions (2015 = 100)
Contributions of different commodities to SA's
export-weighted commodity prices

Platinum
Palladium
Rhodium
Gold
Source: SARB
Coal
Iron ore
Other commodities
Forecast
Percentage of GDP
Balance on current account
-6
-4
-2

2018 2019 2020 2021 2022 2023
Source: SARB
* Dotted line indicates forecast

OCTOBER 2021
Despite these clear benefits, the dependence of the economy
on sharply higher commodity prices presents risks. While
commodity prices have increased across the board, the terms
of trade rise was sourced primarily from a narrow range of
commodities, particularly rhodium, palladium and iron ore (see
Box 1). A sudden and sharp correction in commodity prices
could undermine the broader economic recovery, unwind
the current account surplus and put the fiscal trajectory in
jeopardy, while the rand would depreciate, with adverse effects
for inflation. This fragility to the recovery implies that steps
to broaden the sources of the recovery and strengthen its
momentum should be prioritised. Large economic gains could
be achieved by removing barriers to increasing the supply of
network services, especially electricity, easing constraints to
small business growth, increasing the supply of skills in the
economy and further de-risking the economy by stabilising
public debt.
During the period under review, South Africa’s inflation
trajectory has remained relatively contained and supportive
of the economy’s recovery. South African food price inflation
has ticked up, more closely in line with rapid global food price
inflation, and oil prices have also turned sharply higher, pulling
headline consumer price inflation to 5.2% in May. The more
appreciated level of the rand, underpinned by a more supportive
global environment, has however lessened the impacts of
imported inflation in the domestic economy. Headline inflation
is expected to average 4.4% in 2021, compared to 3.3% in
2020, and remain close to the target midpoint over the forecast
period. Administered price inflation, particularly electricity
prices (13.8% in July), will exert upward pressure on headline
inflation into 2022.
While exogenous price pressures explain the higher headline
inflation outcomes, core inflation remains subdued, reflecting
currency strength, moderate demand, temporarily very low
medical insurance prices, alongside still relatively low housing
price inflation and subdued labour market pressures. These
factors continue to keep inflation expectations well-anchored
between 4 and 4.5%. After averaging 3.3% in 2020, core
inflation is projected at 3.0% in 2021, rising to 3.8% in 2022
and 4.3% in 2023.
Per cent
* Dotted line indicates forecast
Risk premium

Sources: JPMorgan and SARB
Percentage change over four quarters

Targeted inflation forecast*
3–6% inflation target range
Midpoint
* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%.
Sources: Stats SA and SARB

Percentage change over four quarters
* Dotted line indicates forecast
Midpoint of inflation target range
Core inflation

Sources: Stats SA and SARB

OCTOBER 2021
While headline inflation remains contained and core inflation
modest, there are several material upside risks. Global food
prices look set to remain elevated, posing a risk to domestic
inflation despite the expected bumper harvest in 2021. Similarly,
administered prices, particularly for water, electricity and petrol,
have exceeded recent estimates and present further upside
risks to the forecast. Skills shortages could cause premature
tightening of the labour market, and with increased pressures
in collective bargaining forums, push unit labour costs (ULCs)
higher. Lastly, rising global inflation and supply constraints
could drive up imported inflation, with the impacts exacerbated
potentially by rand depreciation.
Overview of the policy stance
With moderate headline consumer price outcomes, forecast
trajectories indicating well-contained inflation, and inflation
expectations moderating generally, the MPC left the repo rate
unchanged at 3.5% over the last seven meetings (since July
2020). Together with higher global growth, low borrowing costs
spurred on the recovery of the domestic economy, propping
up consumption, refinancing of existing credit, and better
activity levels in housing markets. The low repo rate helped
to reduce the prime lending rate to its lowest level in 56 years
and sharply reduced the real cost of servicing debt. For cashconstrained households, this helped boost real consumption.
Low short-term interest rates also presented an opportunity
for the public sector to reduce its borrowing costs, with the
effective interest rate on government debt driven to below 6%,
compared to borrowing costs of around 9% at longer maturities.
However, the need for funding from short-dated Treasury bills
has reduced, following unexpectedly strong revenue flows and
good uptake for non-competitive bond auctions.
With economic recoveries expected to continue at moderate
rates of inflation, global and domestic policy settings are likely
to remain accommodative even as major advanced economies
begin to taper asset purchases and real interest rates start
to normalise.
A key feature of the domestic economic recovery has been the
divergence in monetary policy transmission to households and
that to firms, even as market rates show strong co-movement
with the repo rate indicative of strong pass-through.6
The incomplete transmission of policy to investment is reflected
in weak corporate borrowing and higher saving despite record

See also Greenwood-Nimmo, Steenkamp and Van Jaarsveld (2021).
‘A bank-level analysis of interest rate pass-through in South Africa’,
SARB Working Paper, forthcoming.
-3
-2
-1

Percentage points
Forecast
Contributions to headline inflation

Electricity (3.8%)

Fuel (4.6%)

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

Food and non-alcoholic beverages (17.2%)

Core inflation (74.4%)
Per cent
Repo rate

Source: SARB

Per cent
Implied government interest rate

Sources: National Treasury and SARB

* Dotted line indicates forecast

OCTOBER 2021
low interest rates.7 At a macroeconomic level, however, the
poor investment trajectory was allayed by a massive addition
to demand embodied by the very strong terms of trade.
This has raised national income, supporting economic growth
and fiscal revenues.
Transmission of changes in market rates to economic
activity remains strong in the household sector. Total credit
to households has held up and is around the 2019 level. The
number of mortgage advances granted between January
and August 2021 is substantially higher than the average
for the period 2011–2019. The stock market has performed
exceptionally well, buoyed by the global recovery, low interest
rates and strong commodity prices. Rising asset prices have
supported the rebuilding of household net wealth, which
should further support household consumption.
Between the March and the May meetings of the MPC the
outlook for growth improved markedly. Alongside upward
revisions to global growth, high frequency data implied the
economy had weathered the second wave of the pandemic
better than initially anticipated, leading to the annual growth
estimate being revised higher to 4.2%, from 3.8% in March.
The recovery, however, remained uneven across sectors,
while weak investment saw medium-term growth revised
marginally lower.
The inflation trajectory remained modest with headline
consumer price inflation projected at 4.2% in 2021 (down
from 4.3% in March), before rising to 4.4% and 4.5%, for
2022 and 2023 respectively. Core inflation remained muted
and was projected to average 3.0% in 2021, before rising
to 4.3% in 2023, reflecting the favourable outlook for the
medium-term determinants of inflation, namely, the relatively
stronger rand, ongoing moderation in ULCs, well-anchored
inflation expectations and slow reversion of the output gap.
Headline inflation might have been lower had it not been for
the rising food and administered prices. Higher food inflation
reflected both global food shortages and rising local demand.
The sharp recovery in oil prices from their 2020 lows pushed
petrol price inflation to a projected 12.5% for 2021 (12.7%
in March).

The high commodity prices may have reduced the need for borrowing
by corporates in mining and related sectors that normally borrow for
investment. Equally, the continued depressed activity in some sectors
and broader concerns around the investment climate may partly explain
the subdued corporate borrowing.
Per cent
Repo and market rates

Source: SARB

Effective lending rate

JIBAR (3-month)

Repo rate
Real corporate sector loans and deposits

Source: SARB

Corporate sector loans

Deposits of non-financial companies
-15
-10
-5

Percentage change over 12 months
Number (thousands)
Mortgage advances granted

Source: SARB
Since COVID-19 onset

OCTOBER 2021
With growth stronger and inflation gradually rising to the target
midpoint, the Quarterly Projection Model’s (QPM) Taylor rule
advised two hikes of 25 basis points each in 2021, the first in
the second quarter and the second in the fourth quarter, with
the nominal repo rate terminating at 6.0% by the end of 2023.
The MPC, however, unanimously decided to keep the repo
rate unchanged at 3.5%, keeping monetary policy settings
exceptionally accommodative, and showing deference to
the recovery (see Box 2). Risks of higher imported inflation,
an earlier start to normalisation in the advanced economies,
persistence of supply constraints and higher food and oil
prices were seen outweighing the downward pressures to
headline inflation emanating from the medium-term drivers of
core inflation.
In the run up to the July meeting, the external environment
remained supportive of domestic growth, with trading-partner
growth again revised somewhat higher. Although G3 inflation
for 2021 was expected to remain close to the 2% target,
concerns about rising inflation in the US mounted, with markets
and analysts increasingly expecting an earlier start to policy
normalisation, and causing increased volatility in financial
markets. The US Federal Reserve (Fed) communications,
however, helped to calm the markets, shifting ‘risk-off’
sentiment toward ‘risk-on’, and aiding the flow of capital to
emerging markets.
GDP data for the first quarter of 2021 affirmed the sound
recovery, with growth registering a strong 4.6% compared to
the May forecast of 2.7%. However, the resurgence in the virus
and the resultant heightened restrictions (adjusted Level 4) that
included alcohol sales limitations tempered economic activity
in the second quarter, with the growth forecast consequently
lowered to 1.3% (1.7% in May). The growth momentum was
further curtailed by the protest actions and riots early in the third
quarter. While the exact impacts remain unclear, the protest
actions and riots added strongly to uncertainty, exacerbated
supply bottlenecks and resulted in sharply lower output across
several sectors of the economy.8 The protest actions and riots
and the stronger third wave effectively neutralised the positive
external shocks and the growth momentum from the first and
second quarters, leaving growth for the year unchanged at 4.2%.
The inflation outlook at the July meeting was broadly similar
to the May meeting, with headline consumer price inflation
generally well-contained over the forecast period. Core
inflation forecasts also broadly followed the May forecasts.

Market analysts assess the impact to shave 0.4–0.7 percentage
points off 2021 growth. Manufacturing sector output for July
fell by 8.0% month-on-month and 4.1% year-on-year.
-2

Percentage change over 12 months
Core and non-core inflation

Sources: Stats SA and SARB

Core

Non-core
Midpoint of inflation
target range

OCTOBER 2021
Of note, however, was the downward revision in both headline
and core inflation to respectively 4.2% (from 4.4%) and 3.7%
(from 4%) in 2022.
While core inflation remained muted, the first half of the year
saw a sharp rise in non-core inflation, particularly food and fuel.
Food inflation continued to rise since the April 2021 Monetary
Policy Review (MPR) and was expected to peak at 6.4% in the
second half of the year, before moderating somewhat, and to
average 6.2% in 2021 (up from 5.4% in May). The petrol inflation
forecast for the year was raised to 15.3%, up from 12.5% in
May, even as the strong rand helped to mute the high oil price
effect, but was projected to decelerate to 5.5% in 2022.
With a more subdued inflation outlook for 2022, the QPM-
implied policy path suggested normalisation to only begin in
the fourth quarter of 2021, with the repo rate terminating at
6.0% by the end of 2023, as in the May meeting. The MPC
unanimously voted to keep the repo rate unchanged at 3.5%
– the sixth time in a row. This was despite the committee
assessing the balance of risks to the inflation forecast to be to
the upside. The major concerns for the MPC were the elevated
global and domestic producer prices, supply shortages
created by disruptions to local transport networks during the
July riots, elevated food and petrol inflation, imported inflation
(aggravated by a weakening currency), higher domestic import
tariffs and escalating wage demands.
The September meeting followed the release of the second
quarter GDP data as well as the long-awaited benchmarking
and rebasing of GDP. Growth quickened to 4.7% in the second
quarter, significantly better than the 1.3% projected at the July
meeting. However, growth for the first quarter of 2021 was
revised slightly lower to 4.2% (previous release, 4.6%), while
the projected growth for the third quarter was revised lower to
-1.2%, reflecting the combined effects of the July riots and the
relatively severe third wave of the COVID-19 virus.
The benchmarking and rebasing showed that the economy
performed marginally better than was previously estimated
over the past decade, and was assessed to be 11% larger in
nominal terms. This has had immediate positive effects for the
macro balances, particularly the fiscal deficit and the debt-toGDP ratio, but no effect on long-term borrowing costs. The
SARB’s estimates of potential growth were revised slightly
higher – both historically and in the outlook – but not as high as
the increase in GDP, reflecting somewhat higher demand, the
lower level of investment in the economy and the continuing
electricity supply constraints. Consequently, the output gap
was revised narrower.


Percentage change over four quarters
Evolution of real GDP growth forecasts*

Sources: Stats SA and SARB

Actual

May 2021

Jul 2021

Sep 2021
* Dotted lines indicate forecasts
Percentage change from quarter to quarter

Potential versus actual GDP growth
Sources: Stats SA and SARB
Seasonally adjusted annualised rates
-60
-40
-20

Potential

Actual
-10
-5

Percentage change over 12 months
Food inflation

Source: Stats SA
Bread and cereals (19%)
Meat (32%)
Milk, cheese and eggs (15%)
Food and NAB (100%)

OCTOBER 2021
Growth in 2020 was revised higher to -6.4%, from the
previously reported -7.0%, and the momentum has carried
through to the current year, leading to the 2021 growth being
revised higher to 5.3% (previously, 4.2%). The protest actions
and riots, however, caused a slight widening of the output gap,
with the consequent result that the output gap is now only
expected to close at the end of 2023, same as the projection
at the July meeting.
Price pressures have remained relatively contained on balance,
with headline consumer price inflation projected to average
4.4% in 2021, before easing to 4.2% in 2022 and hovering
around the target midpoint in 2023. Inflationary pressures have
been relatively low when considering that the economy has all
but recovered to the 2019 level of activity. However, headline
inflation has begun to rise rather sharply, with outcomes
above the target midpoint since May, and projected to remain
elevated for the remainder of the year, and pressures coming
from both core and non-core items.
While core inflation remains relatively muted, both core
goods and services are projected slightly higher compared
to the July forecast, but remain below the target midpoint.
Core inflation is projected at 3.0% for 2021, up from 2.9% in
July and expected to rise to 4.3% by 2023. Services continue
to underpin low inflation, with housing inflating at rates wellbelow the target midpoint, though recent outcomes for this
category show a sharp turn. Labour market pressures remain
subdued while inflation expectations remain well-anchored.
Like the July forecast, the QPM advised rate normalisation
to begin in the fourth quarter of 2021, with a 25-basis points
hike. The repo rate is forecast to terminate at 6.4%, a slightly
steeper profile relative to the July repo rate path. The steeper
profile is in response to the relatively higher underlying
inflationary pressures over the forecast period. Again, the
MPC unanimously decided to keep rates on hold at 3.5% at
the September meeting, delaying the lift-off. This is despite
the MPC noting that inflation risks had tilted even further to
the upside.
Compared to peer emerging markets, South Africa’s inflation
has remained muted for longer, creating space for the MPC
to delay normalisation, and providing extended support to
the recovery. 9

South Africa’s divergence from peers is surprising and perhaps
reflects the better-anchored inflation expectations or a stronger rand
exchange rate that has reduced the effects of imported inflation
or the bumper harvests that have kept food inflation relatively low
despite the sharply rising global food prices, or the lingering effects
of the weak demand pressures that existed pre-COVID-19.

Per cent
Evolution of repo rate forecasts*

Source: SARB

Actual

May 2021

Jul 2021

Sep 2021

* Dotted lines indicate forecasts

Per cent
Neutral real interest rate and real repo rate

Source: SARB

Real repo Sep 2021

Jul 2021

Sep 2021

Percentage change over four quarters
Average level of wage settlements

Source: Andrew Levy Survey

OCTOBER 2021
In conclusion, the economy has continued to recover, despite
the setbacks of continuing virus waves and the unrest that
gripped KZN, Gauteng and Mpumalanga in July 2021. GDP
has largely recovered to the 2019 level, though sectors continue
to show wide variation in performance. Inflation has remained
well-contained, and this modest inflation trajectory towards the
midpoint of the target underpin the MPC’s decisions to keep
the repo rate unchanged at 3.5% over the course of the review
period, and since July 2020.
However, risks to the inflation outlook have risen and become
more broad-based, while real rates have become more negative
as expected inflation has risen. These developments imply a
need for interest rates to begin normalising. The nominal repo
rate is expected to gradually rise towards its neutral level over
the medium term.
Monetary policy can smooth business cycles, minimising
output and price fluctuations, however, the toolkit does not
include instruments to raise trend growth or lower structural
unemployment – two of the main ills bedevilling the South
African economy. The MPC has repeatedly highlighted the
importance of structural reforms, among them, providing
sufficient energy for growth, lowering the impact of administered
prices on overall inflation and further de-risking the economy by
stabilising public debt. Reducing these constraints should bring
about more dynamism in the economy, driving potential growth
higher, reducing South Africa’s high structural unemployment
and also lowering inflation. Permanently lower inflation would
enhance South Africa’s competitiveness, and would raise the
prospect of borrowing costs for households and firms being
permanently lower.


Basis points
Changes to emerging market policy rates
Mexico
South Africa
Colombia
Peru
Brazil
Russia
Czech Rep.
Indonesia
Poland
Chile
India
Malaysia
Thailand
China
Taiwan
Turkey
Sources: Haver and SARB

Changes since Apr 2021

Changes from end Jan 2020 to end Mar 2021
+775

OCTOBER 2021
Box 1 The macroeconomic implications of the terms
of trade surge

T Janse van Rensburg and E Visser. ‘Surging commodity prices
explain a lot’, South African Reserve Bank Economic Note
No. EN/2021/16, Pretoria: South African Reserve Bank,
September 2021.

D Turner. ‘Should measures of fiscal stance be adjusted for terms
of trade effects?’. OECD Economics Department Working Papers
No. 519, Paris: Organisation for Economic Co-operation and
Development, October 2006.

Note that this reflects the cumulative impact over
several years from the equilibrium terms of trade.

U Kohli. ‘Real GDP, real domestic income and terms-of-trade
changes’, Journal of International Economics 62(1), 2004,
pp 83–106.
Commodity prices increased strongly and persistently since 2020,
raising South Africa’s terms of trade, lifting the current account from
deficit to surplus, supporting the rand exchange rate and boosting
tax revenue. These developments have also underpinned South
Africa’s recent growth performance.
Few other emerging markets or commodity exporters experienced
similar increases, in part reflecting the broad range of South African
commodity production. Mining export prices have been particularly
buoyant, especially in platinum group metals (PGMs), which featured
an 838.6% increase in rhodium prices and the value of PGM exports
rising by 373.7% between the first quarter of 2019 and the second
quarter of 2021. Other commodities, including iron ore, coal and gold
have also registered strong price gains.
Together with weak imports, these strong price gains moved the
current account into surplus in the third quarter of 2020, reaching
5.1%. It has remained in surplus since, ranging from 3.2% in the
fourth quarter of 2020, 4.3% in the first quarter of 2021 and 5.6%
in the second quarter of 2021. The current account is projected to
record a 4.6% surplus for 2021, before easing back to a narrow
deficit in 2023.
The real rand exchange rate also strengthened, although the real
appreciation was less than might have been expected given
the surge in export-weighted commodity prices.1 The rand has
historically outperformed other emerging market currencies when
the South African export-weighted commodity prices outperformed
international commodity prices, but this has not occurred during this
upswing. This may reflect elevated fiscal risk and adverse shocks to
investment and potential growth.
Higher commodity prices have also cyclically boosted tax receipts
and real income. Assuming that the equilibrium terms of trade are
equal to the 2011–2019 mean, the increase in the terms of trade
since the end of 2018 may have cyclically boosted the budget
balance by a cumulative 5.1% of gross domestic product (GDP) by
the 2020/21 fiscal year.2, 3
The terms of trade surge has also boosted real GDP. With rising
export prices, a country can either import more in volume terms for
what it exports or export smaller quantities for what it imports. In
other words, an improvement in a country’s terms of trade increases
real income and welfare (Kohli, 2004).4 However, because real
GDP is measured from the production side, it does not accurately
Index: 2011Q1 = 1
Exchange rates and commodity prices
Sources: Haver and SARB

SA REER relative to EM REER (2011Q1 = 1)

SA export-weighted commodity prices

relative to global commodity prices

(2011Q1 = 1)


Terms of trade*

Mean (2011–2019)

+1.5*standard deviation

-1.5*standard deviation
Index: 2010 = 100
Equilibrium terms of trade

Source: SARB
* Including gold

Percentage of GDP
Cyclical revenue contributions
Source: SARB


Terms of trade

Output gap

Income gap
-6
-4
-2

OCTOBER 2021
capture the demand and expenditure effects of an improvement
in the terms of trade, resulting in a systematic underestimation of
real GDP growth. Using the methodology proposed by Kohli (2004),
the South African Reserve Bank’s (SARB) calculations show that
real income growth has been about 21⁄2 percentage points stronger
than conventionally measured GDP growth since the final quarter
of 2019 and 2.1 percentage points in 2020, suggesting that
growth in 2020 was -4.3% compared to the -6.4% registered by
Statistics South Africa.

Percentage points
Difference between command and conventional
GDP growth*
Sources: Stats SA and SARB
* Real income growth minus real GDP growth

-3
-2
-1

Box 2 The Quarterly Projection Model
and monetary policy

The QPM began hinting at policy normalisation at the November
2020 MPC meeting, where it suggested two rate hikes of
25 basis points each in the third and fourth quarter of 2021
respectively. The January forecast saw the two 25 basis
point hikes brought forward to the second and third quarters
of 2021, while the March forecast maintained the second
quarter hike but pushed the second hike to the fourth quarter
instead – a repo path mimicked by the May 2021 forecast.
Since the April 2021 Monetary Policy Review (MPR), the South
African economy’s recovery from the COVID-19 crisis has
continued apace, with gross domestic product strengthening and
inflation rising from the lows of 2.1% and 2.2% in May and June
2020 respectively. As a consequence of this recovery, the South
African Reserve Bank’s Quarterly Projection Model (QPM) has
recommended a gradual increase in the repurchase (repo) rate, to
align the trajectory of the inflation rate with the target by the end of
the forecast period. A rising repo rate is consistent with a gradual
decrease in the amount of policy accommodation granted the
economy, reflected in a negative real interest rate that becomes
positive over time.
The May 2021 forecast suggested rate hikes to begin during
the second quarter of 2021.1 In subsequent meetings, the QPM
continued to show rate normalisation, but shifted the initial
repo moves to later in the year. These shifts in the timing of rate
adjustments from meeting to meeting reflect the way unexpected
outcomes for monthly inflation, changes in underlying variables, such
as the exchange rate and oil prices, and other events with economic
effects, such as the unrest that occurred in July, impact on the
rate guidance.
The QPM is a key input to the monetary policy process, but it is not
equivalent to the Monetary Policy Committee’s (MPC) role, which is
to consider all the data at its disposal and assess and take a view

Percentage change over four quarters
Evolution of headline inflation forecasts*

Sources: Stats SA and SARB

Actual

May 2021

Jul 2021

Sep 2021
* Dotted lines indicate forecasts
Midpoint
3–6% inflation target range

OCTOBER 2021
on the balance of risks, before deciding on policy. That assessment of
risk becomes increasingly important in an environment of heightened
uncertainty, a critical feature of recent times.2
The output of the QPM is the repo rate, which is solved for in a Taylor
rule that considers the difference between realised/expected output and
potential output (the output gap) and the distance between expected
inflation and the target. The neutral interest rate is that rate consistent
with inflation at the target and a closed output gap – and both being
stable. The model also includes a smoothing parameter which helps to
reduce volatility in interest rates. Specifically, previous periods’ interest
rate decisions have an influence on future policy rates. The QPM
shifts the repo rate to its neutral level over three years, reflecting the
timeframes in which monetary policy impacts on inflation and a flexible
approach to achieving the target, and depending on shocks to output
and inflation that have occurred in the recent past.
The model is calibrated so that the level of policy accommodation is
optimal at all times, in the sense of being consistent with the projected
state of the economy (as measured by the inflation and output gaps).3
In other words, the repo rate endogenously adjusts within the model
to shrink the real repo rate gap as inflation converges to target and the
output gap closes.4 This minimises the risk of inflation overshooting
the midpoint of the target in the medium term. Risks to the outlook for
inflation are considered by the forecast team and the MPC, and are
normally explicitly discussed in the MPC statement.
The real repo rate is currently negative, and the real repo rate gap
has widened as expected inflation has increased, implying a strongly
accommodative monetary policy stance. The real repo rate should
slowly rise and turn positive in the medium term as normalisation
progresses, but still policy settings will remain accommodative.
In conclusion, the QPM remains a central input to the monetary policy
process. The MPC considers other data over and above the QPM
forecasts to arrive at its decision, key of which is the assessment
of the balance of risks. Divergences between the QPM advice and
MPC policy decisions are inevitable, and do not reflect fundamental
differences in how the MPC and the QPM assess the relationships
between key economic variables.

The QPM forecast is staff-, and not MPC-generated. It is
prepared by staff and is delivered to the MPC as a final product.
The MPC does not participate in the forecast process, except
for approving the assumptions that underpin the forecast.

The QPM’s Taylor rule has the midpoint (4.5%) as the
target, not the 3–6% range, and is more sensitive to
deviations of inflation from target compared to output
deviations, in line with international estimates.

The real repo rate gap is the difference between the real repo rate
and the neutral real interest rate, where the real repo rate denotes
the nominal repo rate adjusted for inflation one-quarter ahead.
Per cent
Real repo rate
Sources: Bloomberg and SARB

Current

2Q ahead

4Q ahead

6Q ahead

8Q ahead
Forecast


OCTOBER 2021
Global recovery remains on
track, but momentum shifts
to advanced economies
The global economic recovery is on track for a strong rebound
in 2021. Advanced economies are leading the recovery,
underpinned by wider vaccination rates and expansionary fiscal
and monetary policies. The growth momentum has, however,
slowed for emerging market and developing economies, where
activity remains constrained by COVID-19. Global inflation
is rising amid strengthening activity and supply constraints,
but is expected to return to lower rates of increase in 2022.
Slower resolution of the supply constraints, financial
vulnerabilities and the Delta variant of the COVID-19 virus are
curbing economic momentum, particularly in the US and China,
with implications for the global economic recovery. Further
COVID-19 waves could exacerbate supply-chain disruptions
and threaten global growth.
The recovery of the global economy remains on track but
increasingly uneven. Countries rebounding strongly from
the pandemic are pulling away from those recovering only
modestly. The first group, mostly advanced economies, has
around 60% of its population already fully vaccinated. The
second group, largely comprising emerging market and lowincome economies, is still struggling with resurgent COVID-19
infections and deaths that have resulted in a slower return to
pre-pandemic activity levels. Fiscal and monetary responses
to the pandemic have also varied, explaining some of the
differentiation in recoveries. Whereas advanced economies
have exploited the policy space afforded by low inflation and
interest rates to provide extensive monetary and fiscal support,
few emerging markets have had that space available.10
The global economy is forecast to expand by 6.0% this year.11
Initially, the recovery was led by an early growth rebound in
China as well as a strong fiscal boost in the US. However,
as vaccination roll-outs accelerated, particularly across the
developed world, so has the growth dividend from vaccines.
Most advanced economies are expected to surpass their 2019
pre-COVID-19 growth projections this year.
10 Most major economies, including the US, Germany and the UK
have extended additional fiscal support this year, while some
emerging markets have begun fiscal consolidation (e.g., China).
11 Forecasts are based on the IMF’s WEO Update, July 2021.
Manufacturing PMI
Economic activity versus vaccination*
Sources: Haver, Our World in Data and SARB
Vaccination rate (per 100 people)
South Africa
Taiwan
India
Russia
Mexico
Thailand
Vietnam
Indonesia
Philippines
Malaysia
* Jun–Aug 2021 average
Japan
Turkey
Brazil
Canada
Spain
UK
Italy
US
Poland
Germany
Czechia
South Korea

Australia
Columbia

Percentage of GDP
Cumulative fiscal response to COVID-19 crisis
Source: IMF
Advanced economies
Emerging markets
Italy
Germany
Canada
UK
Japan
Australia
US
Mexico
Turkey
India
Indonesia
Russia
China
SA
Brazil
Thailand
Chile

Per cent
GDP levels deviation from 2019 projections


Indonesia
Mexico
South Africa
France
Germany
Brazil
Canada
UK
India
Sources: IMF and SARB
Russia
Korea
China
US
Italy
Japan
Turkey

OCTOBER 2021
As lockdowns have eased over time, stronger demand, both
policy-induced and a return to spending by households
and firms, has triggered a global manufacturing-led
rebound, pushing commodity prices to record-high levels.
But lockdown-related and other supply constraints, including
raw materials shortages and surging shipping costs have
begun to impede further growth in manufacturing activity in
major advanced economies. The strong demand and rising
supply-side constraints are driving global price pressures but
are expected to be temporary. The services sector, on the
other hand, has been normalising more gradually, reflecting the
way in which COVID-19 restrictions and vaccinations continue
to impact on more labour-intensive and face-to-face activities.
Advanced economies
leading the recovery
The US economy rebounded strongly in the first half of the year,
accelerating by 6.3% and 6.6% respectively in the first and
second quarters, and benefitting from large scale vaccination
and huge fiscal stimulus. Activity has, however, moderated
slightly as supply-chain constraints began to bite and stimulus
effects have started to fade. Also, the total vaccination rate
has slowed amid rising vaccine-hesitancy, leaving the
economy susceptible to future waves of the COVID-19 virus.
Nevertheless, the US economy remains on track for a sharp
rebound of around 7% this year, marking its fastest pace since
1984.
Recovery in the euro area only started gaining momentum in
the second quarter of 2021, following two consecutive quarters
of negative growth due to stricter COVID-19 restrictions amid a
slow start to vaccination. Strict mobility restrictions (for instance,
on the hospitality and entertainment sectors) across the region
were in place for longer than in the US, even though both were
affected by the COVID-19 second wave. Once economies in
the region began relaxing restrictions and re-opening, and
confidence indicators started increasing, activity accelerated
firmly. The UK, which boasted the strongest vaccination
programme among the major advanced economies earlier
in the year, experienced a strong rebound of 20.7% in the
second quarter of 2021. Following a rebound in the second
half of 2020, the Japanese economy contracted again at the
start of the year amid resurging COVID-19 cases and renewed
lockdown measures.
While the recovery in advanced economies has been solid,
the resumption in activity across emerging markets has been
mixed. The Chinese economy rebounded strongly from its first
wave of COVID-19 infections, registering firm growth of 3.2%
Index

Global purchasing managers' index
Source: IHS Markit

>50 Expansionary

Services

Manuacturing
Percentage change over four quarters
Economic growth
Source: Haver
2019Q4–2021Q2
US
UK
Euro area
Japan


OCTOBER 2021
and 7.7% in the first and second quarters of 2021. China’s
recovery was also unique with exports recovering more quickly
than domestic demand. However, Chinese growth momentum
has slowed as fiscal and credit stimulus measures have been
largely withdrawn. Growth has disappointed in the rest of
emerging Asia, reflecting slow progress in vaccination roll-outs,
supply chain constraints as well as COVID-19 resurgence.
After recording strong growth of 6.0% in the first quarter of
this year, India’s fortunes quickly reversed following a severe
second wave of COVID-19 infections that resulted in growth
contracting by 41.2% in the second quarter. Similar dynamics
were evident in the rest of the region, where growth remained
constrained in Malaysia, Thailand and Taiwan.
Meanwhile, growth prospects improved in other emerging
market regions where high commodity prices, strengthening
global demand and capital inflows created a more favourable
global backdrop. Commodity exporting countries, such as
Brazil and Chile, benefitted from improved terms of trade
conditions, higher tax revenue collections and favourable
exchange rates. The Chilean economy was among the first
countries in Latin America to reach its pre-pandemic GDP level
in the first quarter, partly owing to additional fiscal stimulus.
The recovery across sub-Saharan Africa has been interrupted
by the continued disruptions from the pandemic amid a slow
pace of vaccinations and limited policy space. The region’s
economy is forecast to expand around 3.4% this year, lagging
behind all other regions of the world.
Inflation pushing higher
Expanding demand, together with supply bottlenecks, has
pushed global inflation higher in 2021. Headline consumer price
inflation has accelerated sharply in the US and the eurozone,
reaching multi-year highs of 5.4% and 3.0% in July and August
respectively. Producer price inflation has increased sharply,
raising concerns about its potential pass-through to consumer
prices (see Box 4). Whereas headline inflation readings across
advanced economies and emerging markets have risen this
year, core inflation readings have (in most cases) remained
fairly contained. However, price pressures are only likely to
abate over time as supply constraints ease, global demand
moderates and consumers substitute away from the high
inflation goods. Inflation is expected to remain elevated into
2022 in some emerging markets, related in part to continued
food price pressures, lagged pass-through from higher oil
prices and continuing COVID-19 restrictions.
In 2020, across most of the world, monetary policy became
highly expansionary. As 2021 progressed, many central
banks started to decrease the amount of accommodation
Percentage change over 12 months

Jan Apr Jul Oct
Inflation rate

Sources: Haver and SARB
* Unweighted average of Bangladesh, Brazil, China, Colombia,

Egypt, India, Indonesia, Malaysia, Mexico, Nigeria, Pakistan,

Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand,

Turkey, UAE and Vietnam
** Unweigted average of US PCE, Japan, euro area and UK

Top 20 EMs excluding Argentina and Iran*

Advanced economies**
Dotted lines indicate the sample median

Jan Apr Jul Oct

Jan Apr Jul
Oct

OCTOBER 2021
provided, depending on their different economic paths and
inflation outlooks. In advanced economies, central banks have
generally looked through inflationary pressures, preferring to
avoid raising interest rates until there is more clarity on price
dynamics. Some major central banks, including the Bank of
England and the US Fed, have indicated their intention to begin
reducing the pace of their asset purchases, while others such
as the European Central Bank (ECB) and the Bank of Japan
are expected to continue expanding their balance sheets
for some time.12 In emerging markets, inflationary pressures
have remained relatively muted, although several major
emerging markets – Brazil, Russia, Hungary and Turkey – have
experienced sharply higher inflation and the respective central
banks have responded by tightening policy.
Risks to the recovery
Economic recoveries have been neither smooth nor consistent,
in large part because uncertainties around new virus strains
stall activity. Setbacks have been more common in countries
where vaccination rates remained low and countries need to
implement stricter containment measures. Uneven access to
vaccines also raises the potential for new and more dangerous
mutations of the virus and potential spill-overs from emerging
markets to the highly vaccinated countries.
Higher debt levels are a growing concern for the mediumterm global economic outlook. Resurgent COVID-19 cases
and renewed restrictions have resulted in the deployment of
additional fiscal measures, implying that fiscal consolidation
across emerging markets is likely to be slower in the absence
of more sustained and stronger economic growth. Slower
than expected growth will lower revenue, keeping debt levels
elevated, and raise the vulnerability of these economies to
higher financing costs. Indeed, nearly 40% of emerging markets
have had their credit ratings downgraded since the beginning
of 2020. While record-high debt and fiscal deficits do not pose
an immediate threat in most advanced economies, stronger
growth and fiscal consolidation will be required to re-build
fiscal space and ensure medium-term debt sustainability.13
Conclusion
The global recovery is strong, but countries are progressing
at different speeds. While major advanced economies are
quickly returning to their pre-pandemic levels of activity,
progress across emerging markets remains slow. Addressing
the uneven access to vaccines is a global policy imperative
both from a health and economic standpoint. Risks to the
recovery include the resurgence of COVID-19 cases and the
subsequent reimposition of restrictions, supply bottlenecks
and rising global price pressures. Further intensification of
12 The ECB recently announced a temporary reduction in its asset
purchases, which they characterised as a ‘recalibration’ of their
asset purchase programme, and not a taper.
13 World Bank Global Economic Prospects, June 2021.
Per cent

Policy rates*
Sources: Haver and SARB
Advanced economies
Emerging markets
* Sample includes 16 advanced economies
and 26 emerging markets

Africa

Emerging markets

Advanced economies

World
Millions
New confirmed cases of COVID-19 by region*
Jan Mar
Nov
May Jul
Sep
Jan
* 7-day moving average
Source: Our World in Data


Mar May Jul
Nov
Sep

OCTOBER 2021
inflationary pressures could risk de-anchoring of inflation
expectations across both advanced and emerging markets.

Box 3 Can emerging markets absorb higher prices
without damage to policy credibility?

Following a peak reached in 2008, aggregate emerging
market core inflation has declined markedly over the past
10 years. At its lowest, emerging market core inflation fell
below a median (of 22 emerging markets) of 2%, which is
noticeably below its record high of 5% in the early 2000s.
Since the 2000s, average inflation in emerging markets has
trended lower in line with declining global inflation. And, in stark
contrast to crises in earlier decades, the global financial crisis and
the COVID-19 pandemic have on balance been disinflationary
for most emerging markets, helping to reinforce the moderating
inflation trend. The recovery from the pandemic and pick-up
in price inflation, however, could entrench into price formation
processes in emerging market economies, setting a stern test of
policy credibility. South Africa, Brazil, Russia, Turkey, Mexico, Chile
and India all face intensifying inflationary pressures. Most of these
economies risk inflation well above their inflation targets over the
next 18 months (from the third quarter of 2021 to the fourth quarter
of 2022) and have either embarked on monetary policy tightening
or are weighing the need to reduce policy accommodation. Critical
considerations include the nature of the near-term inflation shocks
and whether they are expected to turn into more permanent
inflation. Brazil, Russia, Hungary and Turkey have begun to exit
from ultra-loose monetary policy stances.
Price stability and the adoption of inflation targeting
frameworks
Emerging markets’ headline inflation is, according to the
International Monetary Fund (IMF), expected to average below
4.5% over the period 2021–2023, with lower variances common
to the advanced economies.1
The better inflation performance is often ascribed to the widespread
adoption of inflation-targeting frameworks as well as other stabilityoriented policies, in particular more sustainable fiscal balances,
flexible exchange rates and greater trade openness. Lower inflation
has been further supported by the absence of major global supply
shocks in the last two decades, suggesting that the high input cost
inflation of the current recovery is a clear shift away from trend.
Policy responses to rising inflationary pressures
Rising global price pressures test inflation targeting credibility as
policy makers also want to maintain support for the economic
recovery from the COVID-19 pandemic. In this context, time
consistency of policy becomes increasingly important, as central
banks weigh policy adjustments now, to contain future inflation and
expectations of higher inflation that would otherwise undermine
the sustainability of the recovery. For many emerging markets,
due to negative real interest rates, policy space exists to begin
gradual normalisation of policy – sending a clear message about

Advanced economies

Emerging economies
Forecast
Latin America’s hyperinflation
in the 1990s
Percentage change

Headline consumer inflation
Source: IMF

Percentage change

Source: IMF
Headline consumer inflation since 2005*

Advanced economies

Emerging economies
* Dotted lines indicate forecast
Temporary divergence
due to weak EM FX
Real policy rate (ex ante)*
Sources: Central banks, Consensus Economics and SARB
* Based on 2022
CPI forecasts
Per cent
-4
-2

Japan
Switzerland
Euro area
Norway
Sweden
Australia
New Zealand
Canada
UK
USA
Malaysia
Thailand
India
South Africa
Peru
Colombia
Chile
Hungary
Poland
Indonesia
Mexico
China
Brazil
Russia
Turkey

OCTOBER 2021
future inflation while continuing to provide support. The transition to
positive real rates closer to longer-term estimated neutral real rates
is likely to be gradual, partly because of the benefits of the longerrun moderation in global inflation. However, this thesis will continue
to be tested, as seen in the experiences of several emerging market
economies, including Chile in recent months.
Box 4 Are producer prices passing through to
consumer prices?

T E Clark, 1995. ‘Do producer prices lead consumer prices?’,
Economic Review, Federal Reserve Bank of Kansas City 80(Q III),
1995, pp 25–39.

Ü Volkan and E Ugur, ‘The relationship between consumer price
and producer price indices in Turkey’, International Journal
of AcademicResearch in Economics and Management
Sciences, 3(1), 2013, pp 205–222.
A key feature of the current global reflation is a rise in producer
prices that continue to accelerate as economies recover from the
pandemic-induced recessions of 2020. Rising producer prices
increase the risk that consumer prices globally will also increase.
The Organisation for Economic Co-operation and Development’s
(OECD) combined producer price index (PPI) measure accelerated
to 11% year-on-year in June 2021, 2.6 standard deviations above
its 20-year average and the first time it has been into double-digit
territory since 1988. The same trend is observed in many large
emerging markets, including China, where producer inflation rose
to its highest rate in more than a decade.
Beyond base effects, several factors account for this surge,
including rising commodity prices, sharply higher shipping costs,
and supply-demand mismatches in multiple segments of value
chains. What is less clear is whether this spike will result in durably
higher consumer price index (CPI) inflation.
Intuitively, rising input prices push production costs up along the
entire production chain and eventually pass-through to consumer
prices.1 However, fundamental differences between the two indices
mean that pass-through of PPI to CPI is typically much weaker than
implied by the production approach.2 Among the differences in the
indices is that PPI typically measures only domestic prices, while
-1

Percentage change over 12 months (both axis)

-10
-5

Source: OECD
PPI and CPI in OECD

PPI

CPI (rhs)
Per cent
Chile’s inflation and policy rates

* Percentage change over 12 months
Source: Haver
Headline inflation*
Overnight target rate

OCTOBER 2021
Percentage change over 12 months
-2

South African PPI and CPI goods

CPI goods

PPI intermediate manufactured goods

PPI final manufactured goods
Source: Stats SA
the CPI measures the prices of both domestic and imported goods.
Second, government taxes and subsidies, as well as distribution
costs, affect consumer prices but not producer prices. Lastly, most
PPI measures exclude services – a large share of the CPI.
Despite these differences in the construction of the indices and
the relatively low share of manufacturing in advanced-economy
gross domestic product (GDP), the last 15 years of OECD data
show a strong correlation between year-on-year producer and
consumer inflation. Much of this correlation appears to be caused
by movement in tradable goods, in particular food and energy,
with significant weights in both inflation measures, whereas nontradables components are more stable.3
Estimates for emerging markets are harder to come by, as the
methodology for measuring producer or wholesale prices varies
across countries. Nonetheless, the South African Reserve Bank’s
(SARB) calculations based on a sample of 11 large emerging
markets show a break down in the link between PPI and CPI around
the middle of the past decade, and while it has resumed in recent
years, the acceleration in CPI is much slower, relative to PPI, than
it was in 2008. The progressive anchoring of inflation expectations
in emerging markets, and a reduction in official inflation targets in
some countries in the 2010s may account for the differences.
In South Africa, while producer prices of intermediate inputs have
risen sharply in recent months, final goods prices have risen only
modestly, and headline CPI even less so. The weaker correlation
may be explained by the differences among the PPI baskets, with
the higher inflation components having much larger weight in the
intermediate PPI basket relative to the final goods PPI basket.
A continued strong long-term correlation between PPI and CPI
inflation, however, suggests that once PPI inflation peaks, its CPI
counterpart will follow, before subsiding. By contrast, a rise in
CPI inflation that does not show in PPI would signal either a deanchoring of inflation expectations, a stronger pass-through from
wages to headline inflation or reduced competition in final goods
markets – all factors with a potentially durable upside impact on
underlying price trends.

IMF research highlights the example of the US, where domestic
factors such as the wage formation process influences mostly
core services prices, while core goods prices mostly reflect
global factors. See Y Abdih, R Balakrishnan and B Shang,
‘What is keeping US core inflation low: insights from a bottomup approach’, International Monetary Fund Working Paper No.
WP/16/124, Washington: International Monetary Fund, July 2016.
Percentage change over 12 months (both axis)

-10
-5

* Brazil, China, Chile, India, Indonesia, Malaysia, Mexico, Russia,
Philippines, South Africa and Thailand
EM average: PPI and CPI*

PPI

CPI (rhs)

Sources: Haver and SARB

OCTOBER 2021
Financial markets: shocks
and resilience
Over the past six months, South African financial markets have
been buffeted by shocks, with the three most extreme being
taper talk in the US, disruptions in the technology and real
estate sectors in China, and July’s domestic riots and looting.
Although these events might have prompted sharp sell-offs of
local assets, domestic financial markets have been relatively
robust. Asset valuations have now fully recovered from the 2020
downturn, although asset prices have still underperformed
relative to advanced economy markets, a trend also visible in
many other emerging markets.
Global financial markets:
a beautiful taper?
In the US, the Fed has maintained a highly expansionary
monetary
policy
stance,
continuing
large-scale
asset
purchases, and promising to keep the Fed Funds Rate close to
zero for an extended period. Asset purchases are now expected
to slow earlier than previously anticipated, given a surprisingly
strong acceleration in inflation and a robust recovery in the US
GDP, although employment rates have not yet reached preCOVID-19 levels. The Fed has nonetheless avoided a reprise of
2013’s taper-tantrum, to date, with clear guidance that smaller
asset purchases do not imply interest rates are also about to
rise. Concerns about the Delta COVID-19 variant have also
moderated growth exuberance. Markets currently anticipate
that the Fed Funds Rate will only move above the zero lower
bound in early 2023, with quantitative easing (QE) tapering
starting late in 2021.
While US inflation has risen above 5%, the US Treasury curve
has flattened on a year-to-date basis, reflecting confidence that
higher inflation will be temporary. The yield on the benchmark
10-year US Treasury bond, for instance, reached record lows
of 1.18% at the beginning of August, from a 2021-high of 1.74%
in April. The 30-year bond yield has declined by a similar
magnitude over the past six months.
Similarly, in the eurozone, government bond yields have also
eased, despite higher inflation outcomes. Euro area inflation
reached 3.0% in August, yet yields have slipped back, with
large portions of yield curves in negative territory. While the
ECB is expected to be further from interest rate normalisation
than the US Fed, the ECB has proceeded with asset-purchase
reductions, or ‘recalibration’, ahead of its American counterpart.
This has not been interpreted as a tightening of financial
conditions, however, despite global market skittishness about
tapering. Consistent with the relative looseness of the ECB’s
Per cent
US Treasury yields
Source: Bloomberg

5-year Treasury bills

10-year Treasury bills

30-year Treasury bills

Sep Nov

Jan Mar May Jul
Sep Nov
Jan Mar May Jul
Index: 1 Jan 2020
Global equity performance
Source: Bloomberg

MSCI DM

MSCI EM

Sep Nov

Jan Mar May Jul
Sep Nov
Jan Mar May Jul

OCTOBER 2021
stance, the euro has weakened against the US dollar over the
year. It remains cheap in historical perspective, while the dollar
stands out as relatively expensive.
Advanced economy equities have performed well over the past
six months, with the Morgan Stanley Capital International (MSCI)
developed markets index hitting record highs in the second
and third quarters of 2021. By contrast, the MSCI Asia Pacific
index weakened due to tightening regulation on technology
companies in China (falling about 30% over the year). More
generally, emerging market and advanced economy equities
have diverged over the past six months, having tracked each
other closely since the onset of the COVID-19 pandemic.
Domestic market resilience
Locally, the JSE All-Share Index reached an all-time high in
July, before weakening as the Chinese technology crackdown
filtered through to the local market space through the JSElisted Naspers Ltd. JSE data shows that non-residents have
sold off South African equities for most of the period. Debt
distress at Evergrande, a major real estate firm in China, has
also generated financial market volatility recently, although in
this case there is not a close connection to local stocks via
a specific firm. While the systemic financial consequences
of Evergrande’s liquidity crisis will probably be contained,
a weaker construction sector poses challenges for China’s
growth model, and in turn global growth.
South African bond yields have fallen slightly over the past
six months, with gains concentrated at the long end of the
curve. Yields responded both to the July unrest episode and
September’s global unease over Evergrande and advancedeconomy inflation. However, South African bond prices have
still outperformed most peers over the year, supported by
improved fiscal metrics and comparatively benign inflation
conditions. South Africa’s yield curve nonetheless remains
unusually steep from an historical perspective given unresolved
concerns about medium-term fiscal sustainability.
Treasury has accumulated large cash balances of around three
to five times normal levels over the past 12 months, mainly due
to unexpectedly strong revenue flows as well as loans from
the international financial institutions (IFI) being converted to
local currency. Given this ample supply of liquidity, there has
been less need to accumulate more cash from issuing shortdated Treasury bills, and the overall maturity of new debt has
therefore risen again, after declining during 2020. The average
maturity of new bond issuance is now around 14 years, which
is unusually long, especially in the emerging market space.
This also explains why the long end of the South African yield
curve is higher than that of peers.
Basis points
Change in South African Government Bond curve

Source: Bloomberg
Years to maturity

Year to date

Quarter to date

Protests
-20

Since 1 Apr 2021

Year to date
Per cent
Change in JPMorgan GBI yields
-1

Source: Bloomberg
Indonesia
SA
India
Czeck
Russia
Turkey
Hunagary
Poland
Romania
Chile
Brazil

Year to date (fiscal 2021)
R billions
Government bond issuances

Source: National Treasury
R186
R2030
R213
R2032
R2035
R2037
R2040
R2044
R2048

OCTOBER 2021
In terms of monetary policy expectations, the Bloomberg
economists poll shows the repo rate rising for the first time in
the first quarter of 2022. Similarly, market expectations from
forward rate agreements (FRAs) show the first hike fully priced
in within six months. The FRA market indicates that the repo
rate is likely to reach 4.25% by the end of 2022, in line with the
median expectation of the Bloomberg survey.
The rand exchange rate has been somewhat volatile over
the past six months, with no clear trend, dipping below
R14 to the US dollar in May and June, weakening to above
R15 in August, and then revisiting most points in that range
during September. The currency is once again trading at preCOVID-19 levels, and has even revisited pre-Nenegate levels,
with the rand having been around R14.30 to the dollar at the
start of December 2015. The local currency has benefitted from
record terms of trade and a large current account surplus, as
well as very low global interest rates.
Monetary policy implementation
South Africa uses a shortage system for implementing
monetary policy, with the SARB deliberately limiting the supply
of reserve money to the market, to force banks to borrow
from the SARB at the policy rate. The size of the shortage
has remained smaller than it was pre-COVID-19, averaging
R32 billion for the year to date, compared with R56 billion during
2019. The SARB has not yet sought to return the shortage
to its pre-crisis levels, given the difficulties of sterilising more
liquidity, with limited demand for some instruments and risks
that over-reliance on others, especially foreign exchange (FX)
swaps, would have distortionary effects on markets. That said,
the SARB’s liquidity draining operations remain significantly
larger than they were before the pandemic, primarily to absorb
the rands associated with the IFI flows, as well as other factors.
Growth in notes and coin, which would normally help maintain
the shortage, has also been unusually muted this year, following
strong demand during 2020.
FX-implied rates, which show the cost of borrowing local
currency through foreign currency swaps, have remained
volatile and periodically elevated relative to the policy rate. This
pattern is less extreme than it was late last year and early in
2021, where short-term FX-implied rates exceeded 12% on
some days. However, these distortions are still substantial
compared with the pre-COVID-19 period. To mitigate this
problem, the SARB has sought to mature the IFI-related
swaps, where possible, and in doing so has been willing to
tolerate a smaller shortage than it did pre-COVID-19 period.
The SARB has also on occasion injected liquidity for short
periods to counter abrupt increases in FX-implied rates. The
shortage framework nonetheless places limits on interventions
to moderate FX-implied rates, as larger volumes of liquidity
could compromise monetary policy transmission.
Percentage change over four quarters
Repo rate forecast
Sources: Bloomberg and SARB

Repo rate

Economists*

* Bloomberg survey
R billions
Apr
Jul

Liquidity requirement
Source: SARB

Jan
Oct
Apr
Jul
Jan
Oct
Apr
Jul
Jan
Oct
Per cent
FX forward market*
* Overnight FX-implied interest rate

Sep Nov

Source: SARB
Jan Mar May Jul
Sep Nov
Jan Mar May Jul

OCTOBER 2021
While FX-implied rates have been unusually elevated relative to
the policy rate, spreads to other short-term rates have tended
to be modestly lower than normal. For instance, 3-month
Jibar has traded at an average of 16.9 basis points above
repo for the year to date, compared with an average margin of
34.5 basis points in 2019. Some components of South African
Benchmark Overnight Rate (SABOR) have also been marginally
below repo, although the benchmark as a whole has tracked
repo closely (supported by its FX-implied component, with a
weight of 5%). These dynamics reflect a relative abundance
of domestic liquidity.14 Over the past six months, banks have
continued to overfund relative to the shortage by borrowing
excess amounts at the weekly repo. This has led to large endof-day surplus positions and therefore frequent usage of the
standing deposit facility, despite its punitive pricing at repo
minus 100. There has nonetheless been limited uptake for the
SARB’s liquidity-draining debentures, with only around half the
available issuance being allotted.
These trends point to inefficiencies in the shortage system for
implementing monetary policy. The SARB is currently reviewing
its monetary policy implementation framework to ensure that it
transmits monetary policy effectively and is robust to shocks.
14 This implies the shortage was over-funded, with banks taking
more liquidity than was required to meet reserve requirements.
Basis points
Jan
Apr
JIBAR spread to repo rate
-30
-20
-10

Source: Bloomberg

3-month

Long-term average

Year-to-date average

Jan
Apr
Jul
Jul
Oct
Oct

OCTOBER 2021
The real economy:
recovery losing steam?
A major rebasing of South Africa’s GDP data by Stats SA
shows somewhat better growth over recent years, including
a smaller contraction last year, with growth revised higher to
-6.4%, up from the -7.0% previously reported. The recovery
broadly strengthened in 2021 despite new waves of the
virus and the lockdown restrictions instituted to contain their
spread. Household spending and strong terms of trade have
underpinned the recovery. Households have benefited from
low interest rates, sharper recovery in earnings, rebound in
net wealth and low inflation. The surge in the terms of trade
has raised national income, boosted the current account
and buoyed fiscal revenues. The near-term fiscal outlook
has improved sharply as a result, though medium-term
fiscal sustainability remains subject to risks. The outbreak of
political unrest, riots and looting in July, however, has set the
economy back and is likely to have caused a contraction of
the economy in the third quarter. Furthermore, the recovery
is expected to slow over the forecast period as the rebound
in demand moderates, investment appetite remains subdued
and electricity shortages continue.
The recent economic performance
The rebased GDP data shows that the domestic economy
has recovered from the COVID-19 pandemic much faster than
previously estimated, with the level of GDP around 99% of the
2019 level as of the second quarter of 2021. The strong recovery
has repeatedly surprised both the SARB and market analysts
to the upside, pointing to the resilience of the economy.
Following the sharp contraction and then rebound of 2020, the
first two quarters of 2021 exhibited growth of 4.2% and 4.7%
respectively. The July unrest is expected, by most forecasters,
to result in a contraction in the third quarter output, with
considerable uncertainty about its exact size. Third quarter
growth estimates range from -1.2% to 2.5%. The shock to
growth in the third quarter is especially damaging as it has
not only slowed the growth momentum but will likely delay the
complete recovery of the economy.
Although the recovery of GDP is almost complete, there
remain substantial variations in performance across sectors.
The primary sector, comprised of agriculture and mining, has
led the recovery. Agriculture ended 2020 well above its 2019
level of output, benefitting from favourable weather conditions
and remains on track for another bumper harvest in the 2021
season. Mining production is also back to its pre-pandemic
level, supported by a broad-based surge in commodity
prices. Platinum group metals (PGMs), particularly rhodium,
experienced the largest price gains, although iron ore and gold
also saw major price gains.
Percentage change from quarter to quarter

Real GDP growth*
Source: Stats SA
* Seasonally adjusted and annualised
-60
-40
-20

Index: 2019 = 100

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

Primary sector

Secondary sector

Tertiary sector

OCTOBER 2021
The secondary sector has recovered rather sluggishly,
with all its subsectors still below the pre-pandemic activity
levels. Construction activity is lagging far behind, while load-
shedding and loss of generation capacity are impacting on
manufacturing activity, together with the accidents at the
Engen and Astron Energy refineries.15 Overall, the sector
remains about 10 percentage points below the 2019 activity
level, whereas construction is 21 percentage points below.
In the tertiary sector, the two biggest subsectors, finance and
community and social services, have fully recovered. This has,
despite ongoing weakness in trade and transport, pulled the
tertiary sector back up to its 2019 level of output. The transport
and trade sectors continue to be weighed down by the frailty
in the tourism sector.
Delving into the second quarter performance, the data
shows that growth was more broad-based, with 6 of the
10 sectors showing significant expansions, of particular
interest being transport (30.5%), personal services (5.3%) and
the trade sectors (9.3%), sectors that have shown the weakest
recovery to date. Agriculture grew by 27% in the second
quarter on increased production of field crops and animal
feed, while mining increased at a slower pace of 8% (from
18.5% in the previous quarter). The expansions were despite
the disruptive effects of the third wave of the COVID-19 virus
and the associated lockdown restrictions during the quarter.
Construction and manufacturing, however, contracted by
5.3% and 3.3% respectively, pointing to deep weakness in the
secondary sector.16
From the expenditure side, the recovery momentum in the
first half of 2021 was underpinned by exports and household
consumption. Exports benefitted from the robust global
demand for commodities and the surging terms of trade.
The strong export performance amid subdued import demand
saw the trade balance widen to R614 billion in the second quarter
of 2021. The robust household spending seen in the latter parts
of 2020 carried through to the current year, supported by higher
employee compensation (which is now around pre-pandemic
levels), subdued inflation and low interest rates. Household
spending, however, slowed to 2.1% in the second quarter,
down from 4.1% in the previous quarter, buttressed by durable
goods, particularly transport, while furnishings, household
equipment and maintenance moderated. The reinstatement of
the SRD grant should sustain household consumption for the
remainder of 2021 and first quarter of 2022, before it phases out.
SARB modelling suggests that the SRD grant will raise 2021 real
household consumption by 0.12 percentage points and GDP by
0.07 percentage points.
15 A combined 31% of the country’s refining capacity is down, following
accidents at Engen and Astron Energy refineries in 2020. The Engen
refinery (17%) was permanently closed while the Astron Energy
refinery is expected to resume operations in 2022.
16 Activity in the manufacturing sector was in part slowed by raw material
shortages due to pandemic-induced global supply-chain disruptions
and persistent electricity shortages. The COVID-19 Level 4 lockdown
restrictions also negatively impacted consumer-related manufacturing
industries, in particular food and beverage production.
Percentage points
Contributions to real GDP growth


* Quarter-to-quarter at seasonally adjusted annualised rates.
Source: Stats SA
Residual items
Exports of goods and services
Imports of goods and services
GDP growth (percentage change)*
Households
Gross fixed capital formation
General government
Change in inventories

Percentage difference from 2019 average
-15
-10
-5

Durables
(9.6)
Semi-durables
(9.0)
Non-durables
(30.4)
Services
(50.9)
Sources: Stats SA and SARB

2020Q3

2020Q4

2021Q1

2021Q2
Household spending by durability*


Percentage change from quarter to quarter
Gross fixed capital formation
Source: Stats SA

Total GFCF

General government

Public corporations

Private business enterprises

OCTOBER 2021
Despite the strong performance of exports and robust spending
by households, fixed investment has remained lacklustre.
The rebased data shows that gross fixed capital formation
(GFCF) as a share of GDP was substantially lower over the past
decade than previously recorded, and only 13.7% in 2020, its
lowest level since the mid-1990s. Indeed, fixed investment
remains 13.9 percentage points below pre-pandemic levels.
This is one important dimension in which South Africa diverges
from peer emerging markets where median investment
sits around 23% of GDP, and largely explains the domestic
economy’s weak growth performance since the GFC.
On a quarter-to-quarter basis, growth in fixed capital formation
edged-up in the second quarter of 2021 (3.7%, saar), after
shrinking in the previous quarter. The main contributors to the
increase were private investment in machinery and equipment,
and transport, at 1.4 and 0.4 percentage points respectively,
and helping to offset lower investment spending in the
public sector.
Labour market conditions deteriorated further in the second
quarter of 2021, despite rising employee compensation
and stronger GDP growth during the quarter. Stats SA’s
Quarterly Labour Force Survey (QLFS) showed more
people lost jobs (54 000) during the quarter. A decrease in
employment was observed in the formal sector (375 000), led
by finance, community and social services and manufacturing.
The informal sector, agriculture and private households
recorded employment gains. The unemployment rate
increased by 1.8 percentage points to a new record high of
34.4%, driven in part by an improvement in the labour force
participation rate, which rose from 56.4% to 57.5%.17 The rise
in the labour force participation rate suggests more South
Africans are returning to the labour market, consistent perhaps
with the stronger economic recovery.
Disruptions to the recovery
During the period under review, the economy was buffeted by
negative shocks, particularly the third wave of the COVID-19
virus and the riots and looting in July. These shocks interrupted
the growth momentum in the third quarter of 2021, and could
also have longer lasting effects on the economy.
The third wave of the COVID-19 virus was severe and required
the lockdown restrictions to be tightened to adjusted Level 4, one
level higher than the tightest restrictions during the second wave
of the pandemic. However, the measures were significantly less
restrictive on economic activity compared to those implemented
in the earlier waves, with less than 3.1% of the economy directly
17 Unemployment registered 44.4% in the second quarter of 2021 when
measured using the expanded definition.

Number (millions)
Working age population

Source: Stats SA
Not economically active
Unemployed
Employed
Working age population
Labour force

Per cent
Unemployment rate

Source: Stats SA

Percentage of economy affected
Lockdown impact
Wave 1:
Mar–Oct 2020
Wave 2:
Nov 2020–Feb 2021
Wave 3:
From June 2021
Sources: Oxford University and SARB
Government and personal services
Finance
Transport
Construction
Trade and tourism
Mining
Manufacturing
Utilities
Agriculture
42.8%
<3.3%
<3.1%

OCTOBER 2021
affected by the restrictions, compared to 3.3% and 42.8% during
the November 2020–February 2021 and March–October 2020
lockdowns respectively. This indicates better tailored lockdown
restrictions and successful adaptations by businesses and
consumers to living with the COVID-19 virus. However, the food,
drink and hospitality (including tourism and transport) sectors
were severely impacted by the restrictions, as travel for leisure,
sit-in at restaurants and alcohol sales were restricted.
The political unrest, riots, looting and disruption to economic
activity that rocked the country in early July further marred the
third quarter. The damage was most acute in KZN, followed
by Gauteng, where the unrest was isolated to certain areas.
Shopping centres and warehouses were ransacked and
vandalised, trucks torched, roads blocked and communication
towers damaged. Total damages are estimated at close to
R20 billion, although estimates vary widely. Small business
revenues collapsed in KZN and Gauteng during the week of the
lootings while truck volumes on key routes in KZN and Gauteng
dropped to near zero. Recovery was however swift, with both
the Yoco turnover index and truck volumes returning to normal
as soon as the situation calmed. Considering the immediate
impacts, the riots are estimated to have shaved 0.4 percentage
points off 2021 GDP. However, the economic impacts are likely
to be more long-lasting, particularly if investment sentiment is
adversely impacted.
Growth outlook
Although growth has surprised to the upside during the
recovery, it is expected to slow considerably over the forecast
period, largely reflecting the pre-existing constraints to longterm growth. First, the recovery is largely complete, implying
that growth will soon return to its long-term trend, which is low.
Second, investment remains quite low, limiting the productive
capacity of the economy. Third, electricity supply constraints
that manifested in load-shedding during 2020 and the first half
of 2021 are likely to become more binding as activity levels
ramp up, restricting both activity and investment.
Following a much stronger third wave and the unrest in July,
third quarter GDP is expected to contract by 1.2%. The forecast
for growth in 2021 is 5.3%, and the medium-term growth is
forecast at 1.7% and 1.8% in 2022 and 2023 respectively.
The strong growth in 2021 is an artefact of the recovery, being
driven largely by the re-opening of the economy. However, the
strong growth despite the disruptions demonstrates that the
economy was on track to recoup most of the output losses by
the end of 2021.

Percentage deviation from pre-COVID-19
Small business turnover
Feb
Jan
Apr
Mar
Jun

May
Jul
Sep
Aug
Food, drink and hospitality
Healthcare, beauty and fitness
Retail
Total
Source: Yoco

Percentage deviation from pre-COVID-19 baseline
Small business turnover index
Feb
Apr
Mar
Jun

May
Jul
Sep
Aug
Source: Yoco
Gauteng
KZN

Deviation from baseline*
Average truck traffic
Sources: SANRAL and SARB


Gauteng N3

Gauteng N1

KZN N2

KZN N3
* Baseline = median of hourly truck
volumes during the same time and
date in previous years

OCTOBER 2021
Household spending and exports are expected to continue to
support growth in the medium term. Real interest rates will
remain supportive of consumption and growth even as the
repo rate normalises while asset markets (particularly housing
and stocks) are expected to remain robust, supporting wealth
accumulation. The labour market is expected to slowly recover,
further lifting consumption and growth (see Box 5). Commodity
prices are, however, expected to continue to revert to longerterm levels, potentially slowing export growth, while the recovery
in imports would narrow the trade balance and partially reverse
the terms of trade gains. Although it suggests that commodity
prices have peaked, the SARB index of commodity prices
projects prices remaining elevated over the medium term.
The COVID-19 pandemic and the lockdown restrictions
instituted to slow the spread of the virus drove both actual and
potential output sharply lower early in the past year, though
they both have since recovered strongly. The virus remains a
constant threat to the economy. Vaccinations should help curb
future waves of the pandemic, reducing the need to tighten
mobility restrictions and lowering consumer COVID-19 risk
perceptions, important for the full re-opening of sectors such
as transport and tourism.18 After a slow start to the roll-out of
vaccines, the pace of vaccination has quickened somewhat,
with about 15% of the population fully vaccinated as of
30 September.
Growth over the medium term, just like growth over the last
decade, will be hamstrung by inadequate electricity supply
coupled with sharply rising tariffs. This constraint appears to
have worsened over the past three years, with the severe loadshedding experienced in 2019 carried through to 2020 and
2021.19 It is evident that the national electricity grid is not able
to sustain the current demand, let alone expanded demand
that would come with new investments. Electricity supply
thus imposes a hard constraint on medium-term growth.
The recent government initiatives to address the electricity
crisis, such as permitting some municipalities to buy electricity
from suppliers other than Eskom and allowing private
companies to self-generate up to 100MW should help to
ease electricity shortages over the medium term, but only if
implementation is expedited.
Whereas the National Development Plan (NDP) argues for
investment of about 30% of GDP for South Africa, realised
investment is much lower, at 13.7% in 2020. Investment is
expected to slowly recover, but will likely be held back by low
business confidence, binding energy constraint and more
18 Stronger bounce-back in these sectors will bolster growth
and also spur labour market recovery given their high
labour intensity and employment multipliers.
19 About 650 hours of load-shedding were experienced in the
first half of the year, with close to 1 000 GWh of power lost,
equivalent to 76.0% of the load-shedding experienced in 2020.
The total energy availability factor declined further in the first half
of 2021 to 61.3%, from 65.0% in 2020 and 66.9% in 2019.

R trillions (constant 2015 prices, quarterly)
Actual and potential GDP

Sources: Stats SA and SARB
Actual GDP
Potential GDP
* Dotted line indicates forecast

Number of people (millions)
Vaccines administered
Mar
Apr
May
Jun
Jul
Aug
Sep

* Total number of individuals that have received a Johnson &
Johnson dose or Pfizer's first and second doses.
Source: Our world in data
At least one dose
Fully vaccinated*
Gigawatt hours
Mar
May
Jul
Sep
Jan
Net energy sent out
Sources: Eskom and SARB

Level 5 lockdown,
weeks 13–18

Nov


OCTOBER 2021
broadly the slow pace of structural reforms. However, the new
reforms around energy self-generation by private companies
and implementation of government’s major infrastructure
projects should prop up investment over the medium term.20
Following the rebasing of GDP, potential GDP growth was revised
during the September MPC. As the lockdown restrictions were
eased and demand recovered, economic activity rebounded
sharply even though the COVID-19 waves persisted (a supplyside response). Potential growth was last revised in January
2021, following better-than-expected growth in the third quarter
of 2020. Potential growth, an unobservable variable, must be
estimated from observable data. This allows the computation
of yet another unobservable, the output gap, and an important
component of the Taylor rule in the SARB’s QPM.21
Potential GDP growth is now expected to recover from -3.1%
in 2020 to 3.4% in 2021. The large swing reflects the sharp
recovery in the production side of the economy, partly supported
by external demand. However, low investment spending,
electricity supply constraints and the slow recovery in the labour
market, will limit the rise in potential GDP over the medium term,
which is projected to be about 0.8% in both 2022 and 2023.
With the initial COVID-19 impact slightly less severe than initially
estimated, potential growth slightly lower and the recovery
stronger, the output gap was revised narrower. However, the
contraction in economic activity in the third quarter following the
riots and looting in July has slightly widened the output gap,
pushing back its closure to the end of 2023.
Macro balances
The current account
South Africa’s current account balance has remained in
surplus for four consecutive quarters, since the third quarter of
2020 – the longest sustained surplus in nearly two decades.22
As a ratio of GDP, the surplus widened to 5.6% in the second
quarter of 2021, from 4.3% in the previous quarter. The larger
current account surplus reflects both stronger export growth
on the back of surging commodity prices and a slow recovery
in the demand for imported consumer and investment goods.
The current account surplus is expected to widen to 4.6% in
2021, from 2.0% in 2020, moderate to 0.7% in 2022 and record
a modest deficit of 0.3% 2023.
20 The infrastructure investment plan, announced in 2020, includes
the following priority projects, among others; Phase 2 of the
Lesotho Highlands Water Project and the Crocodile Mokolo Water
Augmentation Project announced in May 2021, and the South African
National Roads Agency Limited (SANRAL) N2 and N3 highway
upgrade announced earlier this year (February 2021). From the private
sector side, projects from the fifth bid window of the Renewable
Energy Independent Power Producer Procurement Programme
(REIPPPP) should also support investment in the medium term.
21 Realised growth minus potential growth equals the output gap.
The output gap is a common element of the monetary policy rules
used by central banks globally.
22 The last time a surplus lasted for four quarters was the period
2002Q2–2003Q1.


Percentage points
Contributions to current account balance

* Percentage change from quarter to quarter
Source: SARB
SIT
Imports
Gold exports
Merchandise exports
Balance*

OCTOBER 2021
The terms of trade increased further by 4.5% in the second
quarter of 2021, a slight moderation from the 6.1% increase
in the previous quarter. Prices of PGMs have risen sharply
since 2018, with the price of rhodium rising by more than
800% and platinum prices up by 45.2% due to a combination
of scarcity and soaring global demand. However, the
remarkable climb in commodity prices is starting to slow, with
many commodities having turned from their peak levels as
supply begins to normalise. Iron ore prices are vulnerable to
increased global supply as Brazil’s Vale’s operation resumed
amid moderating demand, particularly from Chinese and
US manufacturing activity. The sharp increase in oil prices
(134.0% year-on-year in the second quarter of 2021) together
with the levelling-off in commodity prices should dampen the
terms of trade.
A smaller component of the current account balance is
the services, income and current transfer (SIT) account.
The SIT account contributed negatively to the current account
in the second quarter, and the shortfall on the SIT account
is expected to widen further over the forecast horizon due
to higher dividend payments abroad and low earnings from
international tourism. Dividend payments are expected to
rise in line with higher profits in the mining sector, leading
to an increase in primary income payments.23 Sentiment in
the tourism sector continues to be adversely affected by
rising COVID-19 waves, tighter lockdown measures and the
discovery of new variants of the virus.
Gross secondary payments, dominated by Southern African
Customs Union (SACU) transfers, will likely fall in the remainder
of 2021 as the SACU revenue pool has been significantly
reduced by the effects of COVID-19 on regional trade.
Fiscal account
Better-than-expected
revenue
and
some
expenditure
reprioritisation are facilitating an improved fiscal outlook, even
with the new fiscal relief package and a larger-than-budgeted
public service wage agreement. Smaller fiscal deficits should
help lower fiscal risk and strengthen the macroeconomic
environment, with beneficial effects for long-term borrowing
costs. The fiscal outlook was further boosted by the recent
benchmarking and rebasing by Stats SA, which raised nominal
GDP higher.
23 Payments of interest and dividends to foreign portfolio investors
increased by 22.8% in the second quarter of 2021, following a 5.3%
decline in the first quarter.

Index: 2015 = 100
Terms of trade

Source: SARB

US$ per barrel
Oil price

Source: SARB

OCTOBER 2021
Additional government revenue and expenditure
R billions

Total increase in main budget expenditure from
53.85
22.65
31.20
Sources: National Treasury and SARB
The wage settlement agreed to between the government
and public sector unions includes a 1.5% increase (pay
progression) for all public sector employees and an additional
cash allowance of between R1 220 and R1 695 per month
from 1 April 2021 until 31 March 2022.24 Although the 1.5%
pay progression was already assumed in the February 2021
fiscal framework, the cash allowance was not. As a result, the
public sector wage bill in 2021/22 is estimated to increase by
R18 billion–R20 billion.25 The National Treasury has indicated
that the implementation of the wage freeze will be budget
neutral, financed through budget reprioritisations.
Higher commodity prices and the surge in the terms of
trade have buoyed tax revenue collection. Revenue has
overperformed to date, with corporate income tax (CIT) surging
to record levels on supernormal profits in mining.26 Although
commodity prices appear to have peaked, prices are expected
to remain elevated relative to pre-pandemic levels, at least
throughout the fiscal year. Revenues are therefore expected to
outperform the Budget 2021 projection, easing consolidation
efforts. The SARB now expects the fiscal deficit to improve to
6.5% and 5.7% of GDP in 2021/22 and 2022/23 respectively,
significantly better than the Budget 2021 projections of 9.0%
and 7.4% of GDP in 2021/22 and 2022/23 respectively.
Despite better-than-expected revenue prospects for the
current fiscal year, the fiscal situation remains fragile as debt
levels remain high. Risks to the fiscal outlook include a sharp
correction in commodity prices, much slower growth (and thus
tax revenue) on the back of more severe waves of COVID-19,
temporary spending becoming permanent and further fiscal
support to state-owned enterprises (SOEs).
24 If the wage agreement for 2022/23 is not reached by end of March 2022,
the payment of the cash allowance will remain in force until an
agreement is reached.
25 The Bureau of Economic Research (BER), Weekly Review No. 29. 2021.

(accessed 20 September 2021).
26 In the first quarter of 2021/22 the government collected 28.5% of its
estimated annual revenue collection, substantially higher than the 22.9%
average actual revenue collection in the first quarter of 2015–2019. CIT
in first quarter amounted to almost half of what the government estimates
to collect for the whole year.

Percentage of actual/estimated annual collections
Tax revenue collection
Total
CIT
Payroll Property
VAT
International
trade
Fuel
levy
Source: SARB
Q1 average (2015–2019)
Q1: 2021/22
Fiscal deficit
Source: SARB
Percentage of GDP


Pre-benchmarking

Post-benchmarking

Source: SARB

Pre-benchmarking

Post-benchmarking


Government debt
Percentage of GDP

OCTOBER 2021
Conclusion
Domestic growth, though resilient, appears to be slowing,
as many sectors have completed the steepest part of the
climb from last year’s sharp contraction and returned to
around pre-pandemic levels. The recovery will continue to be
supported by household spending and the expected recovery
in employment. Export earnings will remain firm on the back
of robust global demand for the near and medium term.
The vaccine roll-out, which has picked-up pace, should
support the normalisation of economic activity into 2022. The
near-term fiscal outlook has substantially improved, though
risks to the medium-term outlook remain. However, growth
will be weighed down by weak investment and persistent
electricity shortages.
Box 5 Wages recovering, jobs lagging

J Rubery, ‘Wages and the labour market’. British Journal of
Industrial Relations 35(3), 1997, pp 337–366.

Other possible explanations include segmented labour markets
and relatively higher firing costs in South Africa which impinge
on firms’ ability to optimise their workforce on an ongoing basis.
While the broader economic recovery from the COVID-19 pandemic
has been robust, some sectors remain constrained and labour
market improvements are very partial. A rebound in the labour
market would enhance the durability of household consumption,
supporting economic growth. Of the over 2 million jobs lost during
the depth of the COVID-19 crisis in the second quarter of 2020,
only about 793 000 had been recovered by the second quarter
of 2021. Recovering jobs lost was always going to take time, and
while there have been jobs added in some areas, on balance, the
shocks to the economy suggest that the distribution of jobs across
the economy may be permanently affected. More striking in the
economy’s bounce back is the sharp recovery in earnings to date.
Whereas employment has tended to move sideways, nominal
average wages in the non-agricultural sector were 5.4 percentage
points above their pre-pandemic level (2019 average) by the first
quarter of 2021. Real wages have also recovered well, being just
0.2 percentage points below their 2019 level.
Drivers of rising average wages
Higher wage growth typically serves as an indicator for stronger
labour market conditions, as it signifies rising demand for labour.1
However, the strong recovery in average wages has taken place
even though the unemployment rate has risen to record-high levels
(34.4% in the second quarter of 2021, from 32.6% in the previous
quarter). This apparent puzzle can be explained by the composition
effect and overtime work.2

Index: 2019 = 100

Unemployment and average wages
Source: SARB

Unemployment rate (rhs)

Nominal average wages

Real average wages
Index: 2019 = 100

National employment by skill level
Sources: Stats SA and SARB

High-skilled

Semi-skilled

Low-skilled

Total

OCTOBER 2021
When lower-wage workers disproportionately lose jobs, average
wages rise, with the wage bill more fully reflecting the earnings of
higher paid workers who remain employed and creating an illusion
of high wage growth.3 Employment of low-skilled workers fell by
13.1% year-on-year in the first quarter of 2021 and remained
12.4 percentage points below the pre-pandemic level.4 Job
losses among high-skilled workers (0.5%) were less severe and
employment has also recovered relatively faster for this group.
Rising average wages can also be explained by firms’ reliance on
overtime work to meet growing demand. Overtime payments in the
formal non-agricultural sector increased by 8.6% in the first quarter
of 2021. Increased use of overtime work – a short-term response
to rising demand – enable firms to produce more output and
support higher worker earnings, without committing to expanding
permanent jobs.
Hiring new employees comes at a cost, and the higher these costs
are relative to the overtime wage rate, the more willing employers
are to delay hiring, contributing to low labour utilisation.5 Addressing
the low labour utilisation in South Africa requires policy efforts to be
directed at improving the transition from school to jobs, enhancing
product market reforms for increased competition, creating public
(and private) institutions to enhance job matching and increasing
labour market flexibility.6
The South African Reserve Bank (SARB) forecasts total nonagricultural employment (public and private sector) to increase by
1.9% year-on-year in the third quarter of 2021, after declining by
5.4% in the first quarter. Over the medium term, employment is
expected to decline by 1.4% in 2021, before ticking-up to 0.8%
and 1.4% in 2022 and 2023 respectively.7

E E Crust, M C Daly and B Hobijn, ‘The illusion of wage growth’.
Federal Reserve Bank of San Francisco (FRBSF) Economic
Letter No. 2020(26), 2020, pp 1–5.

Skill classifications are guided by ILO ISCO definitions using
occupation data from Stats SA in the following groupings:
higher skilled: managers, professionals and technicians.
Semi-skilled: clerk, sales and services, craft and related
trade, skilled agriculture and plant and machine operator.
Lower skilled: elementary and domestic work.

R G Ehrenberg, ‘The impact of the overtime premium on
employment and hours in US industry’. Economic Inquiry
No. 9(2), 1971, pp 199–207.

C Loewald, K Makrelov and A Wörgötter, ‘Addressing low
labour utilisation in South Africa’, Economic Research Southern
Africa Policy Paper No. 27, May 2021.
system/files/ publications/policy_papers/policy_paper_27.pdf.

The employment forecasts are from the September 2021
Monetary Policy Committee meeting.
Percentage change over four quarters

Total employment
Sources: Stats SA and SARB
* Dotted line indicates forecast


OCTOBER 2021
Box 6 Credit extension: a tale of diverging trends

Corporates constitute about 50% of total private sector
credit extension.

On a month-on-month basis, the mortgage debt stock rose
by 0.4% in August while ISA credit extension rose by 0.6%.

As of March 2020, FNB’s house price index was only 0.3%
above its 2019 average, or -3.8% when adjusted for inflation.

The RMB/BER business confidence index (BCI) sank to
an all-time low in the second quarter of 2020 (5 index
points). While it has bounced back well in the quarters since
then, it still reflects conservative sentiment (at 50 in the
second quarter of 2021) relative to the history of the series
(historical peaks recorded in the 1980s and 1990s).

Banks also took a more cautious approach to lending
and monitored their risks and exposures more closely.
Despite stronger household borrowing over the past year, total
private sector credit extension is down by 3.6% year-on-year in
real terms in August. This is because corporates have substantially
reduced their borrowing since the onset of the COVID-19
pandemic.1 The credit channel is an important vehicle for monetary
policy transmission. This box discusses the credit extension trends
following the sharp (275 basis points) reduction in the repurchase
(repo) rate between April and July 2020.
The sharp reduction in the prime lending rate lowered debt service
costs, boosted real income and improved credit affordability for
borrowers. Outstanding household debt climbed convincingly
between July and December 2020, then held steady until May
2021, before softening between June and August this year.
Changes in the demand for mortgage advances, which account for
about 60% of total loans and advances to households, explain the
upswing and the subsequent slowing in credit growth. Mortgages
still registered 2.4% year-on-year growth in real terms in August
2021, while instalment sales agreements (ISAs) (mostly vehicle
financing) – the next largest category – also maintained positive
year-on-year growth in August (0.9%).2 Record-low borrowing
costs combined with low average house prices at the onset of the
pandemic encouraged greater interest in mortgage borrowing.3
Mortgage applications and approvals have risen sharply during the
first half of 2021, and remained well-above the averages for the
period 2011–2019. Anecdotal evidence and the elevated rental
vacancy rates (13.3% and 13.2% in the first, and respectively, the
second quarter of 2021) suggest that the favourable conditions
enabled some tenants to upgrade to owner-occupiers.
Corporate credit, on the other hand, has presented a near mirror
image. Following a spike in April last year (which was partly elevated
by a single once-off corporate deal and partly due to firms seeking
additional liquidity while faced with uncertainty in the months
ahead), corporate borrowing slowed sharply. Several factors have
likely contributed to this. First, the initial decline in borrowing likely
stemmed from the heightened uncertainty due to COVID-19 and
lockdown restrictions, with firms taking a wait-and see approach.4,5
Second, the post-global financial crisis (GFC) decade of slow
growth may have fed the hesitation to invest while facing an
R billions
Real loans and advances


Households

Corporations
Source: SARB
R billions
Real private sector credit extension

Source: SARB


Number (thousands)
Jan
Mar
May
Jul
Sep
Nov

Average (2009–2019)
Source: SARB
Mortgage advances granted

OCTOBER 2021
h
uncertain future, resulting in higher-than-average corporate savings.
Third and in the same spirit, some corporates took the cautious
approach further still and used the low interest rate environment
to pay down existing debt and reduce their debt service costs.
Fourth, high commodity prices have provided additional liquidity to
corporates, particularly those associated with commodity supply
chains who would normally borrow for investment, reducing their
borrowing needs. Finally, reduced demand from the businesses that
remain on tenterhooks (especially in transport and tourism) or lost
demand from those that closed in the wake of the crisis may have
also fed into lower corporate borrowing numbers.
The stronger recovery in economic activity should strengthen
sentiment about future economic growth and thus demand for
credit. Reforms that lower the cost of doing business, improve the
investment climate more generally, or increasing the economy’s
labour utilisation rate, should support higher growth and thus
demand for credit.
Percentage point contribution to year-on-year changes
Real household credit subcomponents*
General Overdrafts
Credit
cards
Leasing
finance
Installment
sales
Mortgage
advances
Source: SARB


OCTOBER 2021
Price developments: headline
inflation anchored by core
inflation, but for how long?
After reaching a low of 2.9% in February 2021, headline
consumer price inflation quickened to 5.2% in May, before
moderating again somewhat. Much of the upward pressure
on headline inflation has stemmed from higher food and
administered price inflation. Despite sharply higher monthly
headline inflation outcomes, the medium-term trajectory
looks moderate, anchored by relatively low core inflation and
expectations of future inflation. The muted core inflation is
underpinned by weakness in big-ticket items such as housing,
medical insurance and education. Core inflation is forecast
to average 3.0% in 2021, rising to 3.8% in 2022 and 4.3%
in 2023. Headline inflation is expected to remain around the
target midpoint and to settle at 4.5% by 2023. Like in advanced
economies, however, risks to the inflation outlook are evident
and will require careful consideration by the MPC.
Since the April MPR, headline inflation shifted higher as goods
price inflation accelerated as part of the global and domestic
economic recovery. Goods inflation, which averaged 2.6% in
2020, turned sharply higher and averaged 5.2% during the first
half of 2021, while services inflation, which averaged 3.9% in
2020, moderated to 2.9% over the same period. Within goods
inflation, higher outcomes have largely been driven by food and
fuel inflation, with fuel inflation compounded by base effects
from very low prices last year. Food and fuel price inflation
have averaged 6.2% and 14% respectively since the start of
this year.
Lower inflation outcomes for education, medical insurance and
housing have kept services (and core) inflation muted. Core
inflation has also benefitted from the rand’s strength, subdued
labour market pressures and relatively well-anchored inflation
expectations. Core inflation has remained close to the lower limit
of the target band, pulling down on headline inflation. However,
the increases in goods inflation this year far outweighed the
deceleration in services inflation, with the result that headline
inflation has risen above the target midpoint.
Oil prices and fuel inflation
The strong recovery of the global economy has underpinned the
continued rally in oil prices, supported by supply restrictions.
Brent crude oil averaged US$75 per barrel in July 2021, higher
than the June average of US$73 per barrel, and much higher
than the US$65 recorded in March 2021. While prices appear
to have levelled-off in August, at US$71, as the COVID-19 Delta
variant passes, global demand is expected to strengthen once
again, lifting prices. Oil prices are expected to average US$69
in 2021, US$67 in 2022 and US$65 in 2023, a large upward
revision relative to the April MPR projections.27
27 In April, Brent crude oil was expected to average US$62 in 2021
and US$60 in both 2022 and 2023.

Headline

Core

Non-core
Percentage change over four quarters

Core versus non-core inflation*

Midpoint of inflation
target range
* Dotted lines indicate forecasts
Sources: Stats SA and SARB
US$ per barrel

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

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

OCTOBER 2021
The sharp movements in oil prices since the beginning of the
year have reflected almost immediately in the domestic petrol
prices, with pump prices rising from R16.32 per litre in March
2021 (for Gauteng) to R18.34 per litre in September 2021,
despite a simultaneous appreciation of the rand during this
period. Fuel price inflation is expected to average 16.1% in 2021,
lifting headline consumer price inflation higher. Thereafter, fuel
inflation is expected to slow to 3.7% in 2022 and 2.9% in 2023,
supported by the dissipation of the high base effects of 2021
and some moderation in Brent crude oil prices in 2022.
Food and non-alcoholic
beverages inflation
Although South Africa continues to enjoy bumper harvests,
food and non-alcoholic beverages (NAB) inflation has continued
to rise since the April MPR, surging to 6.9% in August 2021, its
fastest yearly growth rate since June 2017. The recent food
price pressures have been broad-based, with nearly three
quarters of the components within the food and NAB basket
registering inflation above the 4.5% target midpoint. The recent
surge in domestic food prices is on account of both domestic
and global factors.
Bread and cereals inflation slowed in recent months, from 5.1%
in January to 3.5% in August 2021, as global crop harvests
improved, particularly in Argentina and on prospects of a good
harvest in the US as well as slowing demand in China. The
Southern Africa region, a major export market for South African
maize, also realised a bumper harvest in the 2020/21 season.
As a result, foreign demand for the bumper South African
maize harvest has moderated. The SARB’s current forecast
is for bread and cereals inflation to average 4.5% in 2021
(0.3 percentage points lower than the April MPR forecast)
before gradually declining to an average of 3.7% in 2022.
In the food and NAB basket, meat has been a major source
of upward pressure on headline inflation over the past year.
Meat inflation has been rising since September 2020, and has
remained above the 6% upper limit of the inflation target range
for 10 consecutive months. The August reading of 10.7% is
by far the highest since February 2018. Beef and poultry have
been the largest contributors to the surge in meat inflation,
with beef prices soaring to double digits at 12.8% in August.28
A key driver of this has been the decline in slaughtering activity
as farmers rebuild herds following drought conditions in some
parts of the country (Eastern, Northern and Western Cape as
well as central Karoo), increased fodder availability, and rising
input costs such as fuel, fertilisers and herbicides. With regard
to poultry, high feed costs and the base effects from the low
prices in the second half of 2020 have kept prices elevated.
Against this backdrop, meat inflation is expected to average
8.2% in 2021, before moderating to 6.7% in 2022.
28 Beef accounts for 27.0% of the meat basket.
-6
-4
-2

Percentage change over four quarters
Evolution of bread and cereals inflation forecasts*
Sources: Stats SA and SARB

Actual

Sep 2019

Mar 2020

Sep 2020

Mar 2021

Sep 2021
* Dotted lines indicate forecasts
Percentage change over four quarters
Evolution of meat inflation forecasts*
Sources: Stats SA and SARB

Actual

Sep 2019

Mar 2020

Sep 2020

Mar 2021

Sep 2021
* Dotted lines indicate forecasts
-2

Percentage points
Contributions to meat inflation

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

* Percentage change over 12 months

OCTOBER 2021
Food inflation pressures have also emanated from sugar
and oils and fats as high global prices pass-through into the
domestic market (see Box 7). Domestic sugar prices surged to
8.7% in May on reduced global sugar output. Sugar prices have
since moderated somewhat following improved production
prospects in India. Oils and fats inflation hit a multi-year high
of 22.4% in July on tight global supplies and remain elevated.
Milk, cheese and eggs inflation has remained sticky, averaging
6.6% in the first half of 2021, reflecting high input costs and
stronger demand.
In summary, food inflation is revised up to 6.2% in 2021
(previously 5.2%), driven higher by meat, sugar and oils and
fats inflation, but slightly lower to 4.2% in 2022, down from the
4.4% projected in the April MPR. Bread and cereals inflation
is expected to slow further, and easing global food prices
should pull food and NAB inflation lower. Meat, global sugar
and vegetable oils prices, however, pose an upside risk to
domestic food inflation.
Core inflation
Over the review period, core inflation has remained muted,
averaging 3.1% in the second quarter of 2021, from 2.8% in
the first quarter, supported by lower services inflation. Housing
inflation edged up slightly in the second quarter of 2021, but
remains relatively weak, and continues to pull core inflation
lower. Consequently, despite core goods providing some
upward pressure, core inflation is expected to remain subdued
over the forecast horizon, averaging 3.0% in 2021, before
edging up to 4.3% in 2023.

Actual

Sep 2019

Mar 2020

Mar 2021

Sep 2021
Percentage change over four quarters

Evolution of food and NAB inflation* forecasts

* Dotted lines indicate forecasts
Sources: Stats SA and SARB
Consumer food price inflation (September 2021 forecasts)
Percentage change over four quarters, March 2021 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2010–20*
2020*
2021*
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
Food and non-alcoholic beverages


* Annual average percentage change
Sources: Stats SA and SARB

OCTOBER 2021
Housing is a large component of services inflation, hence
price developments in this item tend to drive services inflation
dynamics.29 Lower housing inflation continues to anchor
services inflation lower. The supply of rental space may have
increased as property purchases accelerated, but more
modest price inflation could also reflect reduced demand
as the new ‘work-from-home’ culture allows some people to
relocate away from areas of work.30 The market is currently
experiencing excess supply of rental space, with rental vacancy
rates remaining elevated at 13.2% in the second quarter, down
slightly from a peak of 13.3% in the first quarter. However,
housing inflation appears to have bottomed out at 0.5% in the
first quarter of 2021, after a prolonged descent since 2017,
picking up to 0.9% in the second quarter. The SARB expects
housing price inflation of 0.9% for 2021 and 2.1% for 2022,
underpinned by the expected slow recovery in employment,
elevated vacancy rates and subdued rental escalations in
Gauteng and Western Cape provinces.
After averaging 2.1% in 2020, core goods inflation is expected
to rise to 3.6% in the last quarter of 2021, exerting some
upward pressure on core inflation. On a year-to-date basis,
alcoholic beverages and tobacco, vehicles and spare parts
and accessories have increased by 1.2, 1.0 and 5.4 percentage
points from their respective 2020 outcomes.31 Stats SA
techniques for handling missing goods prices between April
and August 2020 imputed prices using the exceptionally low
headline inflation, affecting about a quarter of the core goods
basket, artificially driving core goods inflation lower. The base
effects from this artificially low core goods inflation are now
partly driving inflation in this category. As these base effects
dissipate over the remainder of 2021, acceleration in core
goods inflation is expected to slow, but the expected rand
depreciation in the second half of 2021 would at least partially
offset this. Nonetheless, inflation in this category is expected to
remain below the five-year average of 4.0% during 2021.
Following the announcement of a 5.9% price increase in
July, by Discovery, medical inflation increased to 5.9% in the
July CPI. This was the second time that medical insurance
was surveyed this year, after the earlier survey in February
2021 where inflation registered 4.7%, slightly lower than the
SARB’s estimate of 5.0% at the time. For 2021, total insurance
inflation is now expected at 4.8% compared to the 4.6% that
was estimated in the April 2021 MPR. However, the ‘low’
29 The housing inflation category (i.e. owners’ equivalent rent and
actual rentals) has a large weight of 23.0% in core inflation and over
32% in services inflation.
30 Higher unemployment since the onset of the COVID-19 crisis could also
have forced people out of renting or into co-living.
31 Alcoholic beverages increased from 3.4% in 2020 to 4.6% (year-to-date
average), vehicle prices increased from 3.8% to 4.8% (year-to-date)
and spare parts and accessories prices increased from 5.9% to
11.3% (year-to-date average).

Percentage change over 12 months
Services inflation
Sources: Stats SA and SARB

Services excluding housing

Services

Total housing
-2

Percentage change over four quarters
Rental escalations by province
Source: TPN Credit Bureau

National

Gauteng

Western Cape

KZN

Eastern Cape

Smaller five provinces
Percentage change over 12 months
Alcoholic
beverages
and
tobacco
Clothing Vehicles Household
contents
Spare
parts and
accessories
Medical
goods
Residual
goods
Core
goods
Goods inflation
Sources: Stats SA and SARB
-2

2021H1

2021H2

2015–2019

OCTOBER 2021
(by historical standards) price increases are likely temporary
as they reflect the reduced expenditures and large capital
reserves accumulated as a result of significant declines in
general admissions and elective procedures (suspended by
the Health Minister) in 2020.32
Medical schemes are yet to announce their 2022 annual
contribution price changes. The Council for Medical Schemes
(CMS) has requested schemes to limit their increases to 4.2%,
but the effect of this for 2022 will remain unclear as the CMS
has no mandate to set scheme prices.33 Medical aid schemes
with adequate reserves may keep their price increases minimal.
The SARB’s forecast incorporates a 9.0% increase in medical
insurance for 2022, which is the long-term average increase
for this sector.
Administered prices
Administered or regulated prices have often inflated at
rates well-above the upper limit of the inflation target band,
keeping headline inflation elevated. This trend continues, with
administered price inflation averaging 7.4% between January
and August 2021, primarily due to high fuel and electricity price
inflation. Core administered price inflation, which excludes fuel
and electricity, has been more muted, averaging 4.1% during
the same period. Electricity prices increased by 13.8% in July
2021, compared to the 7.7% rise in July 2020, and somewhat
below the SARB’s forecast of 14.6% in April.34 Property rates
and water tariff inflation have been somewhat lower than
expected, resulting in administered price inflation projected to
reach an annual average of 8.7% in 2021, before slowing to
6.2% and 5.2% in 2022 and 2023 respectively.
Electricity inflation is forecast at 10.0% in both July 2022
and 2023, in line with the expectations of some of the main
Metropolitan municipalities. Property rates are projected at
3.5% while water tariffs are expected to rise by 6.9%. These
rates are lower than the averages for 2020, and the SARB’s
earlier forecasts.35
While price inflation for education was high after the GFC, it
has moderated somewhat and is expected to remain so over
the forecast horizon. Lower inflation outcomes, around 4.0%
in recent months, were driven by primary education for which
prices rose by 2.5% in March 2021 (compared to 7.3% a year
32
jump-in-medical-scheme-surpluses-as-spending-drops-2021-1
33
in-south-africa-asked-to-cap-price-increases-for-2022/
34 It appears that while the majority of municipalities reported a 14.6%
increase, some reported slightly lower increases, driving the
average lower.
35 The annual average inflation for property rates for 2020 is 5.4%.
The SARB’s forecast prior to the July release was 4.0% for July
2021 until June of 2022, 0.5 percentage points higher than the July
outcome of 3.5%. Water tariffs were expected at 7.6% in July this
year but came out at 7.0%. Water tariffs averaged 10.2% for 2020.
Forecast
Percentage change over 12 months

Sources: Stats SA and SARB
Insurance inflation

Baseline – medical insurance

increase by 9.0% in 2022

CMS scenario – medical insurance

increase by 4.2% in 2022

Percentage change over 12 months

2022 2023
Electricity prices*
Sources: Stats SA and SARB

Jul 2021

Sep 2021

Percentage change over 12 months
Education inflation

Sources: Stats SA and SARB

Long-term average

OCTOBER 2021
earlier). Tertiary education prices inflated considerably faster at
5.1% in March 2021 (from 4.7% in March 2020), while university
boarding fees increased by 6.5% in the same period (from
5.9% in March 2020). Looking ahead, education inflation for
March 2022 and 2023 is projected higher at 5.0% and 5.5%
respectively.
Administered price inflation remains a major driver of headline
inflation and a structural impediment to South Africa realising
permanently lower inflation. Many of the administered items,
including water, electricity and fuel serve as inputs into
the production process. Consequently, higher administered
price inflation contributes to raising the cost structure of
the economy.
Medium-term outlook
Medium-term inflation in the QPM is determined by inflation
expectations, the output gap, the exchange rate gap and
the ULC gap. These gaps reflect departures from long-run
equilibria that cause inflation to deviate from target (here 4.5%).
The QPM sets a policy path for the repo rate, conditioned on
the size of the misalignments, to close these gaps and bring
inflation back to target. At every point in time, these gaps are
subject to economic shocks, which in turn affect the policy
rate path.
Headline inflation (September 2021 forecasts)
Percentage change over four quarters, March 2021 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2010–19*
2020*
2021*
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2

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

OCTOBER 2021
Inflation expectations
At present, inflation expectations appear to remain wellanchored. The BER inflation expectations survey for the third
quarter of 2021 shows two-years ahead inflation expectations
at 4.5%, while the current-year inflation expectations are at
4.2%, unchanged from the second quarter outcome, but
a slight increase over the first quarter outcome (3.9%). This
rise in inflation expectations is likely due to higher food and
fuel inflation (i.e. non-core goods). Equally, producer prices
have risen sharply though pass-through to consumer prices
remains low. Nonetheless, this remains a source of risk for
shifts in inflation expectations.
Demand pressures
In the QPM, economic slack is measured by the output gap
or the difference between observed economic activity levels
and estimates of the full utilisation of productive capacity
(potential economic activity). Estimates of potential activity are
invariably imprecise, and shocks like the GFC or the COVID-19
pandemic radically increase uncertainty around the exact level
of economic slack, and ultimately inflation forecasts (see Box 8).
Since the April MPR, the SARB’s estimate of the output
gap – both contemporaneous and historical – has narrowed
considerably due to lower investment growth rates and higher
actual levels of output calculated in the recent rebasing and
benchmarking exercise by Stats SA.36 The upward historical
revision to the GDP outcomes results in a smaller starting point
for the output gap estimations, and because this revision is
larger as it progresses through time, the gap is narrower over
the full-time horizon of the revisions.
For the forecast, however, the deterioration in GDP growth,
related to factors such as the extended lockdowns and the
social unrest of July 2021, delays the closing of the output
gap. The output gap is expected to close in the fourth quarter
of 2023.
Exchange rate
The rand exchange rate plays an important role in medium-term
inflation dynamics as it can amplify or dampen the impacts
of imported inflation in the domestic economy. Since the April
2021 MPR, the rand has appreciated by 1.8%, and may be
somewhat overvalued relative to its equilibrium. On a quarterly
basis, the second quarter of 2021 averaged R14.12 per dollar
compared to the forecast of R15.73 per dollar at the March
2021 MPC. The nominal effective exchange rate, measured
using a weighted average of a group of three biggest advanced
economies (US, euro area and Japan), is 14 percentage points
more appreciated compared to the March 2021 forecast.
36 Stats SA. 25 August 2021. National Accounts: Sources and Methods.

2004-04-042021.pdf

Per cent

Inflation expectations*
Sources: BER and SARB

Midpoint

Current year

One-year ahead

Two-years ahead

Five-years ahead
3–6% inflation target range
Percentage of potential GDP


2021 2023

2017 2019
Output gap estimates

Mar 2021

Sep 2021
Source: SARB
Percentage change over 12 months

Exchange rate and commodity prices
Source: SARB
-60
-40
-20

Forecast

Rand per US$ (inverted)

SA export-weighted commodity prices

OCTOBER 2021
The terms of trade have played a major role in the rise in the
value of the currency, but so too has global investor risk-on
appetite amid faster than anticipated economic recovery.
Rand appreciation over the last two quarters translates to less
inflationary pressures relative to the April MPR.37
Labour market
Inflationary
pressures
emanating
from
labour
market
developments are measured using the real ULC gap – the
difference between real wage outcomes and productivity
growth. Productivity growth faster than a given real wage
increase reduces inflationary pressures, while real wage
increases greater than a given productivity growth rate increase
inflation pressure.38
Despite considerable volatility in output, employment and
compensation data, ULCs appeared to moderate in 2020
and into 2021. This has resulted in a negative real ULC gap in
the QPM that implies little inflationary pressures arising from
the labour market, an outcome that appears consistent with
developments in many other economies during the pandemic.
The forecast for this gap has remained low for the past year,
and is a key contributor to the moderate inflation expected over
the outer years of the forecast. In recent quarters, stronger
nominal and real wage growth have been somewhat negated
by productivity gains. In terms of public sector wages, the
forecast at the April MPR had anticipated a wage bill freeze as
announced by the Minister of Finance during the 2020 Medium
Term Budget Policy Statement. The out-turn remains largely in
line with those estimates and should exert downward pressure
to wage inflation.
Conclusion
Headline consumer price inflation remains relatively wellcontained despite the sharp increases since the April 2021
MPR. Food and fuel inflation drove the May rise in headline
CPI to peak at 5.2%, while core inflation has remained muted,
helping to anchor inflation lower than would have otherwise
been the case. However, the stronger recovery and narrower
output gap are expected to raise core inflation over the
medium term. Headline inflation is expected to average 4.4%
for the year, and to moderate to 4.2% in 2022, before rising
to the 4.5% target midpoint in 2023. Risks to medium-term
inflation have sharply increased, including elevated producer
prices, the persistence of supply constraints and high food
and oil prices.
37 In fact, given the extent of the 2021 second quarter exchange rate
appreciation and the degree of overvaluation, the forecast is for an
overvalued currency throughout the forecast period despite a nominal
depreciation over the same period.
38 More formally, the real ULC gap is considered inflationary if the real wage
deviation from its equilibrium is more than the gain in productivity.

Mar 2021

May 2021

Jul 2021

Sep 2021
Per cent

Real effective exchange rate gap forecasts*


* Values < 0 imply undervaluations
Source: SARB
Per cent

2022 2023

Unit labour cost gap

Mar 2021

Sep 2021

Source: SARB
-2
-1

OCTOBER 2021
Box 7 High global food prices: a risk to
domestic inflation?

In rand terms, the UN FAO index has increased by much less,
cushioned by the relatively stronger rand.
While South Africa largely produces enough food for domestic
consumption, local markets are well integrated with global
markets. Local food prices respond to global factors mediated by
exchange rate movements and domestic market imbalances that
shift pricing between import and export prices. As a result, global
price developments are a key consideration for food price inflation
forecasting and monetary policy.
Why are global prices surging?
Global food prices have risen sharply over the past year, with the
dollar-denominated United Nations (UN) Food and Agricultural
Organization’s (FAO) food price index surging to a multi-year high
of 40.4% in May 2021, before moderating slightly.1 High crude oil
prices, strong import demand from China and lower crop harvests
in Europe, parts of the United States and South America (due to
adverse weather conditions), partly explain the surge. Other drivers
include the COVID-19-induced labour shortages in Malaysia that
continue to curb palm oil production and unfavourable weather
conditions in Brazil pushing up global sugar prices. Stronger
demand for grains and sugarcane from biofuels have also pushed
prices higher, while lockdowns have disrupted supply chains.
These adverse effects are exacerbated by rising logistics costs.
Domestic prices also rising
In tandem with global food prices, domestic food and nonalcoholic beverages (NAB) inflation has risen strongly, despite
bumper harvests. The recent food inflation is broad-based, with
almost three quarters of the food basket increasing beyond the
4.5% target midpoint, keeping headline consumer price inflation
elevated. Food price inflation, however, may have peaked at 6.9%
in August 2021, the highest reading since June 2017.
Despite global integration, local factors have become more important
in explaining food inflation. Focusing on the five components that
make up the UN FAO food price index (meat, grains, sugar, vegetable
oils and dairy products), the correlation coefficient declined from 0.82
pre-global financial crisis (GFC) to 0.54 post-GFC, suggesting that
changes in global food prices have become less informative about
the trajectory for domestic food prices. Dairy and meat products
reveal a complete breakdown in global and domestic price comovement, reflecting South Africa’s self-sufficiency in these food
groups. The correlation also declined sharply for cereals, for which
South Africa is a net exporter of maize, though domestic grain prices
tend to broadly follow international prices.
Domestic oils and fats prices continue to move closely with global
prices, while the correlation increased sharply for sugar, relative to
the pre-GFC period. Despite the small weights for oils and fats and
sugar in the food and NAB basket (2.6% and 3.2% respectively) the
sharp rise in the international prices of these commodities in recent
months (FAO sugar rose by 58% in April and oils by 124% in May
2021) lifted domestic sugar prices up to 8.7% in May, and oils and
fats prices to a multi-year high of 22.4% in July 2021.
Per cent

FAO global food price inflation
Sources: Haver, UN FAO and SARB
-10

US dollar

Rand denominated
Correlation coefficients

Link between global and domestic food prices
Total
Dairy
Meat
Sugar
Cereals Vegetable
oils
Sources: Stats SA, UN FAO and SARB

Pre-GFC

Post-GFC

Year-to-date percentage change (both axis)
Global and domestic food prices
Sources: UN FAO and Stats SA

Global
Meat
Diary
Cereals
Oils
Sugar
Meat
Diary
Cereals
Oils
Sugar
Domestic

OCTOBER 2021
Outlook
Global agricultural food prices are expected to ease as energy prices
stabilise and supply chains regularise, Chinese demand slows and
weather conditions in major growing regions improve. Indeed, global
food prices have begun to moderate, at least on a month-on-month
basis, and this should filter through to domestic food price inflation
in the coming months.2 Upside risks to global food inflation remain,
however, in the form of potentially higher crude oil prices, continued
adverse weather events or other supply-side shocks (e.g. further
COVID-19 waves) in major food producing regions.

The recent increases in domestic food and NAB inflation are
largely driven by local factors. For example, sticky domestic
meat inflation is underpinned by reduced slaughtering activity.
Box 8 Unpacking the large 2020 inflation
forecast errors

Analysts on the Reuters survey also had large forecast errors,
comparable to that of the SARB.

For Gauteng, 95 unleaded petrol.

Throughout the box, forecast error represents the average
error on the annual 2020 figure between the January 2019
MPC and January 2021 MPC, unless stated otherwise.
The COVID-19 pandemic has posed unique challenges for
macroeconomic forecasting. Most forecasting models rely on past
relationships among observational data to project future states.
With a large shock as COVID-19, some relationships will have
(temporarily) broken down, implying that forecasts made on past
relationships alone could lead to substantial errors.
An error decomposition using the different drivers of headline
inflation shows upside errors on headline inflation, largely driven by
fuel and core services inflation, especially for forecasts generated
prior to the shock. Together, these components account for about
90% of the error on headline.1
The errors in fuel inflation derive from the unexpected collapse in
global oil prices, which reached a low of US$12.50 per barrel in
April 2020. This resulted in a sharp drop in domestic fuel prices, to
R12.22 per litre2 in May 2020, from R15.84 in March 2020, despite
a simultaneous depreciation of the rand.
In services, the sharper-than-expected deceleration in housing
inflation (with a weight of 32.8%) created a forecast error of
0.5 percentage points.3 The average error in core goods inflation
reached 1.3 percentage points. This is largely attributable to
Statistics South Africa’s (Stats SA) imputation techniques for
handling missing data from April to August 2020, which effectively
reduced the core goods basket by carrying over the petrol price
shock to core goods inflation. This affected about 25% of the core
goods basket.
The output gap was not a large contributor to the upside error.
The rebased data from Stats SA confirms that the extent of weak
demand caused by the pandemic (i.e. period since the April 2020
Monetary Policy Committee (MPC) meeting) was overstated as the
economy was not as badly impacted as the old gross domestic

Percentage points
Contributions to 2020 inflation error (forecast-actual)
Jan
May
Jan
Sep
Jan
May
Sep

MPC dates

Core intervention

Core residual

Core real exchange rate gap

Core real ULC gap

Core output gap

Headline inflation
Sources: Stats SA and SARB

Core import prices

Core expectations

Petrol

Electricity

Food

Reuters median
product (GDP) data suggested.4 Another big contributor is the model
residual, which reflects the inflation drivers not clearly explained by
the model structure, and reveals how difficult it can be for models
to explain very large shocks.5 Augmenting the model with ‘outside
information’ as the shock is more clearly seen in the data, however,
helps to minimise future model errors.

To calculate the error on the output gap, the September 2021
MPC output gap (estimated using the latest GDP data)
was used versus those in the previous MPCs (estimated
using 2010-based GDP). See real economy chapter for
more details on the revisions to the output gap.

The model is estimated based on past long run relationships
which do not capture unforeseen events such as the
global financial crisis (GFC) and COVID-19 shocks.

OCTOBER 2021
Conclusion
Despite the severe economic recession in 2020, the effects
of the COVID-19 pandemic on the global economy are
slowly fading. The recovery of the global economy has been
robust, underpinned by unprecedented stimuli – both fiscal
and monetary, and more recently supported by widespread
vaccination roll-out. Growth rates of 6.0% and 4.9% are
projected for 2021 and 2022 respectively.39 The recovery
has correlated strongly with access to vaccines, which has
been uneven. Advanced economies, which on average have
achieved higher rates of vaccination, show greater growth
momentum in 2021 while developing economies, with lower
vaccination rates, have had their growth projections for 2021
slashed as the COVID-19 Delta variant has spread.
The domestic economy has rebounded strongly following the
6.4% contraction in 2020. The benchmarked and rebased
GDP data show that economic activity is largely back to the
pre-pandemic level, indicating that the recovery had been
underestimated. Despite the broad recovery, construction,
manufacturing, transport and trade sectors remain below the
2019 levels, reflecting the lingering effects of the COVID-19
waves. The riots and looting in July have set the recovery back
and may have caused a contraction of the economy in the
third quarter. Notwithstanding these setbacks, the economy is
expected to grow at 5.3% in 2021, the highest annual growth
rate since 2007.
The robust recovery of the domestic economy was
underpinned by a combination of record-low borrowing costs,
strong fiscal support, including social relief measures, and high
commodity prices and surging terms of trade. Together, these
factors raised real incomes of households and corporates,
eased debt repayment pressures and, for those facing binding
budget constraints, boosted real consumption. Government
benefitted from the low interest rates through lower costs of
borrowing while the fiscal position was further buoyed by high
commodity prices.
To provide impetus to the recovery, the MPC held the repo
rate unchanged at 3.5% over the past six months, bringing to
seven the number of meetings over which the repo rate was left
unchanged. Inflation is projected at 4.4% in 2021 and 4.2% in
2022, before edging back to the target midpoint by 2023. The
relatively benign medium-term inflation outlook underpins the
MPC’s decisions to hold rates lower for longer with deference
39 IMF WEO Update (July 2021).
Index: 2019 = 100
Output: 2021Q2 compared to 2019 level
Agriculture
Mining
Manufacturing
Electricity
Construction
Trade
Transport
Finance
GVA
Sources: Stats SA and SARB

Community and
social services

OCTOBER 2021
to the recovery. However, the stronger than expected recovery
in economic activity suggests that underlying price pressures
may be stronger than initially thought. With inflation around the
target midpoint and the output gap closing, the repo rate needs
to adjust to its estimated neutral level over the medium term,
to reduce the stimulus and keep inflation contained. Delaying
the lift-off could see the monetary policy authorities playing
catch-up with inflation, potentially destabilising the relatively
well-anchored inflation expectations.40
The output gap has been revised narrower following the
benchmarking and rebasing of GDP, reflecting the higher
GDP growth and the slight upward adjustment to potential
growth. Lower investment and electricity supply constraints
explain the modest adjustment to potential growth, despite
stronger GDP outcomes. Investment is weaker than previously
estimated and significantly lower than peer emerging market
comparators, reflecting a myriad of constraints, including
inadequate electricity supply, inefficiencies in key infrastructure
sectors, skills shortages, regulatory burdens and weak product
market competition. These bottlenecks raise the cost of doing
business and act as brakes on new investment.
The near-term fiscal outlook has brightened as revenue has
overperformed. Debt and fiscal balances have improved,
benefitting from the higher commodity prices and surging
terms of trade, as well as stronger GDP growth over the past
year. There, however, remain material risks to the mediumterm fiscal outlook, including a sharp correction in commodity
prices, growth slowing towards the low potential growth rate
and temporary spending becoming permanent. The 2021
Budget sets out a fiscal trajectory that, if implemented, would
help stabilise public debt.
Beyond the recovery, the MPC has highlighted the importance
of structural reforms in assuring higher and sustainable growth
in South Africa. Providing sufficient energy for growth, reducing
the impact of administered prices on overall inflation and
stabilising public debt, among other things, would improve the
investment climate. The domestic economy would also benefit
from permanently lower inflation, which would help better
anchor inflation expectations, reduce volatility of the rand and
permanently lower the neutral interest rate, with immediate
feedthrough to borrowing costs.

40 The MPC has repeatedly emphasised the data-dependent nature of its
decision-making and will continue to closely monitor the changing data.
Indeed, the committee will begin to face a trade-off of an earlier gradual
normalisation or a steeper repo rate trajectory on the back of a delayed
lift off.

Percentage of GDP

Gross fixed capital formation of selected
emerging markets
Sources: Haver and SARB

Brazil

South Africa

Argentina

Turkey

India

Russia

Chile

Mexico

OCTOBER 2021
Statement of the Monetary Policy Committee
20 May 2021
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the Quarterly Projection Model (QPM) is a trade-weighted average of South Africa’s trading partners. The IMF’s global forecast for 2022
sits at 4.4%.

The current account is expected to be in surplus of 2.0% of GDP in 2021, shifting to a deficit of 0.6% in 2022.

Our assumptions are now for oil prices to average about US$62 per barrel in 2021 and US$60 per barrel in 2022 and in 2023.
The steady rate of vaccination in many countries has
lifted projections for global economic growth and boosted
confidence, significantly. Vaccination rates have not been
uniform, however, with many emerging and developing
countries lagging behind. This uneven vaccination roll-out
will weigh heavily on some countries more than others and
on economic activity in sectors that are more dependent on
close contact, such as travel, tourism, hospitality and leisure.
Until vaccination is widespread and populations develop
sufficient immunity to curb virus transmission, it is expected
that waves of infection will continue. As indicated by South
Africa’s public health authorities, a third wave of virus
infection is probable in the near future.
The International Monetary Fund’s (IMF) April forecast for
global gross domestic product (GDP) for 2021 was revised
up to 6.0%. The South African Reserve Bank’s (SARB)
forecast for global growth in 2021 now also sits at 6.0%.1
For 2022, we expect global growth of about 3.8%.
Although policy settings in advanced economies remain
accommodative, higher global inflation and greater
uncertainty about world interest rates has contributed to
more recent financial market and capital flow volatility. This
reflects persistent risk aversion, especially for emerging
market economies that fail to take advantage of improved
global prospects or run large macroeconomic imbalances.
Following an expansion of 6.3% in the fourth quarter of 2020,
the SARB’s forecast for South Africa’s first quarter growth
stands at 2.7%, much stronger than the 0.2% contraction
expected at the time of the March meeting. The economy is
expected to grow by 4.2% in 2021 (up from 3.8%).
The stronger growth forecast for 2021 reflects better sectoral
growth performances and a more robust terms of trade in the
first quarter of this year. Despite rising oil prices and a higher
total import bill, commodity prices have risen to new highs,
strengthening income gains to the economy. Household
spending is expected to be healthy this year, in line with the
easing of lockdown restrictions and low interest rates.
Getting back to pre-pandemic output levels, however, will take
time. Supply responses remain muted in some sectors harder
hit by the pandemic. Investment, while stabilising, remains
constrained. GDP is expected to grow by 2.3% in 2022 and
by 2.4% in 2023, little changed since the March meeting.
Overall, and after upward revisions, the risks to the domestic
growth outlook are assessed to be balanced. Moderate
growth in household spending is expected over the forecast
horizon and global conditions are generally supportive of
growth. Slow progress on vaccinations, limited energy
supply and policy uncertainty continue to pose downside
risks to growth.
The large current account surplus at present reflects good
growth and higher prices for exports, still moderate prices
for imported oil, and slowly reviving demand for imported
consumer and investment goods. This surplus is expected
to give way to a modest current account deficit by next year
(2022), as exports slow and imports accelerate.2 Although
financing conditions have modestly improved and fiscal risk
has eased, the yield curve for rand-denominated bonds
remains steep.
The generally favourable global conditions and strong
commodity export prices have led to the appreciation of
the rand through the latter half of 2020 and into this year,
moving the currency close to its long-run equilibrium level.
Since the March meeting, the rand has appreciated by 4%
on a trade-weighted basis. The implied starting point for
the rand forecast is R14.46 to the US dollar, compared
with R14.96 at the time of the previous meeting.
Headline consumer price inflation averaged 3.3% in 2020.
The forecast for 2021 is slightly lower at 4.2% (down from
4.3%) and for 2022 and 2023 unchanged at 4.4% and
4.5% respectively.
In 2020, core inflation also averaged 3.3%. The forecast for
2021 is lower at 3.0% (down from 3.3%) and unchanged
for 2022 and 2023 at 4.0% and 4.3% respectively.
At a global level, a wide range of prices is accelerating,
from raw materials to intermediate inputs to food,
reflecting both global supply shortages and rising demand.
Oil prices were revised up sharply in the previous
forecast, and remain unchanged, resulting in petrol price
inflation of 12.5% for 2021 (down slightly from 12.7%).3
Electricity prices are significantly higher at 10.6% for 2021
(up from 9.7%).
Going forward, a stronger exchange rate, ongoing
moderation in unit labour costs and sustained economic
slack are expected to offset higher electricity and food

OCTOBER 2021
price inflation, keeping the headline inflation forecast
relatively stable.
Expectations of future inflation have broadly stabilised at
around 4.0% for 2021 and 4.2% for 2022. Market-based
expectations for inflation are slightly lower for 2021 and
over longer horizons.4
The overall risks to the inflation outlook appear to be to the
upside. Housing-led services price inflation may continue
to surprise to the downside. Food price inflation, already
very high globally, has also been more moderate than
expected in the South African market, due to a stronger
exchange rate and robust crop production. Domestic and
global producer price inflation have been rising. Further
risks could arise from higher domestic import tariffs and
escalating wage demands. Despite generally low passthrough, a weaker rand would create additional upside risk
to inflation, alongside the ongoing risk from electricity and
other administered prices. Oil prices have increased sharply
this year and, while forecast to remain at current levels, are
subject to increasing upside risk as recent data has shown.
Compared to the March meeting, a higher growth forecast
implies a small further narrowing of the output gap over the
forecast period.
The policy stance and repurchase rate level remain highly
accommodative and will remain so even with steps taken to
normalise interest rate levels in response to rising inflation.
With inflation expectations remaining stable, and despite
inflation risk increasing, the Monetary Policy Committee
(MPC) still expects inflation to be contained in 2021, before
rising to around the midpoint of the inflation target range in
2022 and 2023.
Against this backdrop, the MPC decided to keep rates
unchanged at 3.5% per annum. The decision was
unanimous.
The implied policy rate path of the QPM indicates an
increase of 25 basis points in each of the second and fourth
quarters of 2021.
Monetary policy continues to be accommodative, keeping
financial conditions supportive of credit demand as the
economy recovers from the pandemic and associated
lockdowns. The SARB has ensured adequate liquidity
in domestic markets and will continue to closely monitor
funding markets for stress. In addition, regulatory relief
provided to banks continues to support lending to
households and firms.
Important macroeconomic gains would be realised by
achieving a stable public debt level, increasing the supply of

The (Q1) Bureau for Economic Research (BER) survey expectations for 2021 remain at 3.9%, 4.2% for 2022 and 4.4% for 2023. Market analysts
(Reuters Econometer) expect inflation to be higher at 4.2% (from 4.1%) in 2021, unchanged at 4.3 in 2022 and slightly lower at 4.4% in 2023 (down
from 4.5%). Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflationlinked bonds. These now sit at 4.5% for the five-year and 5.98% on the 10-year breakeven. 15-year breakeven inflation sits at 6.43%.
energy, moderating administered price inflation and keeping
wage inflation low into the recovery. Such steps will enhance
the effectiveness of monetary policy and its transmission to
the broader economy.
Economic and financial conditions are expected to
remain volatile for the foreseeable future. In this uncertain
environment, policy decisions will continue to be data
dependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through temporary price
shocks and focus on second round effects. As usual, the
repo rate projection from the QPM remains a broad policy
guide, changing from meeting to meeting, in response to
new data and risks.
Per cent
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Repurchase rate forecast (May 2021)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

OCTOBER 2021
Summary of assumptions: Monetary Policy Committee
meeting on 20 May 2021*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 62 and 63.

OCTOBER 2021
Summary of selected forecast results: Monetary Policy Committee meeting
on 20 May 2021*
Selected forecast results (annual)
Actual
Forecast


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


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


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

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

OCTOBER 2021
Statement of the Monetary Policy Committee
22 July 2021
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the Quarterly Projection Model (QPM) is a trade-weighted average of South Africa’s trading partners. The IMF’s global forecast for
2022 sits at 4.4%.

The current account is expected to be in surplus of 3.7% of GDP in 2021, shifting to a deficit of 0.1% in 2022.

The G3 comprises the United States, the eurozone and Japan.
Despite steady improvements in vaccination rates,
stronger confidence and better global economic growth,
the COVID-19 pandemic continues to weigh on global
prospects. Vaccination rates are lagging in many emerging
market and developing countries. Until populations develop
sufficient immunity to curb virus transmission, waves of
infection are likely to continue. As indicated by South Africa’s
public health authorities, a third wave of virus infection is
currently peaking. Additionally, by raising uncertainty and
reducing investor confidence, the recent unrest in parts of
the country is likely to slow our ongoing recovery.
Lockdowns and other restrictive measures that remain in
place in a number of countries will continue to weigh on
economic activity, particularly in sectors dependent on close
contact, such as travel, tourism, hospitality and leisure. The
International Monetary Fund’s (IMF) April forecast for global
gross domestic product (GDP) for 2021 is 6.0%, and will be
updated later this month. The South African Reserve Bank’s
(SARB) forecast for global growth in 2021 now sits at 6.1%.1
For 2022, we expect global growth of 4.4% and 3.4% in 2023.
Recoveries in emerging market and developing economies
are expected to lag those in advanced economies, in large
part due to a slower pace of vaccinations.
Although policy settings in advanced economies remain
accommodative, the spread of the Delta variant, higher
global inflation and uncertainty about the normalisation
path for interest rates continue to cause financial market
and capital flow volatility. This is reflected in persistent risk
aversion, especially towards emerging market economies
that fail to take advantage of improved global prospects or
run large macroeconomic imbalances.
The domestic economy grew by 4.6% in the first quarter
of 2021, much stronger than the 2.7% expected at the
time of our May meeting. That outcome reflected better
sectoral growth performances and robust terms of trade.
Commodity prices have remained high, sustaining income
gains despite higher oil prices.
However, recent unrest and economic damage could have
lasting effects on investor confidence and job creation. The
unrest is estimated to have fully negated the better growth
results from the first quarter, resulting in an unchanged
estimate of 4.2% for growth in 2021.
The direct and indirect costs of recent events will likely further
slow South Africa’s economic recovery. Although some
sectors, notably mining and manufacturing, have largely
recovered to pre-pandemic levels, production remains
muted in sectors harder hit by the pandemic and in regions
now affected by the unrest. The SARB’s investment forecast
was revised up for this year but remains constrained.
Household spending is still expected to be healthy, in line
with better than expected salaries and wages, rising asset
prices and low interest rates.
GDP is expected to grow by 2.3% in 2022 and by 2.4% in
2023, unchanged since the May meeting.
Overall, and after revisions, the risks to the medium-term
domestic growth outlook are assessed to be balanced.
High export prices, stronger household incomes and a
somewhat better investment outlook are backed up by
generally supportive global conditions, despite ongoing
financial volatility. Recent events in the country, their impact
on vaccinations, a longer than expected lockdown, limited
energy supply and policy uncertainty pose downside risks
to growth.
The current account surplus remains substantial and reflects
good growth and higher prices for exports, still moderate
prices for imported oil, and slowly reviving demand for
imported consumer and investment goods. This surplus is
expected to give way to a modest current account deficit by
next year (2022), as exports slow and imports accelerate.2
Although financing conditions have improved and fiscal risk
has eased, the yield curve for rand-denominated bonds
remains steep. Long bond yields have returned to prepandemic levels of around 9.0% on 10-year bonds.
The generally favourable global conditions and strong
commodity export prices have kept the currency close to its
long-run equilibrium level, with a year-to-date appreciation of
4% on a trade-weighted basis. Since the May meeting, the
rand has depreciated by 0.5% on a trade-weighted basis.
The implied starting point for the rand forecast is R14.40
to the US dollar, compared with R14.46 at the time of the
previous meeting.
At a global level, a wide range of prices is accelerating,
including raw materials, intermediate inputs and food,
reflecting both global supply shortages and rising demand.
So far, this has had relatively limited pass-through to
consumer prices. Our estimate for inflation in the G3
economies was revised slightly higher for 2021 to 2.2%
(from 2.0%) and lower in the outer years.3

OCTOBER 2021
Oil prices are revised up, and petrol price inflation is sharply
higher at 15.3% (up from 12.5%).4 Local electricity prices are
unchanged at 10.6%.
Headline consumer price inflation for 2021 is revised slightly
higher to 4.3% (up from 4.2%), and revised lower to 4.2%
(from 4.4%) in 2022. For 2023, headline consumer price
inflation remains unchanged at 4.5%.
The forecast for core inflation is revised lower to 2.9% in 2021
(down from 3.0%) and to 3.7% in 2022 (down from 4.0%).
Core inflation is expected to be 4.3% in 2023, unchanged
from the May forecast.
The SARB’s forecast reflects higher food and petrol prices
that push up near-term headline inflation, before moderating
in the latter half of this year and into 2022. Compared to
the May meeting, the current growth forecast implies a
wider output gap in the near term. While economic activity
strengthens over the forecast period, the current exchange
rate level and modest growth in unit labour costs contain
the expected rise in core inflation.
The risks to the short-term inflation outlook are assessed to
the upside, despite weaker than expected services inflation
outcomes in recent months. Rapid global producer price
inflation and supply shortages created by disruptions to local
transport networks increase these inflation risks. Food price
inflation, already very high globally, surprised to the upside
in recent months. Petrol, electricity and other administered
prices also continue to present short-term risks.
Average surveyed expectations of future inflation have
increased by 0.3 percentage points, to 4.2% for 2021 and
by 0.2 percentage points, to 4.4% for 2022. Market-based
expectations for inflation are slightly higher for 2021 and
lower over longer horizons.5
Given the medium and long-term projections set out above,
a weaker currency, higher domestic import tariffs and
escalating wage demands present longer-term upside risks
to the inflation forecast.
Despite higher expectations and continued upside risks, the
MPC expects inflation to be contained in 2021 and 2022,
before rising to around the midpoint of the inflation target
range in 2023.
Against this backdrop, the MPC decided to keep rates
unchanged at 3.5% per annum. The decision was
unanimous.

The forecast for petrol prices in 2022 has been revised up from 3.9% in May to 5.5% currently. Our assumptions are now for oil prices to average
US$66 per barrel in 2021 and US$65 per barrel in 2022 and US$63 in 2023.

The (Q2) Bureau for Economic Research (BER) survey expectations for 2021 rose to 4.2% (up from 3.9%), to 4.4% from 4.2% for 2022, and to 4.5%
from 4.4% for 2023. Market analysts (Reuters Econometer) in July expect inflation to be higher at 4.3% (from 4.2%) in 2021, and 4.4% in 2022, up from
4.3%, and unchanged at 4.4% in 2023. Market-based rates are calculated from the break-even inflation rate, which is the yield differential between
conventional and inflation-linked bonds. These now sit at 4.6% for the five-year and 5.88% on the 10-year breakeven. 15-year breakeven inflation sits
at 6.37%.

This implies a rise in the inflation-adjusted repo rate from about -1.0% for 2021 to about 0.5% by the end of 2022. The real repurchase rate calculation
here is based on the one-quarter ahead inflation forecast.
The implied policy rate path of the QPM indicates an
increase of 25 basis points in the fourth quarter of 2021 and
in each quarter of 2022.
These repurchase rate levels reflect a highly accommodative
policy stance through the end of 2022, keeping financial
conditions supportive of credit demand as the economy
recovers from the pandemic and associated lockdowns.6
The SARB has ensured adequate liquidity in domestic
markets and will continue to closely monitor funding markets
for stress. In addition, regulatory relief provided to banks
continues to support lending to households and firms.
Better anchored expectations of future inflation could
keep interest rates lower for longer, and can be realised by
achieving a stable public debt level, increasing the supply of
energy, moderating administered price inflation and keeping
wage inflation low into the recovery. Such steps will enhance
the effectiveness of monetary policy and its transmission to
the broader economy.
Economic and financial conditions are expected to
remain volatile for the foreseeable future. In this uncertain
environment, policy decisions will continue to be data
dependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through temporary price
shocks and focus on second round effects. As usual, the
repo rate projection from the QPM remains a broad policy
guide, changing from meeting to meeting in response to
new data and risks.
Per cent
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Repurchase rate forecast (July 2021)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

OCTOBER 2021
Summary of assumptions: Monetary Policy Committee
meeting on 22 July 2021*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 62 and 63.

OCTOBER 2021
Summary of selected forecast results: Monetary Policy Committee meeting
on 22 July 2021*
Selected forecast results (quarterly)
Year-on-year percentage change


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


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro area,
the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation
of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

OCTOBER 2021
Statement of the Monetary Policy Committee
23 September 2021
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

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

Statistics South Africa released its revision on 25 August 2021. The main effect of the revisions is to the aggregate level of output in the economy,
which was revised up significantly.

The current account is expected to be in surplus of 4.6% of GDP in 2021, shifting to a deficit of 0.3% in 2023.

The G3 comprises the United States, eurozone and Japan. G3 inflation for 2022 is 2.0% and 1.8% for 2023.
A steady improvement in vaccination rates will sustain
confidence and global economic growth, even with expected
further waves of the COVID-19 virus. However, vaccination
rates are lagging in many emerging market and developing
economies. Until populations develop sufficient immunity
to curb virus transmission, waves of infection are likely to
continue, with ongoing poor economic outcomes. At this
time, the third wave of the virus infection has peaked in South
Africa. The virus, however, is only one of a series of current
risks to the economic recovery that include rising inflation,
weaker commodity export prices and the longer-term impact
of scarring from the pandemic and the July unrest.
The International Monetary Fund’s (IMF) forecast for global
gross domestic product (GDP) for 2021 is 6.0%, and it will be
updated again in early October. The South African Reserve
Bank’s (SARB) forecast for global growth in 2021 now sits
at 6.2% (up from 6.1%).1 For 2022 and 2023, we still expect
global growth of 4.4% and 3.4% respectively. Recoveries in
emerging market and developing economies are expected
to lag those in advanced economies, in large part due to a
slower pace of vaccinations.
Although policy settings in advanced economies remain
accommodative, the spread of the Delta variant, higher global
inflation and uncertainty about the normalisation path for
interest rates continue to cause financial market turmoil and
capital flow volatility. Risk aversion persists where economies
fail to take advantage of improved global prospects or to
reduce large macroeconomic imbalances.
The domestic economy grew by 4.2% in the first quarter of
2021 and by 4.7% in the second quarter. These outcomes
reflect better sectoral growth performances and robust
terms of trade. Commodity prices have been extraordinarily
high, sustaining income gains despite somewhat higher
oil prices. While more South Africans have re-entered the
jobs market as economic activity resumed, the loss of jobs
suggests persistent adjustment and sustained weakness
in some sectors. Household spending remains healthy,
however, in line with better-than-expected salaries and
wages, rising asset prices and low interest rates.
The SARB’s forecast for fixed investment was revised up
for this year but remains constrained, and, as a result of the
GDP revisions by Statistics South Africa (Stats SA), is lower
as a share of economic activity.2
The economy is expected to grow by an upwardly revised
5.3% this year (from 4.2%), despite the much larger negative
effect on output than was previously estimated from the
July unrest. Our revised estimate for third quarter economic
growth is -1.2%, compared to the previous -0.5%. Output in
the manufacturing sector fell by 8.0% in July alone. Mining
was up by 4.1%, while land freight transport fell by 5.0% and
retail output was down by 11.2%.
The July events and the pandemic are likely to have lasting
effects on investor confidence and job creation, impeding
recovery in labour-intensive sectors hardest hit by the
lockdowns. GDP is expected to grow by 1.7% in 2022 (down
from 2.3%), and by 1.8% in 2023 (down from 2.4%).
Overall, and after revisions, the risks to the medium-term
domestic growth outlook are assessed to be balanced,
as most of the bounce back from the recovery is now in
the past. High export prices are expected to fade, while
very weak job creation will slow household consumption.
Investment will remain constrained by the still limited energy
supply and ongoing policy uncertainty. The faster vaccine
roll-out presents upside risks to the growth outlook.
The current account surplus remains large, at 5.6% of GDP,
reflecting high prices for mining and agricultural exports,
still gradually rising oil prices, and slowly reviving demand
for imported consumer and investment goods. The surplus
is expected to shrink to about 0.7% of GDP for next year
(2022), as exports slow and imports accelerate.3
Long bond yields have returned to pre-pandemic levels
of around 9.0% on 10-year bonds. Although financing
conditions have improved and fiscal risk has eased, the
yield curve for rand-denominated bonds remains steep.
The generally favourable global conditions and strong
commodity export prices have strengthened the currency
above its long-run equilibrium level, with a year-to-date
appreciation of 1.5% on a trade-weighted basis. Since the
July meeting, the rand has depreciated by 1%. The implied
starting point for the rand forecast is R14.47 to the US dollar,
compared with R14.40 at the time of the previous meeting.
At a global level, a wide range of prices is accelerating,
including raw materials, intermediate inputs and food. This
reflects both global supply shortages and strong demand.
This has passed through to consumer prices in some major
economies. Our estimate for inflation in the Group of Three
(G3) was revised higher for 2021 to 2.4% (from 2.2%) and
remains the same in the outer years.4

OCTOBER 2021
Oil prices are revised up for this year, and petrol price
inflation is higher at 16.1% (up from 15.3%).5 Local electricity
prices are lower at 10.1% (down from 10.5%).
Headline consumer price inflation for 2021 is revised slightly
higher to 4.4% (up from 4.3%), and remains unchanged at
4.2% in 2022 and 4.5% in 2023.
The forecast for core inflation is revised higher to 3.0% in
2021 (up from 2.9%) and to 3.8% in 2022 (up from 3.7%).
Core inflation is expected to be 4.3% in 2023, unchanged
from the July forecast.
The SARB’s forecast reflects higher headline inflation for the
rest of this year, before moderating in 2022. Compared to
the July meeting and taking into account higher household
consumption and less investment from the recent GDP
revisions, the output gap is narrower historically and over
the forecast period.6
While economic activity continues to expand over the forecast
period, a rise in core inflation is moderated by the current
strength of the exchange rate and modest unit labour costs.
The risks to the short-term inflation outlook are assessed
to the upside. Rapid global producer price and food price
inflation have surprised to the upside in recent months and
could do so again. Oil prices have become more volatile
in recent weeks and could rise beyond our expectations.
Electricity and other administered prices also continue
to present short-term risks. Given the medium and longterm projections set out above, a weaker currency, higher
domestic import tariffs and escalating wage demands
present further longer-term upside risks to the inflation
forecast.
Average surveyed expectations of future inflation remain
unchanged at 4.2% for 2021 and 4.4% for 2022. Marketbased expectations for inflation are slightly higher for 2021
at 4.4% (up from 4.3%) and stable over longer horizons.7
With largely unchanged inflation expectations and even with
continued upside risks, the MPC expects inflation to stay
close to the midpoint over the forecast period.
Against this backdrop, the MPC decided to keep rates
unchanged at 3.5% per annum. The decision was
unanimous.
The implied policy rate path of the QPM indicates an increase
of 25 basis points in the fourth quarter of 2021 and further
increases in each quarter of 2022 and 2023.

The forecast for petrol prices in 2022 is revised down from 5.5% in July to 3.7% currently. Our assumptions are now for oil prices to average
US$69 per barrel in 2021 and US$67 per barrel in 2022 and US$65 in 2023.

The GDP revisions resulted in a higher level of output, consumption and lower investment, among other changes. Upward revisions to potential
growth were not as large as the GDP level revisions, implying somewhat higher demand and therefore a smaller output gap than estimated
pre-revision. For 2020, the output revisions also implied more of a negative supply shock than previously estimated, which then reversed in 2021,
resulting in re-estimates of the output gap for each of these years.

The (Q3) Bureau for Economic Research (BER) survey expectations remain unchanged at 4.2%, 4.4% and to 4.5% for the three years. Market analysts
(Reuters Econometer) in September expect inflation to be higher at 4.4% (from 4.3%) in 2021, unchanged at 4.4% in 2022 and lower at 4.2% in 2023.
Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds.
These now sit at 4.79% for the five-year and 5.98% on the 10-year break-even. The 15-year break-even inflation sits at 6.31%.

This implies a rise in the inflation-adjusted repo rate from -1.0% for 2021 to about 0.6% for 2022 and 1.5% for 2023. The real repurchase rate
calculation here is based on the one-quarter ahead inflation forecast.
These repurchase rate levels reflect a highly accommodative
policy stance through the end of the forecast, keeping
financial conditions supportive of credit demand as the
economy continues to recover.8 The SARB has ensured
adequate liquidity in domestic markets and will continue
to closely monitor funding markets for stress. In addition,
regulatory relief provided to banks continues to support
lending to households and firms.
Better anchored expectations of future inflation could
keep interest rates lower for longer and can be realised by
achieving a stable public debt level, increasing the supply of
energy, moderating administered price inflation and keeping
wage inflation low into the recovery. Such steps will enhance
the effectiveness of monetary policy and its transmission to
the broader economy.
Economic and financial conditions are expected to
remain volatile for the foreseeable future. In this uncertain
environment, policy decisions will continue to be data
dependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through temporary price
shocks and focus on second round effects. As usual, the
repo rate projection from the QPM remains a broad policy
guide, changing from meeting to meeting in response to
new data and risks.
Per cent
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Repurchase rate forecast (September 2021)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

OCTOBER 2021
Summary of assumptions: Monetary Policy Committee
meeting on 23 September 2021*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 62 and 63.

OCTOBER 2021
Summary of selected forecast results: Monetary Policy Committee meeting
on 23 September 2021*
Selected forecast results (quarterly)
Year-on-year percentage change


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


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro area,
the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an overvaluation
of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

OCTOBER 2021
Foreign sector assumptions
1. Trading-partner gross domestic product (GDP) growth
is broadly determined using the Global Projection Model
(GPM), which is adjusted to aggregate the GDP growth
rates of South Africa’s major trading partners on a tradeweighted basis. Individual projections are done for the
six largest trading partners, namely the euro area, the
United States (US), the United Kingdom (UK), Japan,
China and India. Other countries considered, although
with small weights, are Brazil, Mexico and Russia. The
remaining trading partners are grouped into the ‘Rest
of Countries’ bloc. Since sub-Saharan Africa is also a
major trading region for South Africa (but does not have
a bloc in the GPM), it is modelled separately and then
combined with the aggregate of all the countries in the
GPM to make up total trading-partner growth.
2. As with GDP growth, the output gap is determined using
the GPM and is adjusted in a similar way. The output gap
is driven by a combination of country-specific domestic
factors, external factors and financial-real linkages
(beyond interest rate and exchange rate effects).
Domestic factors include expectations of future demand
and medium-term interest rates. External factors include
exchange rate impacts on demand, direct spillovers
through trade with trading-partner countries and
foreign demand.
3. The commodity price index is a weighted aggregate
price index of the major South African export
commodities.
4. The Brent crude oil price is expressed in US dollars
per barrel. The assumption incorporates supply and
demand dynamics as well as oil inventories (of all grades).
The assumption is also informed by projections from the
US Energy Information Administration, the Organization
of the Petroleum Exporting Countries (OPEC) and
Reuters.
5. World food prices is the composite food price index
of the United Nations (UN) Food and Agriculture
Organization (FAO) in US dollars. It is weighted using
average export shares, and represents the monthly
change in the international prices of a basket of five
food commodity price indices (cereals, vegetable oil,
dairy, meat and sugar). World food price prospects
incorporate selected global institution forecasts for
food prices and imbalances from the anticipated trend
in international food supplies relative to expected food
demand pressures.
6. International consumer prices are also broadly
determined using the GPM. The index is an aggregate
of the consumer price indices of the euro area, the
US and Japan, weighted by their relative trade shares.
Consumer prices are determined for each of these
economies by accounting for inflation expectations,
demand pressures, and pass-through from changes in
the relevant exchange rate. Other institutional forecasts
for international consumer prices are also considered.
7. International policy interest rates are again broadly
determined using the GPM. Interest rates are a weighted
average of the policy rates of the euro area, the US and
Japan. They are individually determined by a ‘Taylortype’ monetary policy rule. The communications of the
relevant central banks and other institutional forecasts
are also considered.

OCTOBER 2021
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 agreement between Eskom and the
National Energy Regulator of South Africa (NERSA), with
a slight adjustment for measurement at the municipal
level.
2. Fuel taxes and levies are the total domestic taxes and
costs included in the price of fuel paid at the pump. They
include the Road Accident Fund (RAF) levy, the fuel levy,
retail and wholesale margins, the slate levy, and other
minor levies. The two major taxes, which are set by the
Minister of Finance in the annual National Budget, are
the RAF levy and the fuel levy. The income generated by
the RAF levy is utilised to compensate third-party victims
of motor vehicle accidents, while the fuel levy is used to
provide funding for road infrastructure.
3. Potential growth is derived from the South African
Reserve Bank’s (SARB) semi-structural potential output
model. The measurement accounts for the impact of the
financial cycle on real economic activity, and introduces
economic structure via the relationship between potential
output and capacity utilisation in the manufacturing
sector (SARB Working Paper Series No. WP/14/08).
4. The midpoint of the inflation target range is 4.5%.
The official inflation target range is 3–6%.
5. The neutral real interest rate (NRIR) is the interest rate
consistent with stable inflation and output in line with
the economy’s potential. This variable is the basis for
judging whether a given policy stance is expansionary,
contractionary or neutral.

OCTOBER 2021
Glossary
Advanced economies: Advanced economies are countries
with high gross domestic product (GDP) per capita,
diversified exports, and close integration into the global
financial system.
Balance of payments: This is a record of transactions
between the home country and the rest of the world over a
specific period of time. It includes the current and financial
accounts. See also ‘Current account’ below.
Brent crude: Brent crude is a light and sweet blend of oil
from five different fields in the North Sea. The price of Brent
crude is one of the benchmark oil prices in international
markets.
Budget deficit: A budget deficit indicates the extent to which
government expenditure exceeds government revenue.
Business and consumer confidence: These are economic
indicators that measure the level of optimism about the
economy and its prospects among business managers and
consumers.
Commodities: Commodities can refer to energy, agriculture,
metals and minerals. Major South African-produced
commodities include platinum and gold.
Consumer price index (CPI): The CPI provides an indication
of aggregate price changes in the domestic economy. The
index is calculated using a number of categories forming
a representative set of goods and services bought by
consumers.
Core inflation: Core generally refers to underlying inflation,
excluding the volatile elements (e.g. food and energy prices).
The South African Reserve Bank’s (SARB) forecasts and
discussions refer to headline CPI excluding food, nonalcoholic beverages (NAB), fuel and electricity prices.
Crude oil price: This is the United States (US) dollar price
per barrel of unrefined oil. See also ‘Brent crude’ above.
Current account: The current account of the balance of
payments consists of net exports (exports less imports)
in the trade account as well as the services, income and
current transfers.
Emerging markets: Emerging markets are countries with
low to middle income per capita. They are advancing rapidly
and are integrating with global (product and capital) markets.
Exchange rate depreciation (appreciation): Exchange rate
depreciation (appreciation) refers to a decrease (increase) in
the value of a currency relative to another currency.
Exchange rate pass-through: This is the effect of exchange
rate changes on domestic inflation (i.e. the percentage
change in domestic CPI due to a change in the exchange
rate). Changes in the exchange rate affect import prices,
which in turn affect domestic consumer prices and inflation.
Forecast horizon: This is the future period over which the
SARB generates its forecasts, typically between two and
three years.
Gross domestic product (GDP): GDP is the total market
value of all the goods and services produced in a country.
It includes total consumption expenditure, capital formation,
government consumption expenditure and the value of
exports less the value of imports.
Gross fixed capital formation (investment): The value of
acquisitions of capital goods (e.g. machinery, equipment
and buildings) by firms, adjusted for disposals, constitutes
gross fixed capital formation.
Headline consumer price index (CPI): Headline CPI refers
to CPI for all urban areas, as measured on a monthly basis
by Statistics South Africa (Stats SA). Headline CPI is a
measure of price levels in all urban areas. The 12-month
percentage change in headline CPI is referred to as ‘headline
CPI inflation’ and reflects changes in the cost of living. This
is the official inflation measure for South Africa.
Household consumption: This is the amount of money
spent by households on consumer goods and services.
Inflation (growth) outlook: This outlook refers to the evolution
of future inflation (growth) over the forecast horizon.
Inflation targeting: This is a monetary policy framework
used by central banks to steer actual inflation towards an
inflation-target level or range.
Monetary policy normalisation: This refers to the unwinding
of an unusually accommodative monetary policy. It could
also mean adjusting the economy’s policy rate towards its
real neutral policy rate.
Neutral real interest rate (NRIR): The NRIR is the level at
which the real interest rate will settle once the output gap is
closed and inflation is stable.
Nominal effective exchange rate (NEER): The NEER
is an index that expresses the value of a country’s
currency relative to a basket of other (trading-partner)
currencies. An increase (decrease) in the NEER indicates
a strengthening (weakening) of the domestic currency with
respect to the selected basket of currencies. The weighted
average exchange rate of the rand is calculated against
20 currencies. The weights of the five major currencies are
as follows: the euro (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’ below.
Output gap/potential growth: Potential growth is the rate
of GDP growth that could theoretically be achieved if all
the productive assets in the economy were employed

OCTOBER 2021
in a stable inflation environment. The output gap is the
difference between actual growth and potential growth,
which accumulates over time. If this is negative, then the
economy is viewed to be underperforming and demand
pressures on inflation are low. If the output gap is positive,
the economy is viewed to be overheating and demand
pressures are inflationary.
Policy rate: A policy rate is the interest rate used by a central
bank to implement monetary policy.
Productivity: Productivity indicates the amount of goods
and services produced in relation to the resources utilised
in the form of labour and capital.
Real effective exchange rate (REER): The REER is the
NEER adjusted for inflation differentials between South Africa
and its main trading partners. See also ‘Nominal effective
exchange rate’ above.
Repurchase (repo) rate: This is the policy rate that is set
by the Monetary Policy Committee (MPC). It is the rate that
commercial banks pay to borrow money from the SARB.
Real repo rate: This is the nominal repo rate, as set by the
MPC, adjusted for expected inflation.
Terms of trade: This refers to the ratio of export prices to
import prices.
Unit labour cost (ULC): A ULC is the labour cost to produce
one ‘unit’ of output. This is calculated as the total wages
and salaries in the non-agricultural sector divided by the real
value added at basic prices in the non-agricultural sector of
the economy.

OCTOBER 2021
Abbreviations
AE
advanced economy
BCI
business confidence index
BER
Bureau for Economic Research
CIT
corporate income tax
CMS
Council for Medical Schemes
COVID-19
coronavirus disease 2019
CPI
consumer price index
ECB
European Central Bank
EM
emerging market
FAO
Food and Agriculture Organization
Fed
Federal Reserve
FRA
forward rate agreement
FX
foreign exchange
G3
Group of Three (United States, euro area and Japan)
GBI
Government Bond Index
GDP
gross domestic product
GFC
global financial crisis
GFCF
gross fixed capital formation
GPM
Global Projection Model
IFI
international financial institutions
IMF
International Monetary Fund
ISA
instalment sales agreements
Jibar
Johannesburg Interbank Average Rate
KZN
KwaZulu-Natal
MPC
Monetary Policy Committee
MPR
Monetary Policy Review
MSCI
Morgan Stanley Capital International
NAB
non-alcoholic beverages
NDP
National Development Plan
NEER
nominal effective exchange rate
NERSA
National Energy Regulator of South Africa
NRIR
Neutral Real Interest Rate
OECD
Organisation for Economic Co-operation and Development
OPEC
Organization of the Petroleum Exporting Countries
PCE
personal consumption expenditure
PGM
platinum group metal

OCTOBER 2021
PMI
Purchasing Managers’ Index
PPI
producer price index
QE
quantitative easing
QLFS
Quarterly Labour Force Survey
QPM
Quarterly Projection Model
RAF
Road Accident Fund
REER
real effective exchange rate
REIPPPP
Renewable Energy Independent Power
Producer Procurement Programme
repo (rate)
repurchase (rate)
SABOR
South African Benchmark Overnight Rate
SACU
Southern African Customs Union
SANRAL
South African National Roads
Agency Limited
SARB
South African Reserve Bank
SIT
services, income and current transfer
SOE
state-owned enterprise
SRD
social relief of distress
Stats SA
Statistics South Africa
UAE
United Arab Emirates
UK
United Kingdom
ULC
unit labour cost
UN
United Nations
US
United States
WEO
World Economic Outlook