SARB MPC Statement - March 2013
Central bank: sarb | Type: statement | Date: 2013-03-20

20 March 2013
STATEMENT OF THE MONETARY POLICY COMMITTEE
There are a number of key developments that this meeting of the Monetary
Policy Committee (MPC) had to consider, not least among them on the domestic
front the challenge of moderate growth, rising inflation, a depreciated currency, a
wider current account deficit as well as difficult labour relations and
unemployment that remains stubbornly high.
Since the previous meeting of the MPC the domestic inflation outlook has
deteriorated slightly. Risks posed by the depreciation of the rand exchange rate
have overshadowed the more favourable developments, including lower
electricity price increases and some moderation in food price inflation.
Nevertheless inflation is expected to remain contained within the target range
apart from a temporary breach in the third quarter of 2013. The domestic
economic growth prospects remain fragile amid continued tensions in the labour
market, particularly in the mining sector.
The global economy is still characterised by a multispeed recovery. However,
recent events in Europe, particularly as they affect Cyprus, have increased risk
and uncertainty in the region, and have the potential to reignite the banking and
sovereign debt crisis and undermine growth prospects further. The global outlook
is also clouded by the fiscal gridlock in the United States that remains
unresolved.
The year-on-year inflation rate as measured by the consumer price index (CPI)
for all urban areas was 5,9 per cent in February 2013, up from 5,4 per cent in
January. The upside surprise in the February was mainly due to the increase in
medical insurance costs, which resulted in the contribution to CPI from
miscellaneous goods and services increasing from 0,7 percentage points to 1,1
percentage points. This category also impacted on core inflation, which increased
markedly from 4,7 per cent in January to 5,3 per cent in February. Petrol prices
also contributed to the upward trend having increased by 11,9 per cent. Food
price inflation measured 6,3 per cent, down from a recent high of 7,5 per cent in
November 2012, and its contribution to overall inflation declined from 1,0
percentage points to 0,9 percentage points. Administered prices increased by 8,9
per cent, and by 7,5 per cent excluding petrol, year-on-year. The producer price
inflation for final manufactured goods measured 5,8 per cent in January1.
The inflation forecast of the Bank reflects a slight deterioration in the inflation
outlook for 2013 compared with the previous forecast. The forecasts incorporate
the new CPI weights and rebasing announced by Statistics South Africa, as well
as the lower electricity price increase of 8 per cent granted to Eskom by Nersa.
Inflation is now expected to average 5,9 per cent in 2013 and 5,3 per cent in
2014, compared with the previous forecasts of 5,8 per cent and 5,2 per cent for
these respective years. Inflation is expected to breach temporarily the upper end
of the target range in the third quarter of 2013, when it is expected to average 6,3
per cent, and then to moderate gradually to 5,2 per cent in the final quarter of
2014. This deterioration is largely due to the depreciation of the rand and higher
petrol prices, which more than offset the impact of the lower electricity price
increases and a lower starting point.
The forecast of core inflation is more or less unchanged for 2013 but higher for
2014, yet still indicates the continued absence of significant demand pressures.
This measure is expected to peak at 5,1 per cent in the second quarter of 2014,
and to average 4,8 per cent and 4,9 per cent in 2013 and 2014, respectively. This
1 Statistics South Africa has adopted a “stages-of-production” concept for the PPI and no longer produces
one aggregated series. The five producer price series are PPI for final manufactured goods; intermediate
manufactured goods; electricity and water; mining; and agriculture, forestry and fishing. The PPI for final
manufactured goods is regarded as best representing the effects of price changes through the five stages of
production.
forecast is likely to be adjusted upwards in the light of the increase in medical
insurance costs announced earlier today.
Inflation expectations as reflected in the Reuters survey of analysts conducted in
February 2013 have remained more or less unchanged since December.
Expectations remained anchored within the target range but close to the upper
end, and, as with the Bank’s forecast, the peak is expected in the third quarter of
2013.
The global economic outlook presents a mixed picture following a disappointing
fourth quarter in most of the advanced economies. Recent data from the United
States indicate positive trends in the labour market and household consumption
expenditure due in part to positive wealth effects from the housing and equity
markets. However, uncertainty about the possible negative impulse from fiscal
tightening continues amid political differences over fiscal policy. Economic growth
is still expected to remain below trend in 2013.
The outlook for some of South Africa’s other main advanced-economy trading
partners is less positive. The Eurozone remains in recession, and is not expected
to recover before mid-2013 at the earliest. The tail risks from a sovereign debt
crisis appeared to have subsided, but the uncertainty created by the inconclusive
Italian general election, and the crisis in Cyprus, have renewed concerns about
the stability of the region. The outlook for the UK economy remains subdued
against the backdrop of continued fiscal austerity.
Growth prospects in the Asian economies are more positive. The Japanese
economy is expected to be bolstered by positive consumer sentiment in response
to fiscal and monetary stimuli, but the response on the capital expenditure side is
still cautious. Nevertheless an improved growth performance is expected,
particularly given the 18 per cent depreciation of the yen against the US dollar
since October 2012. Growth in China is expected to be sustained at relatively
robust levels as fixed investment expenditure remains strong despite a
moderation in consumption expenditure growth. Growth in other emerging
markets remains positive.
These trends suggest that monetary policy in the advanced economies will
remain accommodative for some time despite recent fears in the financial
markets of an early reversal of quantitative easing in the US. The relatively weak
growth outlook in the advanced economies has contributed to the subdued global
inflation environment.
The exchange rate of the rand continues to pose the main upside risk to the
inflation outlook. Since the beginning of the year, the rand has depreciated by 8,4
per cent against the US dollar and fluctuated within a range of R8,45 and R9,26.
However, given the significant realignment of global currencies, and particularly
the depreciation of the Japanese yen and the pound sterling against the US
dollar, the trade weighted depreciation since the beginning of the year was more
moderate at 5,6 per cent.
Domestic factors contributing to the recent rand depreciation include continued
work stoppages in parts of the mining sector, which also have the potential to
disrupt electricity supplies, and the further widening of the deficit on the current
account of the balance of payments, which measured 6,3 per cent in 2012. Some
narrowing of the deficit is expected during the course of the year in response to
the depreciation, although the degree of response will be constrained by weak
demand from advanced economies as well as strong infrastructure-related import
demands. Mining export growth will also be dependent on the resolution of labour
market issues with a resumption of full production, and on the extent of possible
shaft closures.
Equity and bond flows to emerging economies have generally moderated in the
past few months, making for a more challenging global environment for financing
the deficit. Inflows into South African bond and equity markets have, however,
been sustained, and year-to-date non-resident net purchases of equities and
government bonds have totaled R6,1 bn and R11,3 bn respectively. These flows
have, however, been volatile, and the growing proportion of bonds owned by
non-residents, currently around 37 per cent of the total outstanding stock of debt
could constrain the pace of inflows.
The rand is likely to remain sensitive to both domestic and global developments.
The exchange rate is expected to remain volatile and subject to overshooting,
and further sustained depreciation would increase the upside risk to the inflation
outlook. The Reuters Econometer survey conducted in February shows that most
analysts still expect the rand to appreciate from current levels during the year,
although the degree of dispersion is indicative of the uncertainty around these
forecasts. According to this survey, the consensus forecast for the rand/US$
exchange rate at the end of 2013 is R8,61, with a range of forecasts between
R9,19 and R7,80.
Domestic growth prospects remain relatively subdued notwithstanding a better-
than-expected fourth quarter GDP growth outcome and positive developments in
the mining and manufacturing sectors in January. The economy grew by 2,5 per
cent in 2012, having recorded annualised growth of 2,1 per cent in the fourth
quarter, despite a 9,3 per cent contraction in the mining sector. The moderate
pace of recovery is expected to continue in 2013. The Bank’s forecast is for
growth of 2,7 per cent this year, marginally up from the previous forecast of 2,6
per cent, and 3,7 per cent in 2014, compared with a previous forecast of 3,8 per
cent. The risks to these forecasts are assessed to be on the downside.
The flat trajectory of the Bank’s leading indicator of economic activity is
consistent with this forecast. Growth this year is therefore expected to remain
below potential output growth of 3,5 per cent, and this is expected to result in a
slight widening of the Bank’s revised estimate of the output gap which, at 2,0 per
cent, reflects the continued subdued state of the economy.
The mining sector recorded year-on-year growth of 7,3 per cent in January, with
3-month-on-3-month growth of 5,4 per cent following four consecutive months of
contraction. Neverthless the sector is expected to remain under pressure given
the unsettled labour relations environment. The outlook for manufacturing
appears to have improved, but this recovery is still very tentative. The sector
grew at a year-on-year rate of 3,9 per cent in January, and by 1,8 per cent on a
3-month-on-3-month basis. This was consistent with improvements in the Kagiso
Purchasing Managers Index, which increased from 49,1 in January to 53,6 in
February.
Growth in gross fixed capital formation, which measured 5,7 per cent in 2012,
has been on a moderate upward trend since 2009, driven mainly by investment
growth of around 9 per cent by public corporations and general government.
Private sector investment growth moderated from 4,6 per cent in 2011 to 3,9 per
cent in 2012 due in part to excess capacity in manufacturing and electricity
supply constraints.
While household consumption expenditure has been the main driver of growth
since 2010, its contribution to growth has been diminishing. The general absence
of demand pressures in the economy is reflected in the continued moderation in
the growth in real consumption expenditure by households, which grew by 3,5
per cent in 2012 compared with 4,8 per cent in 2011. Nevertheless, growth in
consumption of durable goods remained robust at 11 per cent, compared with
demand for services which grew at only 1,8 per cent in 2012. Sales of new motor
vehicles declined on both a month-on-month and on a three-month-on-three-
month basis in February.
Retail trade sales in January appear to reflect this weakening trend, with a 3-
month-on-3-month decline of 0,7 per cent, and a lower than expected year-on-
year increase of 1,9 per cent. There are indications that consumption growth may
moderate further in 2013 amid slower real income growth, higher inflation,
elevated household debt levels, and a possible slow-down in credit extension to
consumers.
Twelve-month growth in banks’ total loans and advances to the private sector
measured 8,9 per cent in January, following growth of 10,0 per cent in
December. Loans and advances to the corporate sector grew by 7,5 per cent in
January, and to the household sector by 9,9 per cent. Growth in general loans to
households - mainly unsecured lending - moderated to 30,1 per cent following a
recent peak growth of 39,3 per cent in June. General loans to households
amounted to 8,3 per cent of total loans and advances, and 14,6 per cent of loans
and advances to household. Growth in this category of lending is likely to be
constrained by lower income growth and high household debt levels. Household
debt to disposable income measured 75,8 per cent in the final quarter of 2012.
Non-mortgage debt as a percentage of total household debt increased from 37
per cent in the third quarter of 2009 to 46 per cent in the final quarter of 2012.
The trend in wage settlements remains an upside risk to the inflation outlook,
although recent data is somewhat contradictory. The minimum wage in the
agricultural sector has been increased by 52,2 per cent, and indications from the
Andrew Levy Employment Publications are that wage settlements in collective
bargaining agreements picked up significantly from 6,8 per cent in the third
quarter of 2012 to 8,2 per cent in the fourth quarter. According to Statistics South
Africa, average salaries and wages per worker in the non-agricultural sector
increased over four quarters by 7,0 per cent in the final quarter of 2012, down
from 8,9 per cent in the previous quarter, while unit labour cost increases
declined from 7,4 per cent to 5,7 per cent in the same period.
The MPC remains concerned about the possible impact of excessively high wage
increases on employment growth. Employment in the formal non-agricultural
sector increased by 1,0 per cent during 2012, compared with annual employment
growth of 1,6 per cent in 2011. This included employment growth of 0,2 per cent
in the mining and quarrying industry and a 0,3 per cent contraction in the
manufacturing sector. In the fourth quarter of 2012 mining sector employment
increased by 1,000 employees, following a decline of 16,000 in the third quarter.
Of concern is the seasonally adjusted annualised decline of 0,7 per cent in total
non-agricultural employment during the fourth quarter of 2012.
The recent national government budget tabled before parliament reflects a
difficult balance between a commitment to medium-term fiscal consolidation and
the need for counter-cyclical policy. The projected deficit of 5,7 per cent for the
past fiscal year was wider than initially budgeted for, a result of lower revenue
due to weaker economic growth. The fiscal deficit as a percentage of GDP is
budgeted to be 5,1 per cent in the 2013/14 fiscal year, and to decline to 3,6 per
cent by 2015/16. The government net debt/GDP ratio is expected to stabilise at
around 40 per cent in 2015/16, well below the international benchmark for debt
sustainability of around 60 per cent.
There are indications that the pressures on inflation emanating from food prices
may be moderating. Food price inflation at the consumer price level declined
from a recent high of 7,5 per cent in November 2012 to 6,4 per cent in January
and 6,3 per cent in February. A similar trend is evident at the producer price level
where manufactured food inflation declined to 5,9 per cent in January, compared
with a recent peak of 11,1 per cent in November 2012. Similarly, producer price
inflation in agricultural products moderated from a recent high of 6,3 per cent in
October 2012 to 3,5 per cent in January. Global agricultural commodity prices
have declined on average by almost 20 per cent since their recent peak in
August 2012, and expectations are for further moderation in the absence of
adverse weather shocks.
Administered prices continue to put upside pressure on inflation, although lower
electricity price increases from the third quarter will dampen some of these
pressures. The petrol price, which has increased by a cumulative R1,24 per litre
since January 2013, remains an upside risk. Although global oil prices have
declined over the past few weeks, resulting in an over-recovery of the petrol price
so far this month, it is unlikely to be sufficient to offset the adverse exchange rate
impacts and the fuel levy increases, and a further increase in the petrol price is
likely in April.
The MPC continues to assess the balance of risks to the inflation outlook to be
on the upside, mainly due to the exchange rate and wage pressures. These
upside risks are mitigated in part by lower risk from food price inflation.
Underlying inflation appears to be relatively contained, consistent with the
moderating trend in consumption expenditure by households.
The economic growth outlook is more or less unchanged from the previous
meeting of the MPC, and risks to the outlook remain on the downside. The
unresolved labour disputes in the mining sector pose a significant risk to the
exchange rate and to economic growth through their negative impact on export
revenues, employment growth and investor perceptions of South Africa.
However, the depreciated exchange rate provides an opportunity for the
manufacturing sector in particular to become more competitive despite the
challenging export environment. Ensuring that this increase in competitiveness is
sustained will require improved productivity and the containment of wage and
other cost pressures, which underlines the need to keep inflation under control.
The MPC continues to assess the monetary policy stance to be appropriately
accommodative given the persistence of the negative output gap. At the same
time, further accommodation remains constrained by the upside risks to the
inflation outlook. The MPC has therefore decided to keep the repurchase rate
unchanged at 5,0 per cent per annum. The Committee will continue to apply
monetary policy consistent with its mandate of price stability within a flexible
inflation targeting framework.
Gill Marcus
GOVERNOR
Contact person:
Candice Jeffreys
+27 12 313 4209
Candice.Jeffreys@resbank.co.za