South Africa Leaves Monetary Policy Unchanged

The South African Reserve Bank left its benchmark repo rate steady at 6.75 percent on November 23rd 2017, in line with market expectations. Policymakers said upside risks to the inflation outlook have increased mainly due to higher oil prices and a weaker rand while the growth outlook remains subdued.

Excerpts from the statement by Governor Lesetja Kganyago:

The inflation forecast generated by the Bank’s Quarterly Projection Model (QPM) shows a deterioration since September. The average forecast for 2017 is unchanged at 5.3%, but has been revised upward for 2018 and 2019 to 5.2% and 5.5%, from 5.1% and 5.4% previously. The lower turning point, which is expected in the first quarter of 2018, increased from 4.5% to 4.7%.

The main upside drivers of these changes are a weaker exchange rate path in 2018 in particular, a higher international oil price, and higher average wage growth. These pressures are offset to some extent by a more favourable food price forecast in 2018 in particular.

Since the previous meeting of the MPC the rand has depreciated by 3.6% against the US dollar, by 3.0% against the euro, and by 3.3% on a trade-weighted basis. The rand recorded a weak point of around R14.55 against the US dollar in midNovember, but has recovered somewhat since then. Factors that impacted on the rand during the period included the ongoing uncertainty with regard to the outcome of the ANC electoral conference in December; concerns about a faster pace of monetary tightening in the US; the negative reaction to the Medium Term Budget Policy Statement (MTBPS); and speculation regarding the introduction of free higher education in South Africa.

The domestic economic growth outlook remains subdued but positive. Both consumer and business confidence remain low and are also likely to be affected by political developments in December. The forecast for GDP growth generated by the QPM has been revised up marginally to 0.7% for 2017, but revised down to 1.2% and 1.5% for 2018 and 2019, from 1.3% and 1.7% previously. The output gap is expected to remain negative over the forecast period. The SARB’s composite leading business cycle indicator increased further in September, consistent with a mild recovery.

The Medium Term Budget Policy Statement (MTBPS) published in October revealed a rapidly deteriorating fiscal position. Significant revisions were made to the expected deficits and government debt-to-GDP ratio over the medium term. This deterioration was mainly a result of significantly lower tax revenues, although there was also a provision for a moderate breach of the expenditure ceiling. The less favourable path of fiscal consolidation could potentially reduce the scope for further monetary policy accommodation.

There are very few signs of domestic demand pressures, as reflected in core inflation outcomes. Although retail sales have surprised on the upside, household consumption expenditure is expected to remain relatively subdued. The economic growth outlook remains constrained, as weak confidence continues to weigh on investment expenditure. Business and consumer confidence are likely to be sensitive to the political outcomes in December. The MPC assesses the risks to the growth outlook to be on the downside.

In light of the high degree of uncertainty prevailing in the economy and the balance of risks, the MPC has decided that it would be prudent to maintain the current stance of monetary policy at this stage. Accordingly, the repurchase rate remains unchanged at 6.75% per annum.

South Africa Leaves Monetary Policy Unchanged

SARB | Stefanie Moya |
11/23/2017 2:25:55 PM