Excerpts from the statement by Governor Lesetja Kganyago:
Despite remaining within the inflation target range throughout the forecast period, the SARB’s model projects an increase in headline inflation, peaking at levels closer to the upper end of the target range. Headline inflation is now expected to remain at an average of 4.8% in 2018, before increasing to 5.7% in 2019 (up from 5.6%) and moderating to 5.4% in 2020. Headline CPI inflation is expected to peak at around 5.9 in the second quarter of 2019. The forecast for core inflation is 4.4% in 2018 (down from 4.6%), 5.6% in 2019 (up from 5.5%) and 5.5% in 2020 (up from 5.3%). The impact of the VAT increase continues to be muted. The more elevated headline inflation trajectory is explained by the weaker rand exchange rate and higher oil prices.
Since the July MPC, the rand has depreciated by 7.3% against the US dollar, by 8.1% against the euro, and by 7.1% on a trade-weighted basis. At current levels, the SARB’s model assesses the rand to be undervalued. The implied starting point for the rand is R14.20 against the US dollar, compared with R13.40 at the time of the previous meeting. Tighter global financial conditions and the change in investor sentiment towards emerging markets remain key external risks to the rand, and it is likely that the rand, along with other emerging market currencies, will remain volatile
The domestic economy has entered a technical recession, following two consecutive quarters of contracting economic activity. Quarter-on-quarter GDP contracted by 0.7% in the second quarter and GDP data for the first quarter was revised down from -2.2% to -2.6%. However, on a year-on-year basis, GDP growth in the first quarter was 0.8% and 0.4% in the second quarter. The SARB now forecasts growth in 2018 to average 0.7% (down from 1.2% in July). The forecast for 2019 and 2020 is unchanged at 1.9% and 2.0% respectively. At these growth rates, the negative output gap is wider in the near term, but is still expected to close by the end of 2020 as GDP growth rates exceed potential growth.
The MPC noted the rising inflation trajectory which, while remaining within the target range, is moving further away from the mid-point of the target range. The MPC assesses the risks to the inflation outlook to be on the upside. The Committee remains concerned about growing risks to the inflation outlook, mainly due to exchange rate risks related to both domestic and external factors, elevated international oil prices and the possibility of higher electricity tariffs. However, demand pressures in the economy are not assessed to pose a significant risk to the inflation outlook.
The MPC assesses the risks to the growth forecast to be moderately on the downside. The Committee continues to be of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by monetary policy alone. Commitment to credible structural policy initiatives and implementation thereof is required to make a marked impact on the cost structure of the economy, potential output and employment. Monetary policy is most effective in addressing cyclical growth.
The MPC has decided to keep the repurchase rate unchanged at 6.5% per annum.