Excerpts from the statement by Governor Lesetja Kganyago:
The headline inflation forecast of the SARB is more or less unchanged since the previous meeting of the Monetary Policy Committee (MPC), despite the upward adjustments to the international oil price assumption and the weaker starting point for the trade-weighted exchange rate. The impact of these adjustments on the inflation forecast was offset in part by a lower food price forecast and a lower starting point. This follows a succession of downside surprises in core goods and food price outcomes. The forecasts for 2018 and 2019 are unchanged at 4.9% and 5.2% respectively, while the forecast for 2020 is marginally higher at 5.2% compared with 5.1% previously. The peak of 5.5% is still expected in the first quarter of 2019 before the impact of the VAT increase largely dissipates. The forecast for core inflation is marginally lower, at 4.5% for 2018, but has deteriorated somewhat more than headline inflation in the coming two years, to 5.1% in both years, from 4.9% previously. A peak of 5.2% is expected in the first quarter of 2019.
The implied starting point for the rand in the forecast is R12.37 against the US dollar compared with R11.97 at the time of the previous MPC meeting. Food prices, by contrast, are expected to increase by 4.9% in 2018 and by 5.5% in 2019, lower than in the previous forecast. There is a degree of uncertainty regarding the likely impact of the VAT increase and the sugar tax on food, and the extent to which these increases will be absorbed by manufacturers and retailers.
Since the previous meeting of the MPC, the rand has depreciated significantly, against the US dollar in particular, reversing much of the overvaluation seen at that time. Since then, the rand has depreciated by 6.0% against the US dollar, by 0.7% against the euro, and by 2.8% on a trade-weighted basis. In the near term, the rand is expected to remain volatile, with movements dominated by the changing assessment of these global trends. Domestically, an expected moderate widening of the current account deficit, a result of deteriorating terms of trade, could also weigh on the rand.
The domestic growth outlook remains challenging, although growth is still expected to outperform recent year outcomes. This is despite the possibility of a contraction in GDP in the first quarter of this year, following negative growth in both the mining and the manufacturing sectors. The SARB’s forecast for GDP growth is unchanged at 1.7% for 2018, but has been revised up from 1.5% to 1.7% for 2019. The forecast for 2020 is unchanged at 2.0%. The forecast remains consistent with a closing of the negative output gap by 2020, but at a slightly faster pace than before. The continued increase in the composite leading business cycle indicator confirms the upward momentum in the economy.
In contrast with the previous meeting, the MPC assesses the risks to the inflation forecast to have moved to the upside. This change is mainly due to global developments. A key uncertainty relates to the outlook for the dollar, which has appreciated against most currencies. Oil prices also pose an upside risk to the inflation forecast. Current spot prices are significantly above the levels assumed in the Quarterly Projection Model. Furthermore, a slight moderation in prices followed by a flat trajectory is assumed in the coming two years. There may be a degree of upside risk to this assumption.
In light of the change in the balance of risks to the inflation outlook, the MPC unanimously decided to keep the repurchase rate unchanged at 6.5% per annum.