Excerpts from the statement by Governor Lesetja Kganyago:
The Bank’s forecast for headline CPI inflation is unchanged at an annual average of 5.3% in 2017, and revised up by 0.1 percentage point to 5.0% and 5.3% in 2018 and 2019. A lower turning point of 4.6% is still expected in the first quarter of 2018. The same pattern is observed in the forecast for core inflation which is unchanged at 4.8% for 2017, but adjusted up to 4.9% and 5.0% for the next two years.
The main drivers of these changes are a lower repurchase rate, a less appreciated exchange rate assumption, a slightly narrower output gap and a marginal adjustment to the food price forecast as meat prices continue to surprise on the upside.
The domestic economic growth outlook remains constrained despite the higher-than-expected growth outcome of 2.5% in the second quarter of this year. This broad-based improvement, while welcome, is not expected to have a significant impact on the annual growth outcome. The Bank’s forecast for GDP growth for 2017 has been revised up marginally from 0.5% to 0.6%, while the forecasts for 2018 and 2019 have remained unchanged at 1.2% and 1.5%.
The rand remains a key upside risk to the inflation outlook. Furthermore, some of the event risks, particularly those of a political nature, are now more imminent but with no greater degree of clarity regarding the outcome. The prospect of a further ratings downgrade persists, particularly given the increased fiscal challenges and political uncertainty. The narrower current account deficit and the global environment remain supportive of the rand.
Although household consumption expenditure rebounded strongly in the second quarter, the MPC does not view this as indicative of the longer-term trend of expenditure, which is expected to remain constrained. The second quarter growth outcome, while positive, does not change our growth forecast significantly, and the outlook remains weak. The MPC assesses the risks to the revised growth forecast to be slightly on the downside. In light of these developments and the deteriorating assessment of the balance of the risks, the MPC has decided to keep the repurchase rate unchanged at 6.75% per annum. Three members preferred an unchanged stance and three members preferred a 25 basis point reduction. Ultimately the committee decided to keep the rate unchanged.
Given the heightened uncertainties in the economy, the MPC felt it would be appropriate to maintain the current monetary policy stance at this stage, and reassess the data and the balance of risks at the next meeting.