Excerpts from the statement by Lesetja Kganyago, Governor:
Since the previous meeting of the Monetary Policy Committee, the inflation outlook has been dominated by the further decline in international oil prices, from around US$75 per barrel in late November to current levels of around US$46 per barrel. Domestic petrol prices declined by almost R2 per litre over the period (and over R3 per litre since August), and a further sizeable decrease is expected in February. This decline in domestic prices occurred despite some offsetting effects from a further depreciation of the rand against the US dollar.
The near-term inflation outlook has therefore changed significantly, but the favourable impact of these developments on both inflation and growth in the longer term will depend on the persistence of the oil price decline. Even a moderate increase in oil prices going forward will reverse the favourable inflation trajectory, and the inflation and growth benefits, while welcome, are expected to be temporary. At the same time, the impact of load shedding and a deterioration of the global growth outlook are likely to offset some of the positive impacts of the lower petrol price on domestic growth.
The domestic economic growth outlook remains subdued. Despite an expected growth acceleration in the fourth quarter of 2014 following an annualised growth rate of 1,4 per cent in the previous quarter, growth for 2014 is expected to average 1,4 per cent, with at least one percentage point lost to work stoppages. The Bank’s forecast for growth in 2015 has been revised down from 2,5 per cent to 2,2 per cent, and that for 2016 from 2,9 per cent to 2,4 per cent. This forecast attempts to take account of electricity supply disruptions which more than offset the positive growth impact of lower oil prices. The Bank’s composite business cycle indicator has followed a moderate downward trend in the past months, confirming the subdued outlook.
For some time we have emphasised that we are in a process of interest rate normalisation. The lower inflation path gives us some room to pause in this process, particularly against the backdrop of continued weakness in the economy. The MPC has therefore unanimously decided to keep the repurchase rate unchanged at 5,75 per cent per annum.
The MPC is aware that the moderation in inflation could raise expectations of lower interest rates. The MPC is of the view that the bar for further accommodation remains high and would require a sustained decline in the inflation rate and inflation expectations.