Excerpt from the statement by Gill Marcus, Governor:
The Bank’s forecast for economic growth has declined marginally to 2.6 percent in 2014, compared with 2.8 percent previously, while the forecast for 2015 has been revised down from 3.3 per cent to 3.1 percent. The risks to this forecast are seen to be on the downside, given the protracted strike in the platinum sector and electricity supply constraints.
The Monetary Policy Committee is acutely aware of the policy dilemma of rising inflation pressures in a subdued economic growth environment. Despite a marginal improvement in the medium term inflation forecast, the trajectory remains uncomfortably close to the upper end of the target range.
The main upside risk to the forecast continues to come from the exchange rate, which, despite the recent relative stability, remains vulnerable to global rebalancing. The expected normalization of monetary policy in advanced economies is unlikely to be linear or smooth, and the timing and pace is uncertain.
The rand is also vulnerable to domestic idiosyncratic factors, including protracted work stoppages, electricity supply constraints, and the slow adjustment of the current account deficit. Pass-through from the exchange rate to prices has been relatively muted to date but there is some evidence that it is accelerating. However, the forecast already incorporates a higher pass-through than has been experienced up to now.
At the same time, the domestic economic outlook remains fragile, with the risks assessed to be on the downside. Demand pressures remain benign as consumption expenditure continues to slow amid weakening credit extension to households and high levels of household indebtedness. The upward trend in the core inflation forecast is assessed to reflect exchange rate pressures rather than underlying demand pressures.
Given the lags with which monetary policy operates, the MPC will continue to focus on the medium term inflation trajectory. The committee is aware that too slow a pace of tightening could undermine inflation expectations and may require more aggressive tightening in the future. Consistent with our mandate, a fine balance is required to ensure that inflation is contained while minimizing the cost to output.
The real policy rate is currently below what can be considered normal in the long run and is likely to increase over the medium term. The pace of tightening will depend on a number of factors including projected inflation, inflation expectations, the state of the economy and global developments.