Excerpts from the statement issued by Lesetja Kganyago:
The challenges facing monetary policy have persisted, and, as expected, the downward trend in inflation which was mainly attributable to the impact of lower oil prices, has reversed. Headline inflation is expected to breach temporarily the upper end of the target range early next year, and thereafter remains uncomfortably close to the upper end of the target band for most of the forecast period. The upside risks have increased, mainly due to further possible electricity price increases. The exchange rate also continues to impart an upside risk to inflation as uncertainty regarding impending US monetary policy continues. Domestic demand, however, remains subdued while electricity constraints continue to weigh on output growth and general consumer and business confidence.
The inflation forecast of the Bank has changed since the previous meeting of the MPC. Inflation is now expected to average 4.9 percent in 2015, with a first quarter low of 4.1 percent. A temporary breach of the upper end of the inflation target band is still expected during the first quarter of 2016, to peak at 6.8 percent, and to decline to 6.0 percent by the second quarter of that year. An average inflation rate of 6.1 percent is forecast for the year. The forecast period has now been extended to the end of 2017, with an average inflation rate of 5.7 percent expected for the year, and 5.6 percent in the final quarter.
The rand therefore remains an upside risk to the inflation outlook, although the degree of upside risk is tempered somewhat by the continued relatively low level of pass-through to consumer price inflation. The Bank estimates that the actual passthrough could be about half of what is currently implied in the forecast model, but it is still uncertain as to whether this reflects a permanent change or a temporary phenomenon which can reverse rapidly.
The domestic growth outlook remains weak, amid continued electricity supply constraints and low and declining levels of business and consumer confidence. The Bank’s forecast for GDP growth is marginally down from the previous forecast: growth is expected to average 2.1 percent and 2.2 percent in 2015 and 2016, and to increase to 2.7 percent in 2017.
The MPC has decided to keep the repurchase rate unchanged at this meeting. Four members of the committee favoured an unchanged stance while two favoured a 25 basis point increase. The deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely. The MPC will continue to closely monitor the evolution of inflation expectations and other factors that could undermine the longer term inflation outlook and stands ready to act when appropriate.