Excerpt from the statement by Gill Marcus, Governor:
The MPC continues to face the difficult dilemma of dealing with upside risks to inflation and a deteriorating domestic economic growth outlook. Although the breach of the upper end of the inflation target band was in line with the Bank’s forecast, the risks to the forecast remain on the upside. The policy dilemma is increased by the fact that inflation is seen to be driven primarily by supply side factors, while demand conditions in the economy remain subdued.
Although the immediate pressures from the exchange rate are lower than was the case earlier in the year, the exchange rate remains a significant source of upside risk to the forecast. The respite from the stronger exchange rate could be temporary and respond quickly to changes in both domestic and external conditions. Although the pass-through from the exchange rate to inflation is still relatively low, there are indications of some acceleration. In addition, food prices are expected to add further upside impetus to inflation in the near term, but this risk may have moderated to some extent given the sharp decline in the maize prices and low global food inflation.
As indicated earlier, the Bank’s economic growth forecast for 2014 has been revised down significantly to 2.1 per cent, and the first quarter growth outcome is anticipated to be the lowest quarterly growth rate since the recession in 2009. Although growth in the second quarter is expected to improve somewhat, the risks to the 2014 growth forecast are strongly on the downside, with developments in the mining sector an ongoing cause for concern. The demand side of the economy is also weakening: household consumption expenditure growth continues to moderate amid slower credit extension to households, high levels of consumer debt levels and moderate job growth. However, the weak state of the economy cannot be resolved through monetary policy actions alone.
The committee continues to hold the view that we are in a rising interest rate cycle, and interest rates will have to be normalised in due course. We embarked on this process with our first move in January 2014. At this stage the pace and timing of normalisation in the advanced economies appears to have been pushed out further and may be more moderate than previously believed. We are also aware that this can change very quickly.
Future actions will be data dependent and determined by developments in the inflation outlook and inflation expectations. Inflation is currently at uncomfortable levels and a marked deterioration in the outlook may require action that we will not hesitate to take. The MPC reiterates that a rising interest rate cycle does not mean that rates will be raised at each meeting, or by the same amount each time.