Excerpts from the statement by Governor Lesetja Kganyago:
The medium-term inflation outlook is largely unchanged. The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) is for headline inflation to average 4.2% in 2019 (down from 4.4%). The projection for 2020 is unchanged at 5.1%, and for 2021 slightly up to 4.7% (from 4.6%). Headline CPI inflation is expected to peak at 5.3% in the first quarter of 2020 and settle at 4.5% in the last quarter of 2021. The forecast for core inflation is lower at 4.3% in 2019 (down from 4.4%), is unchanged at 4.7% in 2020 and is slightly higher at 4.6% in 2021 (up from 4.5%). Electricity, food and fuel price inflation continue to shape the near and medium-term trajectory of headline inflation.
Since the July MPC, the rand has depreciated by 4.6% against the US dollar, and by 3.0% against the euro. The implied starting point for the rand is R14.88 against the US dollar, compared with R14.40 at the time of the previous meeting. At these levels, the QPM assesses the rand to remain slightly undervalued. While the rand has benefited from improvements in global sentiment, investors remain concerned about domestic growth prospects and fiscal risks.
GDP rebounded to 3.1% in the second quarter, following a decline of 3.1% in the first quarter. The sharp quarterly rebound was caused by stronger output in nearly all sectors, including investment and government consumption spending. However, longer term weakness in most sectors remains a serious concern. Based on recent short term economic indicators for the mining and manufacturing sectors, the third quarter GDP outcome is expected to be muted. Business confidence has declined further. The Absa Purchasing Managers’ Index came out at 45.7 points in August (from 46.3), and the RMB/BER Business Confidence Index fell to 21 points (from 28).
The forecast of GDP growth for 2019 remains unchanged at 0.6%. The forecasts for 2020 and 2021 have decreased to 1.5% (from 1.8%) and 1.8% (from 2.0%), respectively, due to revisions to global growth and domestic potential growth. The MPC assesses the risks to the growth forecast to be balanced in the near term, but remains concerned about medium term growth and weak employment prospects. Escalation in global trade tensions, further domestic supply constraints and/or sustained higher oil prices could generate headwinds to growth. Public sector financing needs remain high, exerting pressure on the currency and pushing local bond yields higher relative to country peers. Implementation of prudent macroeconomic policies and structural reforms that lower costs, and raise investment and potential growth, remains urgent.
The overall risks to the inflation outlook are assessed to be largely balanced. Demand side pressures remain subdued and food, wages and rental prices are expected to increase at moderate rates. Global inflation should remain low. In the absence of shocks, relative exchange rate stability is expected to continue. Some upside risks to the inflation outlook remain, in particular from fuel, electricity and water prices.
Against this backdrop, the MPC unanimously decided to keep the repurchase rate unchanged at 6.5% per annum. Monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point of the inflation target range in the interest of balanced and sustainable growth. In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the assessment of the balance of risks to the outlook, and will seek to look-through temporary price shocks.