Excerpts from the statement by Lesetja Kganyago, Governor:
The Bank’s forecast of headline inflation has improved since the previous meeting of the MPC, mainly due to the impact of declining international oil prices. Having reached a peak of 6.5 percent in the second quarter of this year, inflation is now expected to average 5.9 percent in the final quarter of 2014, and average 6.1 percent for the year, compared with 6.2 percent previously. The downward trend is expected to continue into next year, with inflation forecast to reach a low of 5.1 percent in the second quarter, and to average 5.3 percent for the year, compared with 5.7 percent previously. The forecast for 2016 has been revised down from 5.8 percent to 5.5 per cent, and is expected to measure 5.4 percent in the final quarter of the year.
The Bank’s forecast for GDP growth in 2014 has declined marginally from 1.5 percent to 1.4 percent, and forecasts for 2015 and 2016 have been revised down from 2.8 percent and 3.1 percent to 2.5 percent and 2.9 percent respectively.
The domestic growth outlook remains challenging, and the risks to the forecast are assessed to be moderately on the downside. The MPC does not see significant signs of excess demand pressures that are impacting on the inflation outlook and household consumption expenditure is expected to remain constrained.
At the same time, despite its recent relative stability, the exchange rate remains an upside risk to the inflation outlook, vulnerable to changing perceptions of the timing of global monetary policy adjustments, and the slow pace of contraction in the current account deficit. The extent to which policy normalisation is already priced into the exchange rate is also unclear.
A further upside risk to the inflation forecast comes from a possible increase in wage settlement rates in excess of inflation and productivity growth in the coming year.
In light of this assessment, the MPC sees the overall risk to the headline inflation forecast to be more or less balanced. However, given the elevated level of core inflation, and the fact that headline inflation is expected to increase later in the forecast period as the first round effect of the oil price decline dissipates, the Committee remains vigilant and will continue to monitor developments closely.
The Committee remains of the view that interest rates will have to normalise over time. However, given the lower trajectory of headline inflation and the continued weak state of the economy, the MPC has unanimously decided to keep the repurchase rate unchanged at 5.75 percent per annum at this stage.