Excerpts from the statement by Governor Lesetja Kganyago:
The inflation forecast has improved marginally since the previous MPC. While remaining within the inflation target range throughout the forecast period, the SARB’s model projects an increase in headline inflation, albeit slightly lower than the September projection. Headline inflation is now expected to average 4.7% in 2018 (down from 4.8%), before increasing to 5.5% in 2019 (down from 5.7%) and moderating to an unchanged 5.4% in 2020. Headline CPI inflation is now expected to peak at around 5.6%, in the third quarter of 2019. The forecast for core inflation is 4.3% in 2018 (down from 4.4%), 5.3% in 2019 (down from 5.6%) and 5.5% in 2020. These inflation projections are based on an interest rate path generated by the SARB’s Quarterly Projection Model (QPM).
The domestic growth outlook remains challenging. Recent monthly data on economic performance in key sectors suggests a more moderate recovery in growth in the third quarter than expected in September. The SARB now forecasts growth in 2018 to average 0.6% (down from 0.7% in September). The forecast for 2019 and 2020 is unchanged at 1.9% and 2.0% respectively. At these growth rates, the negative output gap is wider than at the time of the previous MPC meeting. The output gap will narrow but will not close by the end of 2020, as previously expected.
The MPC assesses the risks to the growth forecast to be moderately on the downside. As previously highlighted the Committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by monetary policy alone. Prudent macroeconomic policies are essential to ensuring that growth is sustainable and that the economy is more resilient to shocks. These should be complemented by implementation of credible structural policy initiatives that make a marked impact on the cost structure of the economy, potential output and employment.
The MPC noted the rising inflation trajectory which, while remaining within the target range, continues to deviate from the mid-point of the target range. The MPC continues to assess the risks to the longer-term inflation outlook to be on the upside. These risks include tighter global financial conditions, a weaker exchange rate, higher wage growth, international oil prices and rising electricity and water tariffs. However, demand pressures are still not assessed to pose a significant risk to the inflation outlook.
The MPC had to decide whether to act now or later. Given the relative stability in the underlying core inflation measure, delaying the adjustment could give the MPC room to re-assess these unfolding developments in subsequent meetings. However, delaying the adjustment could cause inflation expectations to become entrenched at higher levels and thus contribute to second round effects, which would require an even stronger monetary policy response in the future.
Against this backdrop, the MPC has decided to increase the repurchase rate by 25 basis points to 6,75% per year, effective from 23 November 2018. Three members preferred an increase and three members preferred an unchanged stance.