Excerpts from the statement by Governor Lesetja Kganyago:
The near-term inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) has improved significantly since the previous MPC. Headline inflation is now expected to average 4.6% in 2018 (down from 4.7%) and 4.8% in 2019 (down from 5.5%), before increasing to 5.3% in 2020 (down from 5.4%) and moderating to 4.8% in 2021. Headline CPI inflation is now expected to peak at around 5.6%, in the first quarter of 2020. Core inflation is expected remain unchanged at 4.3% in 2018 and forecast to average 5.0% in 2019 (down from 5.3%), 5.1% in 2020 (down from 5.5%) and 4.8% in 2021. These inflation projections are based on an interest rate path generated by the QPM.
Since the November MPC, the rand has appreciated by 1.4% against the US dollar, by 1.5% against the euro, and by 0.5% on a trade-weighted basis. The implied starting point for the rand is R14.30 against the US dollar, compared with R14.50 at the time of the previous meeting. At these levels, the QPM assesses the rand to be less undervalued.
The domestic growth outlook remains sluggish. Although, GDP increased by 2.2% in the third quarter of 2018, private sector fixed investment remains weak and production in key sectors is volatile. The SARB now expects growth in 2018 to have averaged 0.7% (up from 0.6% in November). The growth forecast for 2019 is 1.7% (down from 1.9%), it is unchanged at 2.0% for 2020 and increases to 2.2% in 2021. At these growth rates, the negative output gap is expected to close in the first quarter of 2021.
The MPC assesses the risks to the growth forecast to be on the downside. Weak business and consumer confidence continue to weigh on fixed capital formation. This could be exacerbated by the possibility of protracted electricity supply constraints. Prudent macroeconomic policies are essential to ensuring that growth is sustainable and the economy is more resilient to shocks. Furthermore, the Committee remains of the view that current challenges facing the economy are primarily structural in nature.The implementation of credible structural policy initiatives that make a marked impact on potential output and employment and lower the cost structure of the economy should be prioritised.
The MPC has taken note of the improved inflation outlook, especially in the near-term. Over the forecast period, inflation is expected to remain within the inflation target range, averaging 5.3% in 2020 and 4.8% in 2021.
The overall risks to the inflation outlook are assessed to be moderately on the upside. The risks include administered prices such as electricity and water tariffs, rising domestic food prices in the outer years, changing investor sentiment towards emerging markets, moderation in global growth and volatile international oil prices.
Against this backdrop, the MPC unanimously decided to keep the repurchase rate unchanged at 6,75% per year.