Excerpts from the statement by Governor Lesetja Kganyago:
The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) is broadly unchanged since the previous MPC. Headline inflation is expected to average 4.8% in 2019, before increasing to 5.3% in 2020 and moderating to 4.7% in 2021 (down from 4.8%). Headline CPI inflation is expected to peak at 5.7%, in the first quarter of 2020 and settle at 4.5% by the end of the forecast period.
The forecast also takes into account the recent electricity tariff increases announced by the National Energy Regulator of South Africa. The assumption for electricity price inflation, which takes into account municipal price adjustments, has increased from 12% to 13% for 2019/20 and from 6% to 9% in 2020/21. Higher food, fuel and electricity prices are expected to lift inflation over the medium term. However, this is expected to be offset by lower core inflation as unit labour costs and inflation expectations moderate.
Since the January MPC, the rand has depreciated by 6.4% against the US dollar, by 5.2% against the euro, and by 6.1% on a trade-weighted basis. The implied starting point for the rand is R14.00 against the US dollar, compared with R14.30 at the time of the previous meeting. At these levels, the QPM assesses the rand to be less undervalued.
GDP increased by 1.4% in the fourth quarter of 2018, averaging 0.8% for the year. Fixed capital formation remains weak. This is largely due to declining investment by public corporations and government as well as weaker business confidence, as suggested by the most recent RMB/BER Business Confidence Index.
The SARB now expects GDP growth for 2019 to average 1.3% (down from 1.7% in January). The forecast for 2020 is 1.8% (down from 2.0%), rising to 2.0% for 2021 (down from 2.2%). This results from the bigger than expected slowdown in the global economy, declines in business confidence, potential supply side disruptions from load shedding and growing pressure on household disposable income.
The MPC assesses the risks to the growth forecast to continue to be on the downside. Electricity supply constraints and weak business confidence will likely limit near term production and investment prospects. The Committee remains of the view that current challenges facing the economy are primarily structural in nature. Given current economic vulnerabilities, prudent macroeconomic policies combined with structural reforms that raise potential growth and lower the cost structure of the economy, have become even more urgent.
Against this backdrop, the MPC unanimously decided to keep the repurchase rate unchanged at 6.75% per year. The Committee continues to assess the stance of monetary policy to be accommodative.