Excerpts from the statement by Governor Lesetja Kganyago:
The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) has improved since the previous MPC. Headline inflation is expected to average 4.5% in MPC Statement May 23rd, 2019 (down from 4.8%), increasing to 5.1% in 2020 (down from 5.3%) and moderating to 4.6% in 2021 (down from 4.7%). Headline CPI inflation is expected to peak at 5.5% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021.
The main drivers of the forecast are a lower starting point for food and services inflation, and the revised oil price assumptions. Food price inflation is now expected to average 3.7% in 2019 (down from 4.1%). The assumptions for Brent crude oil in the QPM were revised up from US$64 to US$69.50 for 2019. The assumptions for 2020 and 2021 were also revised up from US$65 to US$68.
Since the March MPC, the rand has appreciated by 1.5% against the US dollar, by 2.5% against the euro, and by 3.1% on a trade-weighted basis. The implied starting point for the rand is R14.40 against the US dollar, compared with R14.00 at the time of the previous meeting. At these levels, the QPM assesses the rand to be slightly undervalued.
Based on recent short term indicators and negative growth in mining and manufacturing, GDP is expected to contract in the first quarter of 2019. The disappointing data outcomes partly reflect supply side constraints due to load shedding and a strike at a major gold mine. Fixed capital formation and household consumption expenditure also remain weak. The SARB now expects GDP growth for 2019 to average 1.0% (down from 1.3% in March). The forecast for 2020 and 2021 was unchanged at 1.8% and 2.0%, respectively. The near term growth outlook is limited by the larger than expected slowdown in the first quarter, weak business and consumer confidence as well as growing pressure on household disposable income.
The MPC assesses the risks to the growth forecast to be on the downside. Weak business confidence, possible electricity supply constraints and high debt levels in certain state-owned enterprises will continue to limit investment prospects. The escalation of trade tensions could significantly impact global trade with likely negative impacts for South Africa as a small open economy. The Committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be resolved by monetary policy alone. It is now even more urgent to have a combination of prudent macroeconomic policies and structural reforms that raise potential growth and lower the cost structure of the economy.
The MPC welcomes the continued downward trend in recent inflation outcomes and the moderation in inflation expectations. These are positive developments, as the Committee would like to see inflation remain close to the mid-point of the inflation target range on a more sustained basis. The overall risks to the inflation outlook are assessed to be more or less evenly balanced.
Against this backdrop, the MPC decided to keep the repurchase rate unchanged at 6.75% per year. Three members preferred to keep rates on hold and two members preferred a cut of 25 basis points. The Committee assesses the stance of monetary policy to be broadly accommodative over the forecast period. Any future policy adjustments will continue to be data dependent. The implied path of policy rates generated by the Quarterly Projection Model is for one cut of 25 basis points to the repo rate by the end of first quarter of 2020.