Excerpts from the statement by Governor Lesetja Kganyago:
The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) shows some improvement since November. The average forecast for 2017 is unchanged at 5.3% but has been revised downwards for 2018 and 2019 to 4.9% and 5.4% respectively from 5.2% and 5.5% previously.
The main drivers of the more favourable forecast were the stronger exchange rate and lower electricity price assumption, following the 5.23% electricity tariff increase granted to Eskom by the National Energy Regulator of South Africa (Nersa). These effects are countered to some extent by upward adjustments to the international oil price assumptions, as well as by the impact of the sugar tax on food prices.
Since the previous meeting of the Monetary Policy Committee (MPC), the rand has appreciated by 13.1% against the US dollar, by 9.6% against the euro, and by 10.6% on a trade-weighted basis. In the near term, the rand is expected to remain sensitive to sentiment generated by political developments.
Domestic growth prospects appear to be showing some signs of improvement, although off a low base. This follows encouraging growth rates in the second and third quarters of this year, driven to a significant degree by the exceptionally strong recovery in the agricultural sector. The SARB has revised its forecast for gross domestic product (GDP) growth up from 0.7% to 0.9% for 2017, while forecasts for 2018 and 2019 have been adjusted to 1.4% and 1.6% respectively, up from 1.2% and 1.5% previously.
Two main risks featured prominently in the MPC discussions. First is the prospect of a sovereign credit ratings downgrade, which would result in three major agencies rating South Africa’s local-currency debt as sub-investment grade. The impact on the rand and on long-bond yields could be significant, but the extent to which a universal downgrade is already priced in remains unclear. Furthermore, the assumption in the forecast for the starting point of the rand (at R12.90 against the US dollar) is weaker than current levels.
The second risk relates to international oil price developments. Although the assumptions have been raised over the forecast period, the MPC still assesses the risks to be moderately on the upside, and further upward adjustment may be required in the future.
Demand pressures are benign, with core inflation pressures relatively contained. While household consumption expenditure is expected to be supported by positive wage growth, it remains constrained. The economic growth outlook is also more positive, but fragile. At this stage, the MPC assesses the risks to the growth forecast to be more or less balanced.
In light of the recent developments and the balance of risks, the MPC has decided that it would be appropriate to maintain the current monetary policy stance at this stage. Accordingly, the repurchase rate remains unchanged at 6.75% per annum. Five members preferred an unchanged stance, while one member preferred a 25 basis point reduction.