STATEMENT BY THE MONETARY POLICY COMMITTEE
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
High inflation and weak economic growth continue to shape global conditions alongside monetary and fiscal policy responses.
Russia’s war in Ukraine drags on, hurting trade and raising prices for a wide range of energy, food and other basic commodities.
Growth in the United States is expected to weaken and remain weak in China. Although energy constraints have eased somewhat in the Eurozone, the risk of recession is high. In addition, a number of developing economies face debt overhangs, exacerbated by tighter global financial conditions.
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Policy normalization has accelerated and monetary conditions are expected to tighten further to ensure inflation comes down from its current elevated levels. With high long-term borrowing costs and expanded fiscal positions, there is less room available for major countercyclical efforts to increase economic growth.
In several economies, including South Africa, the ongoing consolidation of fiscal positions will support disinflation. Asset values in major markets have also fallen sharply and investor appetite for riskier assets remains low.
Given these and other factors, Sarb’s forecast for global growth in 2023 is revised down to 1.9% (from 2%). The International Monetary Fund (IMF) October forecast for global growth is 3.2% in 2022 and 2.7% in 2023.
We now expect the South African economy to grow by 1.8% (from 1.9%) this year. Despite high volatility in monthly indicators, GDP growth of 0.4% is still expected in the third quarter. Growth in the fourth quarter is expected to be just 0.1%, largely due to record shedding.
In the medium term, and despite an increase in private investment, the forecasts take into account the fall in commodity prices, the rise in inflation and interest rates. On the supply side, the forecast incorporates an assumption of increased load shedding, which could deduct 0.6 percentage points in 2023.
As a result of these factors, the economy is expected to grow by 1.1% in 2023 (instead of 1.4%) and 1.4% in 2024 (instead of 1.7%), below previous projections. . GDP growth of 1.5% is forecast for 2025.
With a low potential rate, our current growth forecast leaves a slightly larger output gap in the near term, before closing in the third quarter of 2023.
After revisions, risks to the medium-term domestic growth outlook are rated on the downside.
Movements in commodity prices over the past few months have been mixed, with oil prices relatively stable and export prices lower. Relative to September, our oil price forecast is broadly unchanged, averaging $102 per barrel for 2022 and $92 per barrel in 2023.
South Africa’s export commodity price basket has declined from previous highs.
Due to weaker export developments, the current account balance is expected to be -0.2% of GDP this year, falling to -1.5% in 2023 and -1.9% in 2024. current account in 2025 should be -2.1% of GDP.
Although short-term fiscal risk has been mitigated by better tax revenues, a weaker-than-currently expected commodity price trajectory could increase the risk. Funding conditions for rand-denominated bonds have generally been tight and more volatile in recent months. Ten-year bond yields are currently trading at around 10.7%.
The normalization of policies in major economies and slowing growth in China contributed to the depreciation of many emerging market currencies, including the rand. The implied starting point for the rand forecast is 17.76 rand (22q4) to the US dollar, down from 16.91 rand (22q3) at the time of the previous meeting.
Globally, economic growth is slowing and prices have fallen for some transportation goods and services. However, price pressures continue to spread from goods to services and wages.
Our estimate of inflation in the G3 is revised upwards to 7.3% in 2022 (from 7.0%) and to 4.1% in 2023 (from 3.5%). The forecast for 2024 is unchanged at 2.1%.
Although South Africa’s fuel price inflation for the year remains excessively high, some easing in global oil prices has led to forecast revisions at recent MPC meetings.
Fuel price inflation for this year is now forecast at 33.3% (from 33.5%), falling to 0.8% in 2023 (from 1.1%).
Local electricity price inflation is slightly above 10.7% in 2022, 9.0% in 2023, and remains unchanged at 10% in 2024.
Global food price inflation has come down. However, local food price inflation is revised upwards partly due to the weak exchange rate and is now expected to be 8.8% in 2022 (from 8.1%). Food price inflation is revised upwards to 6.2% (instead of 5.5%) in 2023 and unchanged at 4.2% in 2024.
The Bank’s forecasts for headline inflation for this year and next are slightly higher at 6.7% and 5.4%, respectively. In 2024 and 2025, we expect headline inflation of 4.5%.
Our core inflation forecast is unchanged at 4.3% in 2022, and is above our forecast of 5.5% (vs. 5.4%) in 2023. The forecast for 2024 is unchanged at 4 .8%, and 4.5% are forecast for 2025.
Services inflation is broadly unchanged and continues to be fueled by expected knock-on effects and steadily rising unit labor costs. Core property price inflation is forecast a little higher at 5.7% for next year. Average wage growth forecasts are broadly unchanged.
Risks to the inflation outlook are rated on the upside.
Despite falling world producer prices and food inflation, Russia’s war in Ukraine continues, with negative effects on world prices in general. The oil market is expected to remain tight, with an upside risk to prices.
Electricity and other administered prices continue to present clear medium-term risks. Given the low wage assumptions in the public sector and the high inflation of gasoline and food prices, there is still considerable risk to the average wage forecast.
Higher-than-expected inflation prompted major central banks to accelerate policy rate normalization. This has tightened global financial conditions and increased the risk profiles of economies in need of foreign capital.
G3 interest rate levels for the forecast period are now expected to be significantly higher than in September. Overall, with few exceptions, capital flows and market volatility will be high for emerging market assets and currencies. While the rand has recovered somewhat, it has depreciated by around 7% since the start of the year against the US dollar.
Inflation expectations have risen sharply this year and remain high. Future inflation expectations surveyed in the third quarter of this year had previously increased to 6.5% for 2022 and 5.9% for 2023.
Inflation expectations in 2022 based on market research rose to 6.8%. On the other hand, long-term inflation expectations derived from 5-year equilibrium rates on the bond market moderated to 5.27%.
In the second quarter of this year, headline inflation crossed the upper end of the target range and is expected to remain above it until the second quarter of 2023. Headline inflation is only expected to return sustainably to the point midpoint of the target range around the second quarter of 2024.
The forecast takes into account the path of the policy rate indicated by the Bank’s Quarterly Projection Model (QPM). As usual, the QPM repo rate projection remains a broad policy guide, changing from meeting to meeting in response to new data and risks.
In this context, the MPC has decided to increase the repurchase rate by 75 basis points to 7% per annum, effective November 25, 2022.
Three members of the MPC preferred the announced increase. Two members preferred an increase of 50 basis points.
The level of the redemption rate is now higher than the level that prevailed before the start of the pandemic. The revised repurchase rate continues to support demand for short-term credit, while raising rates to levels more in line with the current view of inflation and the risks to it.
The objective of the policy is to anchor inflation expectations more firmly around the midpoint of the target range and to increase confidence in the sustained achievement of the inflation target over time.
Bringing inflation back to the midpoint of the target range can reduce the economic costs of high inflation and allow for lower interest rates in the future.
Achieving a prudent level of public debt, increasing energy supply, moderating administered price inflation and keeping wage growth in line with productivity gains would strengthen the effectiveness of monetary policy and its transmission to the whole economy.
Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, monetary policy decisions will remain data dependent and sensitive to the balance of risks to the outlook.
The MPC will seek to overlook temporary price shocks and focus on potential side effects and risks of unanchoring inflation expectations. The Bank will continue to closely monitor tensions in funding markets.
The next MPC statement will be released on January 26, 2023.
The MPC dates for 2023 are as follows: 24 – 26 January 2023; and from March 28 to 30, 2023.