South Africa Interest Rate

Excerpts from the statement issued by Lesetja Kganyago:

The inflation forecast of the Bank has deteriorated since the previous meeting of the MPC. Headline inflation is now expected to only return to within the target range during the final quarter of 2017, and to average 6.2 per cent for the year, compared with 5.8 per cent in the previous forecast. The forecast for 2018 is more or less unchanged at an average of 5.5 per cent. The peak of the forecast remains at 6.6 per cent, which was recorded in the final quarter of 2016, and this level is now expected to persist in the first quarter of 2017. This deterioration is mainly due to changed assumptions regarding international oil prices, the domestic fuel prices and the outlook for food prices, which more than offset the more favourable exchange rate assumption. By contrast, the forecast for core inflation is unchanged, averaging 5.5 per cent and 5.2 per cent in 2017 and 2018 respectively.

The outlook for emerging markets is also unclear, given conflicting developments. Commodity prices, especially industrial commodities, have risen in recent months, but protectionist threats from the US, if carried through, could undermine world trade and have an adverse effect on emerging markets in particular. These countries are also highly dependent on Chinese growth, which is expected to remain above the 6 per cent level. However, given the credit-driven nature of recent Chinese growth, there are fears of an unsustainable credit bubble which could expose financial sector vulnerabilities, and undermine the growth outlook.

The domestic growth outlook remains weak and more or less unchanged since the previous meeting of the MPC. The Bank expects growth to have averaged 0.4 per cent in 2016, although recent monthly data for the fourth quarter suggest that there may be a downside risk to this forecast. The forecast for 2017 has been revised down marginally to 1.1 per cent (from 1.2 per cent), and remains unchanged at 1.6 per cent for 2018. This improved outlook relative to 2016 is consistent with the recent upward trend in the composite leading indicator of the Bank.

The more favourable rand exchange rate has been an important factor in offsetting some of the negative impacts of these developments. Despite a turbulent second half of 2016, both domestically and globally, the rand has been relatively resilient. Furthermore, the current level of the rand is stronger than that implicit in the forecast, and pass-through to inflation continues to be relatively muted. Nevertheless it remains vulnerable to both domestic and external shocks.