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MPC Statement September 17, 2020
Issued by Lesetja Kganyago, Governor of the Reserve Bank of South Africa
Since the July meeting of the Monetary Policy Committee (MPC), the Covid-19 pandemic has subsided in South Africa. However, several other countries continue to experience a rapid spread of the virus. The economic effects of the crisis have been broad, and recovery to pre-pandemic levels will take several years.
Current IMF forecasts show that global gross domestic product (GDP) will contract by about 4.9% this year, although the overall economic outlook has improved somewhat. Second quarter GDP performance for most economies has been hugely negative, as expected.
At this stage, the third and fourth quarter recoveries for 2020 are expected to be strong. However, the pace of growth towards 2021 could be modest, depending on the control of new virus outbreaks, the extent of supply and demand losses, and future growth in investment and productivity.
Volatility in financial asset prices remains high, as virus developments and geopolitical events continue to strongly impact market sentiment. While capital flows to emerging markets have generally recovered compared to outflows in March and April, the global environment continues to reflect pronounced levels of risk aversion.
Political responses to the crisis in general have been strong in all countries. In recent months, many fiscal and monetary authorities have chosen to wait for new data to gauge conditions and assess the speed of the economic recovery before making further adjustments.
The Covid-19 outbreak has had significant health, social and economic impacts, presenting difficulties in forecasting national and global economic activity. The compilation of accurate economic statistics has been and will continue to be seriously questioned. On September 8, Statistics SA released its second quarter GDP growth estimate and slightly revised the first quarter figure. As expected, production was severely negative, with annualized seasonally adjusted quarterly GDP contracting by 51%, in all sectors except agriculture, which expanded.
The Bank now expects a GDP contraction of 8.2% in 2020, compared to the 7.3% contraction expected in July. The lower second quarter is followed by revised projections for stronger expansion in the third and fourth quarters of 2020.
Further relaxation of the blockade has supported economic growth. High-frequency indicators generally show a rebound in economic activity from extremely low levels in April and May. However, returning to pre-pandemic production levels will take time. With a sharp drop in investment, estimates of potential growth have been lowered, leading to a smaller output gap over the forecast period. GDP is expected to grow 3.9% in 2021 and 2.6% in 2022.
South Africa’s terms of trade remain strong. Export prices for commodities are high, while oil prices generally remain low. The price of Brent crude rose between July and September, and is expected to average around $ 42 per barrel in 2020, increasing to $ 47 per barrel in 2021 and $ 52 per barrel in 2022.
The rand has depreciated 14.5% against the dollar since January and remains below its long-term estimated equilibrium value, despite a significant appreciation since June. The implicit starting point for the rand forecast is rand 17.07 per US dollar, compared with rand 17.93 at the time of the previous meeting.
Risks to the growth outlook are estimated to be balanced, but this is tentative and open for adjustment given the wide range of shocks to the economy, uncertainties related to the effectiveness of the policy, and sentiment sensitivity to flow. of news.
Exceptionally accommodative policies in many advanced economies and improving economic prospects have supported a partial recovery in global financial markets. But so far this has resulted in only a trickle of new capital flows to emerging markets, and financing conditions remain uncertain.
The sharp increase in South Africa’s public financing needs stemming from falling tax revenues and increased spending has been financed by increased savings from the private sector and loans from international financial institutions. Along with the SARB’s liquidity management operations, resident investors, including banks, have increased purchases of sovereign bonds, helping to reduce yields in recent weeks. However, the yield curve remains exceptionally steep, reflecting the continuing credit risk associated with high public borrowing needs.
The Bank’s general consumer price inflation forecast averages 3.3% in 2020 and is lower than previously forecast at 4.0% in 2021 and 4.4% in 2022. The forecast for core inflation is lower at 3.4% in 2020 and is generally stable at 3.7% in 2021 and 4.0% in 2022.
The overall risks to the inflation outlook at this time appear to be balanced. World producer prices and food inflation have bottomed out. Oil prices remain low. Local food price inflation is expected to remain contained. Risks to inflation from currency depreciation are expected to remain quiet while carry-over remains low. While there is no apparent pressure on the demand side, electricity and other administered prices remain a concern. Additional pressures on the exchange rate could result from increased fiscal risks.
Importantly, future inflation expectations continued to soften this year and have moved slightly below the midpoint of the band for 2021. Market-based short- and medium-term inflation expectations have moderated slightly, while Long-term inflation expectations remain higher.
Despite a higher than expected inflation result in July and high levels of country financing risk, the Committee observes that the economic contraction and the slow recovery will keep inflation below the midpoint of the target range for this year. Except for the risks described above, inflation is expected to be well contained in the medium term, remaining below but close to the midpoint in 2021 and 2022.
In this context, the MPC decided to keep rates unchanged at 3.5% per annum. Two committee members preferred a 25 basis point cut and three preferred to keep rates at the current level.
The path of the implicit policy rate of the Quarterly Projection Model indicates that there will be no further cuts in buyback rates in the short term, and two rate increases in the third and fourth quarters of 2021.
Monetary policy has eased financial conditions and improved the resistance of households and businesses to the economic implications of Covid-19. The Bank has taken important measures to ensure adequate liquidity in domestic markets. Regulatory capital relief has also been provided, which underpins loans from financial institutions to households and businesses.
However, monetary policy alone cannot improve the economy’s potential growth rate or reduce fiscal risks. These must be addressed through the implementation of prudent macroeconomic policies and structural reforms that lower overall costs and increase investment opportunities, potential growth, and job creation. These steps will improve the effectiveness of monetary policy and its transmission to the wider economy.
Global economic and financial conditions are expected to remain volatile for the foreseeable future. In this highly uncertain environment, future decisions will remain data-sensitive and sensitive to the balance of risks to the outlook. The MPC will seek to analyze temporary price shocks and will focus on second-round effects. As usual, the QPM repurchase rate projection remains a broad policy guide, changing from meeting to meeting in response to new data and risks.
Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be published on November 19, 2020.
