24 March 2022
STATEMENT BY THE MONETARY POLICY COMMITTEE
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Since January, the Omicron wave of the covid-19 virus has spread globally with various social and economic results. Despite the high rate of infection, many economies have remained open and, with a few exceptions, the economic costs of the virus continue to fall. Even as the economic impact of the pandemic fades, the outbreak of war in February between Russia and Ukraine is expected to reduce global economic growth and contribute to higher inflation. The war is likely to harm the production of a wide range of energy, food and other commodities and further disrupt world trade.
SARB forecast for global growth in 2022 is revised down to 3.7% (from 4.4%) and for 2023 is lowered to 2.8% (from 3.3%), as a result of the war and the spread of the virus in Asia. and elsewhere
For 2024, global growth remains unchanged at 2.7%. Dramatically higher oil, commodity, and food prices, additional restrictions on trade and finance, and rising debt costs create more adverse economic conditions for most emerging and developing economies. While policy settings in advanced economies remain broadly accommodative, the start of policy normalization by major central banks and rising inflation have tightened global financial conditions. Investor appetite for riskier assets is lower. Economies that failed to take advantage of better global conditions or reduce large macroeconomic imbalances remain vulnerable.
Last year saw the ongoing recovery of the South African economy from the pandemic, with expansion of 4.9% for 2021 as a whole, slightly higher than the 4.8% we had forecast in January.
The South African economy is expected to grow 2.0% in 2022, revised up from 1.7% at the time of the January meeting. This is due to a combination of factors, including stronger growth in 2021 and higher commodity export prices.
Output growth in the first quarter of this year is likely to be significantly stronger than expected at the time of the January meeting.
GDP growth is projected to be 1.9% in both 2023 and 2024.
Economic growth at these rates remains well above a low potential growth rate still constrained by political uncertainty and burden reduction. Public sector investment has weakened significantly in recent years and that of public companies is expected to be very modest. Household spending remains supportive, reflecting good disposable income growth, rising asset prices and low interest rates, while private investment has also proven more resilient than expected.
Overall, and following revisions, the risks to the medium-term domestic growth outlook are seen as balanced.
With the current low potential growth rate and the upward revision of GDP growth for 2022 and 2023, the output gap is closing faster during the forecast period compared to the January meeting. The output gap is expected to turn positive after the third quarter of 2023.
While export prices for major raw materials such as coal, iron ore, platinum and rhodium generally declined in the second half of 2021, they rose again in late January and rose further with the breakout of hostilities in Europe. Oil prices soared to around $130 a barrel in the early days of the conflict before tapering off a bit.
We expect oil prices to average $103 per barrel by 2022, $80 per barrel in 2023, and $75 per barrel in 2024.
South Africa’s basket of commodity prices is forecast to rise by 8% over the full year, keeping terms of trade high, before falling sharply in 2023. As a result of these export and import price developments , the current account surplus is expected to increase. it will rise to around 3% of GDP this year, before slowing to 1.6% in 2023 and 0.8% in 2024.
Although fiscal risk has decreased, financing conditions remain tight and the yield curve on rand-denominated bonds is steep. Ten-year bond yields rose to around 10.3% at the end of February, before falling back to around 9.7% today.
The first two months of this year were characterized by a weaker rand exchange rate, somewhat below its equilibrium level. Since then, and despite less favorable global conditions, stronger commodity export prices have appreciated the currency and helped dampen price pressures. The implied starting point for the Rand forecast is R15.41 per US dollar, compared to R15.60 at the time of the previous meeting.
As the global economy has recovered from the pandemic, aggressive policy easing and supply shortages have pushed up the prices of many goods and commodities. These price increases have passed through to the prices of services, salaries and consumer prices in the main economies. Our G3 inflation estimate is revised upwards throughout the forecast period, to 5.6% in 2022 and 3.0% in 2023 (vs. 3.1% and 1.7%), before moderating to 2.3% in 2024 (from 1.6%).
Oil prices are further revised for this year, with fuel price inflation higher at 26.1% (vs 13.7%). Local electricity price inflation is revised down to 11.0% for 2022 (from 14.5%) and to 9.2% in 2023 (from 12.4%). By 2024, electricity price inflation of 10% is expected, unchanged from the previous meeting.
As a result of rising global food prices, local food price inflation is also revised upwards and is now expected to be 6.1% in 2022 (vs 4.8%) and 5 .1% in 2023 (compared to 4.6%). Food price inflation is projected to decline to 4.4% in 2024 (from 4.6%).
The Bank’s forecast for headline inflation for this year is revised upwards to 5.8% (from 4.9%), mainly due to higher food and fuel prices. While food prices will remain high, fuel price inflation should decline in 2023, helping headline inflation to fall to 4.6%, despite rising core inflation.
Core inflation is forecast to rise to 4.2% in 2022 (from 3.8%), to 5.0% in 2023 (from 4.4%), before tapering off a bit to 4.7% in 2024 (from 4.5%). Core goods and services price inflation is forecast higher over the horizon, with services price inflation above the midpoint of the target for the fourth quarter of this year.
Risks to the inflation outlook are assessed on the upside. Global producer and food price inflation continued to surprise to the upside in recent months and could do so again, especially if the war in Ukraine persists through the growing season. Oil prices rose sharply through 2021 and have risen sharply again so far this year, pushed higher also by war and economic sanctions. Electricity and other administered prices continue to present risks in the short and medium term. Higher diesel and coal prices may lead to upward revisions to our electricity price forecast for 2023. Given lower inflation assumptions than public sector wage growth and higher electricity price inflation gasoline and food, a considerable risk is associated with a still moderate nominal wage forecast.
Global financial conditions are more volatile today and higher-than-expected inflation has pushed major central banks to start normalizing global policy rates. In general, and with some exceptions, capital flow volatility is expected to remain high for riskier assets such as emerging market debt and currencies.
Average surveyed expectations of future inflation have risen to 5.1% for 2022 (from 4.8%). Surveyed market-based inflation expectations have also risen to 5.5%. Long-term inflation expectations derived from equilibrium rates in the bond market have also increased.
In the short term, headline inflation has risen well above the midpoint of the inflation target band and is forecast to break above the target range in the second quarter.
Then, headline inflation returns close to the midpoint in the second quarter of 2023, taking into account the path of the policy rate indicated by the Bank’s Quarterly Projection Model (QPM).
Some risks to the inflation outlook, such as food and fuel, have materialized, and other risks, such as currency volatility and capital flow reversals, have become more pronounced.
In this context, the MPC decided to increase the repo rate by 25 basis points to 4.25% per annum, effective March 25, 2022.
Three Committee members preferred the announced increase and two members preferred a 50 basis point increase in the repo rate.
The implied path of the QPM policy rate, given the inflation forecast, indicates a gradual normalization through 2024. As usual, the QPM repo rate projection remains broad policy guidance, changing from one meeting to the next. to another in response to new data and risks.
Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, policy decisions will remain data driven and sensitive to the balance of risks to the outlook. The MPC will seek to analyze temporary price shocks and will focus on potential spillover effects and risks of de-anchoring inflation expectations.
Current repo rate levels reflect an accommodative policy stance over the forecast period, maintaining financial conditions that support credit demand as the economy continues to recover. The Bank has ensured adequate liquidity in domestic markets and will continue to closely monitor funding markets for stress.
Better-anchored expectations of future inflation could support lower interest rates, and can be achieved by achieving a prudent level of public debt, increasing energy supply, moderating administered price inflation, and keeping wage growth in line with earnings. of productivity. Such steps will improve the effectiveness of monetary policy and its transmission to the broader economy.
The next statement from the Monetary Policy Committee will be released on May 19, 2022.