With a unanimous decision, members of the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) voted on 17 January to keep interest rates unchanged, in line with analyst expectations. This follows an interest rate hike of 25 basis points (bps) in November 2018, which brought the repo and prime lending rates to 6.75% and 10.25%, respectively.
Amidst a downward revision of oil price expectations, milder expected food price inflation and a stronger exchange rate, the SARB now expects headline inflation to average 4.8% and 5.3% in 2019 and 2020, down from November’s estimations of 5.5% and 5.4%, respectively. Furthermore, the peak in headline inflation that was predicted for the third quarter of this year at 5.6% has now moved out to the first quarter of 2020, according to new SARB estimations.
After Brent crude oil prices retreated for much of the fourth quarter of last year, the SARB revised down its expectations of oil prices across the forecast period. Brent crude prices are now expected to average $62 per barrel in 2019 and $65 per barrel in 2020 and 2021, around $10 lower than anticipated in November. Revised oil prices, which contribute to lower domestic fuel prices, benefit the inflation outlook by relieving supply side pressures.
Risks to the inflation outlook, however, are moderately to the upside, and include rising electricity and water tariffs, rising domestic food prices in the outer years of the forecast horizon, emerging markets risk-off sentiment, a global economic growth slowdown and volatile oil prices.
Additionally, the SARB revised its expectations of the degree of monetary policy tightening required to assure price stability. While in November the Quarterly Projection Model (QPM), a broad policy guideline, suggested three increases of 25 bps each before the end of 2020, the QPM now suggests only one increase of 25 bps before the end of 2021. As a result, the repo and prime lending rates would only rise to 7% and 10.5%, respectively, by 2021.
While the QPM is revised every two months, the current milder interest rate stance expected by the SARB bodes well for South Africans facing high debt-repayment costs. The improvements in the inflation outlook also play an important role in improving consumers’ purchasing power, especially helping lower-income consumers who are most exposed to changes in price levels.
Repo rate forecast based on Quarterly Projection Model, November 2018
Source: SARB Quarterly Projection Model, November 2018
Repo rate forecast based on Quarterly Projection Model, January 2018
Source: SARB Quarterly Projection Model, January 2019
While the inflation and interest rate outlook have eased, economic growth concerns prevail. The SARB revised down its expectations for economic growth in 2019 to 1.7%, from 1.9% in November last year. Expected growth in 2020 of 2% remained unchanged.
Several risks to the growth outlook remain elevated; in particular, concerns around electricity supply shortages. Weak business and consumer confidence furthermore weigh on fixed investment and curtail the potential for faster economic growth.
International volatility also poses a threat to domestic economic growth, with ongoing trade tensions between the United States and China, Brexit uncertainty and the threat of emerging markets risk spill-over adding to domestic growth concerns.
The MPC convenes again in March to decide a suitable interest rate stance that anchors inflation near the midpoint of the target range at 4.5%, thereby ensuring price stability in the interests of balanced and sustainable economic growth. Unless key risks to the inflation outlook materialise, the MPC is likely to take a similar stance in March and keep interest rates on hold.