diff --git "a/clean/cb_requests/08f367d850a1c80c692e7e54b132f891.json" "b/clean/cb_requests/08f367d850a1c80c692e7e54b132f891.json"
new file mode 100644--- /dev/null
+++ "b/clean/cb_requests/08f367d850a1c80c692e7e54b132f891.json"
@@ -0,0 +1 @@
+{"doc_id": "08f367d850a1c80c692e7e54b132f891", "text": "Monetary Policy Review \nOctober 2016\nSouth African Reserve Bank\nMonetary Policy Review\nOctober 2016\nMonetary Policy Review October 2016\nSouth African Reserve Bank\n© South African Reserve Bank\nAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any \nmeans, electronic, mechanical, photocopying, recording or otherwise, without fully acknowledging the Monetary Policy Review of the South \nAfrican Reserve Bank as the source. The contents of this publication are intended for general information only and are not intended to serve \nas financial or other advice. While every precaution is taken to ensure the accuracy of information, the South African Reserve Bank shall \nnot be liable to any person for inaccurate information or opinions contained in this publication.\nEnquiries relating to this Monetary Policy Review should be addressed to:\n\t\nHead: Economic Research and Statistics Department\n\t\nSouth African Reserve Bank\n\t\nP O Box 427\n\t\nPretoria 0001\n\t\nTel. +27 12 313 3668\nwww.reservebank.co.za\t \t\n\t\n\t\n\t\n\t\n ISSN: 1609-3194\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nPreface\nThe primary mandate of the South African Reserve Bank (the Bank) is to achieve and \nmaintain price stability in the interest of balanced and sustainable economic growth. \nLow inflation helps to maintain and improve competitiveness, protects the purchasing \npower and living standards of all South Africans, and provides a favourable environment \nfor balanced growth, investment and employment creation. In addition, the Bank has a \ncomplementary mandate to oversee and maintain financial stability. The Bank’s Monetary \nPolicy Committee (MPC) is responsible for monetary policy decisions, and comprises the \nGovernor as Chairperson, the deputy governors and senior officials of the Bank. \nPrice stability is quantified by the setting of an inflation target range by government after \nconsultation with the Bank. The Bank has instrument independence, with the commitment \nto pursue a continuous target of 3–6 per cent for headline consumer price index inflation. \nThe MPC conducts monetary policy within a flexible inflation-targeting framework that \nallows inflation to be temporarily outside the target range under certain circumstances. \nThe MPC takes into account a viable medium-term time horizon for inflation and considers \nthe time lags between policy adjustments and economic effects. This provides for interest \nrate smoothing over the cycle, and contributes towards more stable economic growth. The \nrepurchase (repo) rate decision reflects the MPC’s assessment of the appropriate monetary \npolicy stance. \nThe decision of the MPC, together with a comprehensive statement, is announced at a media \nconference at the end of each meeting. This announcement outlines the MPC’s assessment \nof prevailing domestic and global economic conditions, as well as recent outcomes and \nforecasts for inflation and real economic activity. \nThe Monetary Policy Review (MPR) is published twice a year and is aimed at broadening the \nunderstanding of the objectives and conduct of monetary policy. The MPR covers domestic \nand international developments that have affected inflation and that impact on the monetary \npolicy stance. It also provides an assessment of the factors determining inflation and the \nBank’s forecasts of the future path of inflation and economic growth. The MPR is presented \nby the Governor and senior officials of the Bank at monetary policy forums in various \ncentres across South Africa in an effort to develop a better understanding of monetary policy \nthrough direct interaction with stakeholders.\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nContents\nExecutive summary.......................................................................................................\t\n1\nOverview of the world economy....................................................................................\t\n5\nOverview of the domestic economy...............................................................................\t\n10\nInflation developments and outlook..............................................................................\t\n17\nSummary.......................................................................................................................\t\n25\nBoxes\nBox 1\tSlowing growth in sub-Saharan Africa: implications for South Africa................\t\n9\nBox 2\tDisaggregating the trade component of the current account...............................\t\n12\nBox 3\tCore inflation forecast accuracy..........................................................................\t\n21\nBox 4\tSouth African inflation: an international perspective..........................................\t\n24\nStatements issued by Lesetja Kganyago, Governor of the South African Reserve Bank\nStatement of the Monetary Policy Committee\n19 May 2016..................................................................................................................\t\n26\nStatement of the Monetary Policy Committee\n21 July 2016...................................................................................................................\t\n32\nStatement issued by the South African Reserve Bank\n25 July 2016..................................................................................................................\t\n38\nStatement of the Monetary Policy Committee\n22 September 2016........................................................................................................\t\n39\nGlossary........................................................................................................................\t\n47\nAbbreviations...............................................................................................................\t\n50\n1\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nExecutive summary\nIn recent years, South Africa has been buffeted by a series of adverse economic \ndevelopments, including falling commodity prices, weakening capital flows, \nshifting perceptions of country risk and drought. Since the previous Monetary \nPolicy Review (MPR), published in April 2016, the global environment has \nbecome somewhat more favourable. Both commodity prices and capital flows to \nemerging markets have strengthened, benefitting the exchange rate. Inflation is \nexpected to average 6,4 per cent this year, a new post-crisis high, but the outlook \nhas improved from earlier in the year. The breach of the inflation target range \nis now anticipated to end in the first rather than the second half of 2017, and \nthe risks to the forecast have become more evenly balanced. This has permitted \na pause in the interest rate cycle, allowing the repo rate to remain at the 7,0 per \ncent level reached in March 2016. Should conditions remain consistent with \nthose envisaged in the latest forecast, the end of the cycle may be in sight.\nWorld economic conditions look better now than they did early in 2016. \nChina’s economy has stabilised following a period of disruptive exchange \nrate and stock market activity at the start of the year. Stimulus measures \nhave put a floor under growth, at least temporarily, benefitting commodity \nprices. More recently, major central banks in advanced economies have \neither eased policy or signalled a slower pace of normalisation than was \notherwise expected, in response to the Brexit referendum of June 2016 as \nwell as other factors. One consequence has been a rebound in investment \nflows to emerging markets, reversing a long phase of declining inflows which \nbegan with the ‘taper tantrum’ of May 2013. Emerging market currencies \nhave appreciated in response, with those which lost the most ground early \nin the year showing the largest appreciations.\nSouth Africa-specific elements also contributed to the rand rally. The major \ninternational ratings agencies re-affirmed the sovereign’s investment-grade \ncredit rating in the middle of the year. Furthermore, the local government \nelections held in August provided a useful reminder of the vitality of South \nAfrica’s democratic institutions. Nonetheless, domestic factors have not \nall been supportive. In late-August, for instance, the rand weakened again \nin response to news of a police investigation affecting the serving finance \nminister. Furthermore, South Africa’s macroeconomic fundamentals may \nleave the rand exposed in the event of future risk-off episodes, given slower \nand less complete adjustments than those in peer economies.1 In particular, \nthe current account deficit is expected to remain between 4 and 5 per cent \nof gross domestic product (GDP) through 2016 and 2017 (despite a sharp \nnarrowing of the deficit in the second quarter of 2016). The main budget \nfiscal deficit will be close to 4 per cent of GDP this year, as per the 2016 \nNational Budget.\nDomestic growth is forecast narrowly above zero this year (0,4 per cent). It \nis expected to improve slightly over the forecast period, reaching 1,2 per cent \nin 2017 and 1,6 per cent in 2018. Yet this remains below population growth \n(of 1,6 per cent in 2015/16), and well below the 3 per cent average growth \nrate achieved in the two decades after 1994. In part, weak growth reflects \nthe impact of passing shocks (such as drought). More fundamentally, two of \nthe most important growth drivers in the recent past – debt and commodity \n1\t\nThe connection between macroeconomic fundamentals and exchange rate depreciation in response to recent \nchanges in US monetary policy has been established in a number of studies. See, for instance, South African \nReserve Bank Working Paper 15/04 by Shakill Hassan, Merissa Paul and Siobhan Redford titled ‘Vulnerability to \nnormalisation of global financing conditions: an operational approach’, available at http://www.resbank.co.za/\nLists/News%20and%20 Publications/Attachments/6941/WP1504.pdf and Federal Reserve Bank of San Francisco \nEconomic Letter 2016-22 by Julia Bevilaqua and Fernanda Nechio titled ‘Fed policy liftoff and emerging markets’, \navailable at http://www.frbsf.org/economic-research/publications/economic-letter/2016/july/liftoff-and-emerging-\nmarkets/.\nPercentage change over 12 months\nHeadline and core inflation\n \nHeadline inflation\n \nCore inflation\n \nInflation target range\nSources: South African Reserve Bank and Statistics South Africa\n2011\n2012\n2013\n2015\n2016\n2014\n0\n1\n2\n3\n4\n5\n6\n7\n8\nIndices: January 2011 = 100\nCommodity prices\nSources: Thomson Reuters/Jefferies and World Bank\n2012\n2011\n2013\n2015\n2016\n2014\n60\n70\n80\n90\n100\n110\n120\n130\n140\nPrecious metals\nBroad commodities\nPercentage change\nSources: Bank for International Settlements and own calculations\nJun 2015 – Jan 2016\nFeb – Aug 2016\nEmerging market exchange rate dynamics:\nnominal effective exchange rate changes\nRussia\nBrazil\nColombia\nSouth Africa\nChile\nPeru\nIndonesia\nIndia\nThailand\nPhilippines\nChina\nPoland\nTurkey\nMalaysia\nArgentina\nMexico\n-10\n-5\n0\n5\n10\n15\n20\n25\n-30\n-20\n-10\n0\n10\nMonetary Policy Review October 2016\n2\nSouth African Reserve Bank\nprices – are not expected to bolster growth in the coming years. World \ncommodity markets are still adjusting to a mix of slower growth conditions, \nrelative to the 2000s, and excess capacity left over from the commodity \nboom, which is depressing prices from both the supply and demand sides. \nMeanwhile, South African household debt levels remain quite elevated, \nwhile government has exhausted most of its fiscal space.\nAlthough household and government balance sheets are insufficiently \nrobust for much further leverage, corporates are more favourably positioned, \nhaving generally avoided the wave of private-sector borrowing which has \nswept emerging markets in recent years. Yet corporate investment is very \nsubdued in an environment of weak business confidence. Gross fixed capital \nformation has contracted in each of the past three quarters in the mining, \nmanufacturing, construction and commerce sectors; in the first quarter \ninvestment declined in all sectors except agriculture. Nonetheless, as the \nIndependent Power Producer Procurement Programme demonstrates, it \nis possible to attract substantial business investment when closed sectors \nare opened up to new market players. Such reforms offer an important \nopportunity for raising both investment and the potential growth rate of the \neconomy. In the absence of new investment, however, potential growth is \nlikely to remain depressed. By the latest South African Reserve Bank (Bank) \nestimates, it will be barely 1,4 per cent this year and 1,7 per cent in 2018.\nIn a high-debt, low-investment, low-confidence environment, monetary \npolicy has limited capacity to boost growth. Low interest rates help to \nminimise debt servicing costs, but with weak borrowing and lending \nappetites their stimulatory effect is diluted. Furthermore, excessively \naccommodative monetary policy settings could compromise growth over \ntime. If such settings erode the credibility of monetary policy, then longer-\nrun borrowing costs would likely rise on higher inflation expectations and \ninflation risk premiums. Recovering lost credibility might, in turn, entail \nsharp increases in interest rates with more adverse growth consequences.\nThese are important considerations at a time of elevated inflation. Consumer \nprice index (CPI) inflation2 has been outside the 3–6 per cent target range \nfor much of the year. The monthly numbers for July and August were \n6,0 and 5,9 per cent respectively, but inflation is expected to move back over \n6,0 per cent from September and remain above the target range into the \nsecond quarter of 2017. This breach of the target traces directly to higher \nfood prices as a result of domestic drought. Yet underlying inflation is also \nelevated. Core inflation has been above 5 per cent since February 2013, \nand is expected to peak at 5,9 per cent this year. One of the reasons for \nthe persistence of core inflation is the accumulated pressure of sustained \nexchange rate depreciation. This is evident, for instance, in rising prices for \nmotor vehicles and other consumer durables, and may also be feeding through \nto high inflation in services such as medical insurance and education. An \nimportant additional explanation is continued, above-inflation increases \nin wages and salaries. Over the past five years, remuneration growth has \naveraged just over 8 per cent per year, versus annual headline inflation of \n5,4 per cent. Some of the inflationary pressure from these wage and salary \nincreases is absorbed through higher productivity (which is desirable) and \nhigher unemployment (which is not). Still, unit labour cost (ULC) growth \nis expected at 7,5 per cent this year, followed by 6,0 per cent in 2017 and \n5,7 per cent in 2018, higher than headline inflation in each year. Given \n2\t\nUnless otherwise stated, inflation refers to year-on-year changes.\nPercentage of GDP\nCurrent account balances for major \nemerging markets*\n \nSouth Africa \n \nEmerging market median\n* Top 10, based on capital flows: Brazil, Chile, China, India,\nIndonesia, Mexico, Poland, Russia, South Africa and Turkey\nSources: Institute of International Finance, International Monetary\nFund and own calculations\n2000\n04\n06\n10\n08\n16\n18\n14\n12\n02\n-6\n-5\n-4\n-3\n-2\n-1\n0\n1\n2\nForecast\nPercentage of GDP\nFiscal balances for major emerging markets*\n \nSouth Africa \n \nEmerging market median\n* Top 10, based on capital flows: Brazil, Chile, China, India,\nIndonesia, Mexico, Poland, Russia, South Africa and Turkey\nSources: Institute of International Finance, International Monetary\nFund and own calculations\n2000\n04\n06\n10\n08\n16\n18\n14\n12\n02\n-6\n-5\n-4\n-3\n-2\n-1\n0\n1\n2\nForecast\nPer cent\nYield curve \n \n17 May 2013\n \n18 January 2016\n \n27 September 2016\nSources: Bloomberg and own calculations\n4\n5\n6\n7\n8\n9\n10\n11\n29\n27\n25\n23\n21\n19\n17\n15\n13\n11\n9\n7\n5\n3\n1\nYears to maturity\n3\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nthis underlying inflationary impetus, headline inflation is not expected to \nsubside below 5,4 per cent in any quarter during the forecast period, which \nextends to the end of 2018.\nOverview of the policy stance\nMonetary policy has responded to rising inflation with a gradual increase in \ninterest rates. This tightening cycle has, so far, divided into two active phases \nand two pause phases. The cycle commenced in 2014, with the repurchase \n(repo) rate increasing by three-quarters of a percentage point in the face \nof rising inflation and an expected extended breach of the target range. \nTowards the end of 2014, the collapse in world oil prices permitted a pause, \nproviding time to evaluate whether the positive price shock from cheaper \npetrol would have lasting effects on inflation. By around the middle of 2015 \nit became clear the relief would be temporary. The tightening cycle therefore \nre-started with a quarter percentage point adjustment to the repo rate in \nJuly. The outlook continued to deteriorate over the following few months: \nthe exchange rate of the rand fell to near-record lows, longer term borrowing \ncosts spiked alongside a large increase in market pricing of sovereign risk,3 \nand drought pushed food price inflation into double digits. In response to \nthe worsening inflation outlook, the repo rate was increased by a further \npercentage point between November 2015 and March 2016, to 7,0 per cent.\nMore recently, conditions have improved and the cycle has once again \npaused. Headline inflation is now expected to average 6,4 per cent in 2016, \n5,8 per cent in 2017 and 5,5 per cent in 2018, compared – for example \n– to March 2016 forecasts of 6,6, 6,4 and 5,5 for 2016, 2017 and 2018 \nrespectively. Core inflation forecasts have been revised lower since the start \nof the year (although core is still expected to reach seven-year highs in 2016, \nwith the peak very close to 6 per cent). Longer-run inflation expectations \nseem to be holding steady around the top of the inflation target range.\nThe risks to the inflation outlook remain considerable. However, it is \nclearer now than it was earlier in the year that the risks go both ways. Two \nfactors stand out. First, food price inflation is expected to moderate and \nfutures contracts suggest that the prices of staple grains will fall towards \nmore normal levels. Much depends on rainfall patterns, however, which \ncould deliver better-than-normal harvests but might also disappoint again. \nSecond, the exchange rate remains volatile and unpredictable. The rand is \nexposed to both domestic and foreign risks, including additional monetary \npolicy normalisation by the US Federal Reserve and the possibility of credit \nratings downgrades. Nonetheless, it has been on an appreciating trend \nthrough much of 2016, aided by positive interest rate differentials and more \nsupportive commodity prices, among other factors. Beyond food and the \nexchange rate, the forecast also relies on ULCs decelerating quite rapidly, \nfrom 7,6 per cent growth in 2016 to an average of 5,9 per cent through \n2017 and 2018 (somewhat below the post-2011 average of 6,8 per cent). \nPetrol prices are expected to trend modestly higher on a rising world oil \nprice, but are likely to be volatile on supply disruptions and fluctuations \nin the exchange rate. Electricity and education prices remain subject to \nadministrative uncertainty. The recent improvements in the inflation \nforecast are therefore subject to significant upside and downside risks. The \npause in the cycle should provide time to resolve some of these uncertainties.\n3\t\nFive-year credit default swaps (CDS) on South African government debt, for instance, nearly doubled from just over \n200 basis points at the start of 2015 to almost 400 in early 2016. CDSs are used to insure against default risk.\nPer cent\nSouth African repurchase and prime rates\nSource: South African Reserve Bank\nRepurchase rate\nPrime rate\n4\n6\n8\n10\n12\n14\n16\n18\n2000 2002 2004 2006 2008 2010 2012 2014 2016\nRand per US$\nExchange rate of the rand against the \nUS dollar\nSources: Bloomberg and own calculations\n2011\n2012\n2013\n2014\n2015\n2016\n6\n8\n10\n12\n14\n16\n18\nTrend (2011 to mid-2015)\nMonetary Policy Review October 2016\n4\nSouth African Reserve Bank\nIn sum, monetary policy has traversed a challenging landscape over the \npast few years. The beginning of 2016 was especially difficult, given \ndeteriorating inflation forecasts from rapid exchange rate depreciation and \nlarge increases in food prices – only partially countered by weak world oil \nprices. Conditions have become somewhat more favourable in recent months, \nand the inflation forecasts have therefore moderated. These improvements \ncould reverse rapidly in the event of domestic or foreign shocks. As of the \nSeptember MPC meeting, however, the risks appeared less clearly skewed \ntowards higher inflation than they had been earlier in the year. On balance, \nit now seems about equally likely that the forecasts might improve from here \nas that they might deteriorate.\nAt present, the policy rate remains at the 7,0 per cent level reached in March \nof this year. Should conditions develop in line with the current forecasts, \nit may at some point become possible to conclude the policy tightening \ncycle. However, the bar for loosening policy is high, requiring a substantial, \nsustained improvement in forecast inflation bringing it more comfortably \nwithin the 3–6 per cent target range.\n5\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nOverview of the world economy\nThe first half of 2016 has seen a continuation of moderate growth in the world \neconomy, against a background of ongoing monetary accommodation by the \nworld’s major central banks and an absence of inflationary pressures in leading \neconomies. Early-year pessimism about a renewed global economic downturn \nhas abated, supporting a mild recovery in commodity prices. Capital flows to \nemerging markets have also rebounded, mainly reflecting yield differentials \nwith advanced economies. The world economy therefore appears somewhat \nhealthier than it has in the recent past. Nonetheless, there are vulnerabilities \nwhich could disrupt the ongoing global recovery, including debt overhangs in \nemerging markets (especially China) and political shocks comparable to Brexit. \nFurthermore, world growth potential appears to have slowed, for reasons that \nremain contested.\nSeven years after the Great Recession, a lack of solid economic momentum \nremains the norm in most of the world. In its July 2016 World Economic \nOutlook Update, for the fifth quarter in a row, the International Monetary \nFund (IMF) revised down its forecast for global growth, in this case by \n0,1 percentage points for both 2016 and 2017, to 3,1 per cent and 3,4 per \ncent respectively. Such growth rates compare unfavourably with the 3,8 per \ncent average of the past 15 years.\nThe extent to which this deceleration is structural or cyclical in nature remains \nan open question. Different international institutions hold competing views \nabout the size, or even the persistence, of a global output gap. The IMF, for \ninstance, has emphasised lacklustre growth in most advanced economies, \ncontributing to a persistently negative output gap which now also appears to \nbe closing at a slower pace.4 The Bank for International Settlements (BIS), \nhowever, has argued that growth and employment are close to longer-run \naverages, implying that the world economy is operating close to potential.5 \nThe World Bank has also suggested that the global economy is operating \nclose to potential given the gradual increase in the weight of faster-growing \ncountries such as China and India.6 \nThe outcome of this debate has large consequences. If the world economy is \noperating below potential, policymakers could improve welfare by exploiting \nrecord low interest rates to fund fiscal stimulus policies. Monetary settings \nshould also stay looser for longer, and more unorthodox policies might be \nappropriate given natural limits to negative interest rates. However, if higher \ngrowth expectations are simply extrapolations from the boom of the 2000s, \nthen more stimulus could be counterproductive. Further debt accumulation, \nin the public and private sectors, could undermine financial stability in the \nevent of an economic downturn or a rise in borrowing costs. Furthermore, \npersistently accommodative financing conditions might permanently erode \nproductivity growth, by artificially prolonging the lives of uncompetitive \nfirms, including banks.\n4\t\nSee ‘Too slow for too long’, World Economic Outlook, International Monetary Fund, April 2016.\n5\t\nSee Chapter 1, titled ‘When the future becomes today’, in the 86th Annual Report published by the Bank for \nInternational Settlements in June 2016.\n6\t\nSee ‘Divergences and risks’ in Global Economic Prospects published by the World Bank in June 2016.\nPercentage change\nForecast\nWorld real GDP growth\nSource: International Monetary Fund\nAverage\n2017\n2015\n2010\n2005\n2000\n-1\n0\n1\n2\n3\n4\n5\n6\nIndices: 1980 = 100\nGlobal real GDP\nSources: International Monetary Fund and own calculations\n \nGlobal real GDP\n \n1980–2008 trend line\n \n2002–2008 trend line\n2015\n2010\n2005\n2000\n1995\n1990\n1985\n1980\n80\n120\n160\n200\n240\n280\n320\n360\nMonetary Policy Review October 2016\n6\nSouth African Reserve Bank\nImproved stability\nThe early months of 2016 saw growing investor concerns that the US \neconomy could tip into recession, amid a drag from earlier US dollar \nappreciation on net exports and foreign earnings, investment cutbacks in the \nenergy sector and excess inventories. The US economic expansion did slow, \nwith annualised quarter-on-quarter GDP growth easing to 0,8 per cent in \nthe first quarter and 1,2 per cent in the second. However, ongoing job gains \nand low inflation have bolstered household incomes: the Census Bureau has \nrecently reported a 5,2 per cent increase in middle-class incomes in 2015, \nthe largest annual gain on record. In July the IMF scaled down its forecast \nfor 2016 US growth to 2,2 per cent, from 2,6 per cent in January, but in \nview of the receding drag from a stronger dollar and excess inventories, the \nconsensus of economists continues to foresee a faster pace of US expansion \nin late 2016 and 2017.\nIn the eurozone, forecasters have long been more circumspect about the \nsustainability of the recovery, owing to banks’ slow balance-sheet repair, \nelevated levels of public debt and structural economic rigidities. Nonetheless, \nGDP growth has remained positive, with output expanding by 1,6 per \ncent year-on-year, on average, in the first half of 2016. Policy rate cuts and \nquantitative easing measures implemented by the European Central Bank \n(ECB) have supported a gradual recovery in bank lending to the private \nsector. Declining unemployment and low inflation have bolstered household \nspending while exports have continued to grow, albeit at a slower pace than \nin 2014–15. Economic activity also gathered speed in the United Kingdom \n(UK) up to the middle of the year, but the ‘Leave’ vote in the 23 June \nreferendum on European Union (EU) membership ushered in a period of \neconomic and policy uncertainty, with subsequent declines in business and \nconsumer confidence as well as downward revisions to consensus forecasts \nfor GDP growth in both 2016 and 2017.\nIn late 2015 and early 2016, a key source of global uncertainty originated \nfrom China, which faced a mix of slowing economic growth, industrial \nover-capacity, high corporate debt and rising capital outflows. In particular, \nsteps taken by the Chinese authorities in the second half of 2015 to reform \ntheir exchange rate policy raised fears of a large-scale renminbi devaluation, \nboosting global financial market volatility and investor risk aversion. \nChinese economic data have since stabilised, however, partly in response to \nfiscal and monetary stimulus, while authorities have allowed the renminbi \nto depreciate only gradually on a trade-weighted basis, a move that has \napparently assuaged market fears of a more abrupt adjustment.\nMore generally, inflation has been unusually low in several major economies. \nIn the US, despite some evidence of broader price and wage gains, targeted \ninflation is still somewhat below the Federal Reserve’s medium-term goals. \nWages and prices have been considerably more subdued in the eurozone, \nwhile Japan has been at risk of sliding back into deflation amid renewed \nyen appreciation. In China, core inflation has remained remarkably stable \nat around 1½–1¾ per cent, a pattern replicated in other major Asian \neconomies. This benign backdrop has allowed major central banks to defer \npolicy normalisation (as in the US), or expand monetary accommodation \nto combat deflation risks (the eurozone and Japan) and pre-empt potential \neconomic weakness (as in the UK).\nPercentage change over 12 months\nAdvanced economy core inflation\nSource: Bloomberg\n2012\n2013\n2015\n2016\n2014\n-1\n0\n1\n2\n3\nJapan\nUnited States*\nHeadline target\nEuro area\n* Core personal consumption\n expenditure deflator\n7\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nThis global environment has benefitted emerging economies, especially net \nresource exporters, through easier financial conditions and stronger terms \nof trade. Most measures of financial market risk improved in the first half \nof 2016. For example, the JPMorgan Emerging Market Bond Index Plus \n(EMBI+) spread declined to 342 basis points as of 8 September 2016, from \nan average of 449 basis points in January/February. Reflecting increased \nrisk appetite, as well as the reduction in downside real economic risks and \ncentral bank accommodation, commodity prices rose from the lows seen in \nearly 2016. As of 8 September 2016, the Reuters/CRB commodity index \nstood 18,5 per cent higher than its trough on 11 February 2016. Of course, \nperformance has varied across the different subsectors. Precious metals \nhave generally out-performed minerals, while oil prices have lagged, with \nBrent crude repeatedly struggling to break through the US$50 per barrel \nbarrier. Consequently, the improved global financial and commodity price \nenvironment since the beginning of 2016 has mostly benefitted non-oil \nresource exporters, including South Africa.\nThe mix of more favourable ‘push’ (lower government bond yields \nand financial risk premiums in advanced economies) and ‘pull’ factors \n(reduced risks to economic growth and commodity-led terms-of-trade \ngains) facilitated a resumption of capital inflows to emerging markets. \nThe Institute of International Finance projects that private non-resident \ncapital inflows to emerging markets could in 2016 rise to around double \n2015 inflow. Indeed, in the six months since March 2016, inflows into debt \nsecurities rose to US$46 billion from an outflow of US$30 billion in the \npreceding 12 months, while equity inflows also gathered pace.\nPersistent challenges\nImprovements in global financial conditions remain tentative and could easily \nreverse in the face of shocks, with negative spillovers to emerging markets, \nespecially those with weaker economic fundamentals. GDP growth in emerging \nmarkets remains near its slowest pace in 25 years, and the gradual improvement \nexpected in 2016 and 2017 stems mainly from recessions fading in Brazil and \nRussia, rather than from an actual growth pickup in other major economies. \nFurthermore, average emerging market public deficit and debt ratios have risen \nin recent years, while the average current account balance moved into a shortfall \nlast year for the first time since the 1998 Asian Crisis. (The shift into deficit \nterritory mainly reflects large changes in oil-exporting countries and a slightly \nsmaller surplus in China.) Unusually fragile growth, as well as weak fiscal and \nexternal fundamentals, leave certain emerging markets vulnerable to potential \nnew episodes of financial stress.\nOne such episode could result from an acceleration in US inflation, which \nmay lead the Federal Reserve to raise rates at a quicker pace than the consensus \ncurrently discounts. Up to now, below-target inflation has provided US \npolicymakers with the leeway to defer policy tightening in response to shocks, \nsuch as Brexit, but they may not always enjoy such a margin of manoeuvre. \nWorld financial conditions remain exceptionally loose, with low or even \nnegative yields in many advanced economy bond markets. This limits the \nrisk of a sharp tightening of emerging market financial conditions, even if \nthe Federal Reserve raises rates further. Nonetheless, policy shifts towards \nlesser monetary stimulus, amid a growing debate on its present efficacy, could \nweaken capital flows into emerging markets.\nUS$ billions\nEmerging markets: total non-resident\ncapital inflows\nSource: Institute of International Finance\nForecast\nBrexit\nvote\n2012\n2011\n2013\n2015\n2016\n2014\n-100\n0\n100\n200\n300\n400\n500\n600\nTaper\ntantrum\nUS$ per barrel\nBrent crude oil price\n Source: Bloomberg\nSep\nNov\n2015\n2016\nJan\nMar\nMay\nJul\nSep 25\n30\n35\n40\n45\n50\n55\nIndices: January 2011 = 100\n2012\n2011\n2013\n2014\n2015\n2016\nSelected commodity currencies to the \nUS dollar \n \nSouth African rand\n \nBrazilian real\n \nNew Zealand dollar\nSources: Bloomberg and own calculations\n \nAustralian dollar\n \nChilean peso\n80\n100\n120\n140\n160\n180\n200\n220\n240\n260\nMonetary Policy Review October 2016\n8\nSouth African Reserve Bank\nAt the same time, economic and policy trends in China remain highly \nuncertain. Historical experience, in particular in developing Asian \neconomies, suggest that rebalancing economies from export- and investment-\nled growth to a more consumer-led path, rarely happens without significant \ndeclines in trend GDP growth. Similarly, comparable periods of rapid debt \naccumulation have almost invariably ended in abrupt growth slowdowns. \nAny sharper deceleration in the Chinese economy, relative to consensus \nexpectations, would most probably rekindle uncertainties about its impact \non world growth, commodity price levels, and Chinese currency trends.\nFurthermore, a number of more structural factors are likely to constrain global \ngrowth in the medium term. Among these, subdued productivity growth in \nadvanced economies, and increasingly in several large emerging economies, \nhas yet to be fully understood. In the US, average hourly productivity growth \nhas slowed from as much as 3,2 per cent in the latter half of the 1990s to \n2,7 per cent in 2000–07, and as little as 1,0 per cent since 2010. Measures for \nmajor European economies display similar trends. The slowdown may reflect \ntemporary factors, including unusually subdued investment since the Global \nFinancial Crisis. However, the moderation in productivity gains, at least in \nadvanced economies, predates the Crisis. Other, longer-term explanations \ninclude a slow diffusion of information technology to other sectors, especially \nthose firms that are not operating at the technological frontier; reduced social \nmobility, increasing inequality in educational outcomes; and even a secular \nslowdown in the pace of innovation.7\nAnother concern has been the slowdown in world trade growth since the \nGlobal Financial Crisis. Data from the IMF show that the elasticity of \nglobal trade to global GDP has fallen sharply in the 2011–15 period relative \nto both 2000–07 and 1992–99. This shift has been more pronounced in \nemerging economies, and seems to follow from weakness in global fixed \ninvestment, which tends to be import-intensive, as well as stabilising global \nvalue chains after major shifts over the past 20 years. But trade-restrictive \nmeasures, which are being added, on average, at a faster pace than they are \nbeing removed, may also play an increasing part.8\nFinally, large and growing debt stocks have weighed on growth in a number \nof major economies, and could in coming years limit policymakers’ ability \nto respond to any new economic slowdown. Quarterly statistics from the \nBIS show that total credit to the non-financial sector, as a share of GDP, \nrose from 218 per cent in 2011 to 235 per cent by end-2015. For reporting \nemerging economies only, the increase was even more pronounced, from \n133 per cent to 179 per cent over the period.\nIn summary, a number of headwinds may well continue to affect the world \neconomy in the next few years; and within the emerging world, most \nregions appear likely to face ongoing challenges. Emerging Asia remains \nthe strongest-performing region, with the IMF expecting real GDP \ngrowth of 6,4 per cent this year and 6,3 per cent in the next. However, the \nregion is exposed to a slowing Chinese economy and several countries are \ncharacterised by high levels of corporate indebtedness. Central and Eastern \nEurope’s strong trade and financial links to the more advanced European \neconomies render it vulnerable to the latter’s potentially unfavourable \npolitical-economic dynamics. Latin America continues to display elevated \n7\t\nSee The Future of Productivity published by the Organization for Economic Co-operation and Development in 2015.\n8\t\nOverview of developments in the international trading environment: Annual Report by the Director-General \n(Mid-October 2014 to mid-October 2015), World Trade Organisation, 17 November 2015.\nPercentage points\nPercentage change\nContributions to emerging market real\nGDP growth\n \nChina\n \nRussia\n \nOther emerging markets\nSources: International Monetary Fund and own calculations\n \nIndia\n \nBrazil\n \nEmerging markets\n \n(right-hand scale)\n-1\n0\n1\n2\n3\n4\n5\n6\n7\n8\n2017\n2016\n2015\n2014\n2013\n2012\n2011\n2010\n-1\n0\n1\n2\n3\n4\n5\n6\n7\n8\nForecast\nPercentage change\nRatio\nWorld trade growth and elasticity\n \nWorld trade\n \nElasticity of global trade to global GDP (right-hand scale)\nSource: International Monetary Fund\n0\n1\n2\n3\n4\n5\n6\n7\n8\n2011–2015\n2000–2007\n1992–1999\n0,0\n0,5\n1,0\n1,5\n2,0\n2,5\nPercentage change over four quarters\nUnited States labour productivity\nSource: Bloomberg\n1995\n1990\n2016\n2010\n2005\n2000\n-1\n0\n1\n2\n3\n4\n5\n6\n7\n9\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nvulnerability to commodity price swings and limited policy space, while \nthe Middle East and North Africa still have to adjust to what now seems a \nstructural decline in oil revenues. Finally, sub-Saharan Africa, which had \noutpaced world economic growth in 2015, is also increasingly grappling with \ndeteriorating external and fiscal fundamentals, tighter financial conditions \nand insufficient economic diversification (see Box 1).\nConclusion\nNearly a decade after the onset of the Global Financial Crisis, the world \neconomy continues to grow, yet at a pace that now looks structurally weaker \nthan pre-Crisis trends. Productivity growth has stagnated, exacerbated by \nslower world trade growth and businesses remaining cautious about new \ninvestments. More positively, inflation is generally low, allowing major \ncentral banks to maintain a sizable degree of monetary accommodation, \nwhich in turn compresses global bond yields and channels capital towards \nhigher-yielding emerging markets. Risks therefore remain that geopolitical \nor financial shocks could force a sudden tightening in global financial \nconditions, at a time when growth dynamics lack resilience.\nBox 1\t\nSlowing growth in sub-Saharan Africa: implications for South Africa\nEconomic activity in sub-Saharan Africa (SSA) has weakened sharply. Over the past dec-\nade, the region achieved an average GDP growth rate of 5,5 per cent. The International \nMonetary Fund’s (IMF’s) forecast for this year, by contrast, puts growth at 1,6 per cent. \nThis marks a 17-year low, and also the first time since the turn of the century that SSA \ngrowth will fall below the global rate. The primary cause of the slowdown has been declin-\ning commodity prices, but the negative effects have been magnified by policy choices, \nincluding decisions to increase overseas borrowing or ration access to foreign currency.\nAs a whole, the rest of the world is relatively insulated from slower growth in SSA. Since \n2000, the region has on average contributed only 2,8 per cent of global output, and just \n0,1 percentage points to world growth. South Africa, however, is much more exposed. \nSSA is South Africa’s most important trading partner region, taking almost 30,0 per cent \nof South Africa’s exports – versus 28,7 per cent and 23,0 per cent for Asia and Europe re-\nspectively. Furthermore, South African exports to the region are highly responsive to local \ngrowth rates. Since 2000, a percentage point increase in SSA’s dollar-denominated trade-\nweighted growth has on average increased South Africa’s dollar-denominated exports to \nthe region by 0,8 percentage points.1 In dollar terms, exports have contracted by 27,7 per \ncent since 2011, which corresponds to a 28,8 per cent decline in US dollar-denominated, \ntrade-weighted GDP over the period.\nSouth Africa runs a consistent trade surplus with SSA, averaging almost 2 percentage \npoints of GDP since 2000. That surplus has also grown with time reaching 4,6 per cent \nof GDP in 2015. Without SSA trade, the overall trade balance of -1,25 per cent in 2015 \nwould have been -5,8 per cent.\nFurthermore, South Africa’s exposure to the region is not limited to the trade account. \nSSA has been an increasingly important investment destination for South Africa. As a \nresult, the proportion of South African assets in SSA, as a share of total assets, has more \nthan doubled over the past decade. Hence, lower growth outcomes in SSA could de-\ncrease dividends repatriated from the region, worsening the outlook for the overall current \naccount balance.\n1\t\nBoth trade-weighted GDP and export values are denominated in US dollars and exclude the SACU region.\nPercentage change\nSub-Saharan African growth and \nSouth African exports to the region\n \nSouth African exports to sub-Saharan Africa*\n \nSub-Saharan Africa growth*\nSources: International Monetary Fund and own calculations\n2000\n2006\n2009\n2015\n2012\n2003\n-20\n-10\n0\n10\n20\n30\n40\n* Based on nominal US dollar values (excluding the SACU region)\nPercentage of total foreign assets\nSouth African assets in sub-Saharan Africa\nSource: South African Reserve Bank\n2001\n2003\n2005\n2007\n2009\n2011\n2013\n3\n4\n5\n6\n7\n8\n9\n10\nPercentage change\nGDP growth in sub-Saharan Africa\n \nGDP-weighted sub-Saharan Africa\n \nTrade-weighted sub-Saharan Africa (excluding SACU region)\nSources: International Monetary Fund, Department of Trade\n \nand Industry, and own calculations\n2000\n04\n06\n10\n08\n2016\n14\n12\n02\n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\nForecast\nPercentage of GDP\nTotal* credit to non-financial sector\nSource: Bank for International Settlements\n2005\n2003\n2007\n2011\n2013\n2016\n2009\n100\n120\n140\n160\n180\n200\n220\n240\n260\nWorld\n* Totals for reporting countries\nEmerging markets\nMonetary Policy Review October 2016\n10\nSouth African Reserve Bank\nOverview of the domestic economy\nThe recent period of low economic growth reflects both cyclical and structural \nfactors. It is now quite clear that the economy is several years into a major \nstructural slowdown. Potential growth has subsided to around 1,5 per cent, less \nthan half longer-run averages. Cyclical factors retain some explanatory power, \nparticularly for this year’s near-zero growth forecast. Over the next few years, \ngrowth is likely to accelerate marginally, but is unlikely to return to longer-\nterm averages without reforms which generate stronger investment and renewed \nproductivity growth.\nSouth African GDP growth has trended steadily lower since 2010. Output \nis unlikely to expand in any meaningful way this year, and growth forecasts \nsuggest only a slight rebound over the next two years. The ongoing slow-\ngrowth episode is proving unusually prolonged. In the past two decades, no \nother period has had such a low average growth rate. Indeed, over the past \ncentury, five-year moving averages have only been lower in the late 1980s \nand early 1990s – periods of acute political instability – and much earlier, \naround World War I and the Great Depression.\nThe slump has two components. One is weak demand, meaning the gap \nbetween what the economy can produce at potential and what it actually \nis producing. The other component is declining potential growth, defined \nas the growth rate the economy can achieve with stable inflation. It is clear \nthat potential growth has slowed dramatically, from around 4 per cent at the \nheight of the boom to roughly 1,4 per cent in 2016. At the moment, actual \ngrowth is falling below even this low level. In these conditions, monetary \npolicy can help narrow the gap between potential and actual growth. As such, \ninterest rates remain quite low relative to most estimates of ‘neutral’ levels, and \nthe exchange rate is also advantageous and should be generating a stronger \nexport response. However, achieving a growth rate closer to the post-1994 \naverage of 3 per cent, or the National Development Plan goal of over 5 per \ncent, requires higher potential growth. This is beyond the scope of stimulatory \nmacroeconomic policies and requires a broader reform agenda.\nInvestment\nAccording to the Commission on Growth and Development, for an \nemerging market to achieve sustained growth it must typically invest at \nleast 25 per cent of GDP.9 South Africa has not achieved this threshold in \nover three decades. Investment did accelerate in the 2000s, peaking at just \nabove 23 per cent of GDP, which helped to amend for the long period of \ninvestment neglect through the late 1980s and 1990s. In the post-Crisis \nperiod, however, investment has declined, led by a fall in private-sector \ninvestment. Total investment is currently at around 20 per cent of GDP, \nand is expected to remain at about these levels over the next three years.\nThe private sector led the investment upswing of the 2000s, contributing \nabout two-thirds of the total real growth in investment, with the remaining \nthird split almost equally between public corporations and government. \nDuring the Global Financial Crisis, private investment contracted sharply \nbut rebounded soon afterwards. In the period 2011–13, total real investment \ngrowth declined to 5,0 per cent per annum, compared to 9,4 per cent \n9\t\nSee The growth report: strategies for sustained growth and inclusive development published by the Commission \non Growth and Development in 2008 (p.34).\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n8\nReal GDP growth outcomes \nfrom the October 2016 MPR\nPercentage change*\n* At seasonally adjusted annualised rates\nSources: Statistics South Africa and South African Reserve Bank\n2012\n2008\n2010\n2014\n2016\n2018\nSouth Africa’s five-year rolling average\nreal GDP growth\n \nGrowth below 2012–2016 average\n \nFive-year rolling average\nSource: South African Reserve Bank\nPercentage change\n-4\n-2\n0\n2\n4\n6\n8\n10\n12\n30\n1916\n40\n50\n60\n70\n80\n90 2000 10 18\nForecast\nPercentage of GDP\nInvestment as a share of GDP\n1994\n1998\n2002\n2006\n2010\n2014\n2018\nSource: South African Reserve Bank\n12\n14\n16\n18\n20\n22\n24\n11\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nbetween 2000 and 2008, but the private sector contributed almost three-\nquarters of overall investment growth, a slightly larger share than it had in \nthe 2000s.\nAfter 2013, however, the pattern changed. Private investment has contracted \nin seven of the past ten quarters. Over this period, the little investment \ngrowth South Africa achieved came mainly from the public sector, mostly \nfrom general government but with minor contributions from state-owned \nenterprises. Furthermore, the forecast suggests that the contribution from \nprivate investment is expected to be negative until mid-2017 and barely \npositive thereafter, with marginal positive growth expected from government \nand public entities.\nOn a sectoral basis, considering only private-sector investment, the largest \ncontributors to investment growth in the 2000s were finance, mining and \nmanufacturing. The contribution from mining was perhaps smaller than \nmight be expected for a commodity economy: the sector provided less than \na fifth of overall investment growth in the 2000s, and although it has faded \nin the post-Crisis period, the growth rate has not been negative on average. \nIndeed, investment in finance (which includes real estate) displays a clearer \nboom and bust pattern than mining investment, contributing over twice as \nmuch to total investment as mining did in the 2000s and then contracting \nat an average rate of 0,4 per cent from 2011.\nIn recent years, the electricity industry has been an important source \nof private investment. The category stands as proof of the growth that \ncan be achieved by opening restricted sectors to new investors. Without \nsuch reforms, however, private investment is unlikely to recover strongly. \nBusiness confidence is subdued. In the second quarter of 2016, for \ninstance, the Rand Merchant Bank/Bureau for Economic Research \n(RMB/BER) Business Confidence Index reached its lowest point since the \nGlobal Financial Crisis. It rebounded in the third quarter, probably driven \nby the same factors which supported the rand rally, but it remains at low \nlevels. The BER’s survey of manufacturers point to several constraints \non investment. Answers related to weak demand and shortages of skilled \nlabour feature prominently in recent surveys, and have become more \ncommon relative to long-run averages. The single biggest obstacle to \ninvestment, however, is political uncertainty, a response which recently \nattained its highest frequency since the inception of the series in 1987.10\nCompared to the universe of emerging markets, South Africa’s investment \nlevels appear low. The comparison is distorted by extreme levels of \ninvestment in China, which remain at over 40 per cent of GDP, but even \nwith China excluded South Africa’s investment levels remain somewhat \nbelow the emerging market average. They are, however, still above the \nlonger-run domestic average (which is just 17 per cent for 1994–2015). The \nSouth African investment narrative is therefore quite complex. Although \ninvestment levels are too low to support rapid and sustained growth, they \nare still quite elevated from an historical perspective. They are surprisingly \nhigh given the weakness of GDP growth, perhaps reflecting low borrowing \ncosts, and they are also high relative to savings.\n10\t\nSpecifically, the BER survey asks if the ‘general political climate’ is a constraint.\nPercentage of GDP\nPrivate-sector investment\n \nServices\n \nFinance\n \nTransport\n \nTotal private sector\nSource: South African Reserve Bank\n \nCommerce\n \nConstruction\n \nElectricity\n \nManufacturing\n \nMining\n \nAgriculture\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\n1994\n1997\n2000 2003\n2006\n2009 2012 2015\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\nPercentage points\nPercentage change*\nInvestment growth by type of organisation\n \nPrivate enterprises\n \nGeneral government\n \nPublic corporations\n \nTotal (left-hand scale)\nSource: South African Reserve Bank\n2000\n2004\n2008\n2012\n2018\n2016\n* Over four quarters\nForecast\nInvestment: comparison with \nemerging markets\n \n \nEmerging market weighted average (excluding China)\n \n \nSouth Africa\nSources: International Monetary Fund and own calculations\n15\n17\n19\n21\n23\n25\n27\n1994\n1997 2000\n2003 2006\n2009 2012\n2015\nPercentage of GDP\nMonetary Policy Review October 2016\n12\nSouth African Reserve Bank\nSavings\nIn a closed economy, all investment must be funded out of domestic savings. \nIn an open economy, however, it is possible to import savings and thereby \nboost investment levels beyond the domestic savings constraint. The most \nsuccessful growth cases are typically countries which save large portions \nof income for investment. Countries with low savings rates, however, need \nto borrow, within limits, to fund investment and thereby lift growth. \nSouth Africa has long been characterised by a low savings rate, and has \ntherefore imported foreign savings to finance investment. Dependence on \nforeign funding has grown in recent years, however, as domestic savings \nhave declined. This has magnified South Africa’s exposure to shifting global \nfinancial conditions.\nHistorically, the savings choices of households, corporates and government \nhave tended to vary, with one party almost always behaving contrary to \nthe others. In the 1990s, for instance, government dissaving was roughly \nbalanced by household and corporate savings. By the late 2000s, the position \nhad reversed, and government surpluses were partially offsetting household \nand corporate borrowing. In recent years, however, all three contributors to \nsavings have reduced their saving levels, which has created a large savings \ngap. The biggest swing factor is government, which has become the main \nsource of economy-wide dissaving. Households have also maintained a \nsubstantial dissaving position, however, and even corporates have been \nmodest net borrowers through 2012–14 (with a small positive contribution \nin 2015). The resulting savings gap provides one perspective on South \nAfrica’s persistently large current account deficit. The other perspective – \non what imported savings bought – is detailed in Box 2.\nBox 2\t\nDisaggregating the trade component of the current account\nSouth Africa tends to run large current account deficits when the economy is doing well, \nboth because of savings flowing in from abroad and because of rising imports of capital \nand consumer goods. Since 2011, however, growth has slowed markedly even as the \ncurrent account deficit (CAD) has expanded. Disaggregating the trade balance shows \nthat machinery imports – mostly for investment – have been resilient despite slowing \ngrowth, suggesting investment has become less productive. Commodity trends are \nalso important for explaining swings in the trade balance, and in recent quarters vehicle \nexports have become more significant.\nFocus on trade…\nThe trade balance forms one part of the overall current account balance, and is usually \nsmaller than the services, income and current transfers account. In 2015, for instance, \nthe annual current account deficit of 4,4 per cent of GDP was made up of 3,5 percentage \npoints from the services, income and transfers account and just 0,9 percentage points \nfrom the trade balance. The trade balance tends to be the swing variable, however, \nproducing large current account deficits when it turns negative and closing the CAD when \nit shifts into positive territory. (The correlation between the two is 0,95 over the past \ndecade.)\n… specifically, trade in commodities and machinery\nAlthough the trade data are very complex, historically the trade balance has been tightly \ntied to just two broad categories: machinery imports (including transport equipment) and \nnet commodities, the latter defined as the top four commodity exports (iron ore, coal, \nplatinum and gold) less imports of oil and oil-related products. These two categories \nexplain the current account narrowing which followed the Global Financial Crisis, from \n-6,6 per cent of GDP in the third quarter of 2008 to -0,4 per cent of GDP in the fourth \nquarter of 2010. Oil import costs fell faster than commodity export earnings, producing \na net commodity gain of about 1,5 percentage points of GDP between 2008 and 2010. \nMeanwhile, machinery imports fell, from around 11 to 7 per cent of GDP.\n-8\n-6\n-4\n-2\n0\n2\n4\n6\nGross saving minus gross capital formation\n \nHouseholds\n \nCorporations\n \nGeneral government\n \nTotal\nSource: South African Reserve Bank\n1995\n2000\n2005\n2010\n2015\nPercentage of GDP\nCurrent account and components\n \nCurrent account balance\n \nService, income and transfers balance\n \nTrade balance \nSources: South African Reserve Bank, South African Revenue\n \nService, IHS Global Insight and own calculations\n2004\n2002\n2000\n2006 2008\n2014\n2012\n2016\n2010\n-8\n-6\n-4\n-2\n0\n2\n4\n6\nPercentage of GDP\nPercentage of GDP\nSavings: comparison with emerging markets\nEmerging market\nweighted average \n(excluding China)\nSouth Africa\nSources: International Monetary Fund and own calculations\n2015\n2012\n2009\n2006\n2003\n2000\n1997\n1994\n10\n15\n20\n25\n30\n13\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nDebt\nGiven low savings, household and government debt positions leave \nlimited room for more borrowing and therefore leverage-driven growth. \nGovernment entered the crisis with comparatively large amounts of fiscal \nspace, but its debt-to-GDP ratio has almost doubled since 2008. This \nexplains the appropriateness of fiscal consolidation. However, the slowdown \nin government borrowing weakens one of the main growth drivers of the \neconomy in recent years. In future, the main growth contribution from \ngovernment will not come from overall spending aggregates but from the \nIn the post-Crisis period, export commodity and oil prices bounced back from Crisis-\nera lows. Yet whereas export commodity prices peaked in 2011 before declining, oil \nprices stayed high all the way until the second half of 2014. This decline in South Africa’s \ncommodity terms of trade explains the widening of the CAD following the Crisis. When \noil prices finally began falling in 2014, the CAD improved, and kept narrowing – from \nover 5 per cent of GDP to just over 3 per cent of GDP – until export commodity prices \nweakened again in 2015.\nCommodity exports, oil and machinery imports\nPer cent\nDate\nCommodity\nexports \nOil \nimports\nMachinery \nand transport\nimports\n\t2004.....................................\n7,5\n-2,8\n-7,6\n2005.....................................\n7,3\n-2,9\n-7,6\n2006.....................................\n8,2\n-4,4\n-8,6\n2007.....................................\n8,8\n-4,7\n-9,3\n2008.....................................\n10,0\n-6,4\n-10,6\n2009.....................................\n8,4\n-4,3\n-7,1\n2010.....................................\n9,0\n-3,9\n-7,0\n2011.....................................\n10,5\n-4,8\n-7,8\n2012.....................................\n9,5\n-5,5\n-8,1\n2013.....................................\n9,5\n-5,8\n-8,9\n2014.....................................\n8,5\n-6,3\n-8,7\n2015.....................................\n7,8\n-3,9\n-9,0\n2016.....................................\n7,9\n-3,0\n-8,5\nSources: IHS Global Insight and South African Revenue Service\nMeanwhile, machinery imports quickly recovered to between 8 and 9 per cent of GDP \nsoon after the Crisis, as a consequence of the investment to GDP ratio rebounding to \naround 20 per cent. These imports have been diverse: personal computers, transformers, \ntrucks and turbines are all significant, but collectively only explain around a third of \nmachinery imports, with the balance coming from a large number of smaller categories.\nRebalancing?\nImports have compressed somewhat since mid-2015, with imports of oil-related \nproducts and machinery declining by a cumulative 1,5 per cent of GDP over four quarters. \nThere have also been gains in vehicles, textiles, clothing and wood, and chemicals \n(totalling 1,3 percentage points over four quarters). Food imports have climbed to a high \nof 2,2 per cent of GDP, reflecting domestic shortfalls from drought, but this only adds \nabout 0,3 percentage points to imports.\nExport performance has deteriorated in three of the past four quarters, but a strong \nimprovement in the second quarter of 2016 has interrupted this trend. As a result, the \ncurrent account deficit narrowed from 5,2 to 3,1 per cent of GDP. Vehicle exports have \nrisen to 3,3 per cent of GDP. Platinum group metals and gold have also picked up in the \nlatest quarter, from a low level.\nCorrelates of current account deficit\n \nCurrent account\n \nSource: South African Reserve Bank\n2004\n2006\n2012\n2010\n2008\n2016\n2014\n-9\n-8\n-7\n-6\n-5\n-4\n-3\n-2\n-1\n0\n \nSelection (commodities \n \nand machines)\nPercentage of GDP\n0\n5\n10\n15\n20\n25\n30\n2016Q2\n2016Q1\n2015Q4\n2015Q3\n2015Q2\n2015Q1\nPercentage of GDP\nMajor imports\n \nCrude oil and petroleum products\n \nMachinery and transport equipment\n \nTextiles, clothing and wood\n \nChemicals\n \nVehicles\n \nBase metals\n \nAgriculture, beverages and tobacco\n \nTotal\nSources: South African Revenue Service and \n \n South African Reserve Bank\n24,5\n22,9\n25,3\n24,3\n23,0\n22,5\n0\n2\n4\n6\n8\n10\n12\n14\n16\n2016Q2\n2016Q1\n2015Q4\n2015Q3\n2015Q2\n2015Q1\nPercentage of GDP\nMajor exports\n \nVehicles\n \nPlatinum group metals\n \nGold\n \nIron ore and steel\n \nCoal\n \nChrome\n \nPetroleum\n \nTotal\nSources: South African Revenue Service and \n \n South African Reserve Bank\n12,3\n13,4\n13,4\n12,7\n11,9\n14,5\nMonetary Policy Review October 2016\n14\nSouth African Reserve Bank\ncomposition of spending. Inasmuch as government investment is protected, \nand cost control mainly affects consumption – particularly the state wage \nbill – it will be more growth friendly. Consolidation at the expense of \ninvestment, however, will be detrimental for longer-run growth.\nThe household sector is similarly ill-positioned to drive growth through \ngreater leverage. Household debt stocks expanded rapidly in the late 2000s, \nreaching a peak close to 90 per cent of disposable income. They have trended \ngradually lower in subsequent years, to slightly below 80 per cent of incomes, \nreflecting households’ desire to reach more comfortable debt levels as well \nas tighter credit standards than those in force before the Global Financial \nCrisis. The composition of borrowing is also important: in the post-Crisis \nperiod, leverage has shifted from financing asset accumulation, particularly \nthrough mortgages, to supporting consumption. Given these constraints, it \nis unsurprising that credit to households has been contracting, in real terms, \nsince about the start of 2014.\nWith reduced domestic saving and more borrowing from the world, South \nAfrica’s net international investment position should be deteriorating. The \nflexible exchange rate, however, has once again provided an adjustment \nmechanism, insulating the economy. In the first quarter of 2016, South \nAfrica’s net international investment position actually reached its highest \nlevel since records began in 1956. This chiefly reflects valuation effects, with \nrand depreciation supporting the value of foreign currency assets held by \nSouth Africans while suppressing the value of rand assets held by foreigners.\nThe output gap \nIn the post-Crisis environment, estimates of the output gap have been \npersistently negative in real time. With the benefit of new techniques \nand hindsight, however, the revised estimates have been much smaller or \neven zero. The reason for this is that the economy’s potential growth rate \nwas originally overstated, with the result that disappointing growth was \ninterpreted as a cyclical phenomenon rather than a structural problem.\nThis record justifies a cautious approach to interpreting output gap data. \nFor this reason, the estimates are presented within a range to convey \nuncertainty. The range is wide: at present, the 75 per cent confidence band \nstretches from -4,0 to 1,5 per cent of potential GDP. The midpoint of the \nrange, however, is currently at around -2 per cent of potential GDP, and \nmost of the range is below zero. It therefore fits the intuition that potential \ngrowth probably has not fallen all the way to zero, or lower, and as such the \neconomy is currently operating below its ‘speed limit’, even if that limit is \nmuch lower than it used to be.\nThe current output gap is therefore almost certainly negative, despite the \nuncertainty invariably attached to the concept. According to the most recent \nestimates, which incorporate data revisions from Statistics South Africa \n(Stats SA), this gap began widening quite recently. The central projection \nfor the output gap was actually slightly positive in late 2014, but became \ngradually more negative over the course of 2015, with actual growth for \nthe year coming in at 1,3 per cent compared to a potential growth rate \nof 1,5 per cent. The gap has been widening more sharply this year, given \na much bigger distance between potential (estimated at 1,4 per cent) and \nactual growth (currently forecast at 0,4 per cent). The gap then stays close to \ncurrent levels across the forecast horizon, reflecting growth forecasts closer \nto potential through 2017 and 2018.\n-20\n0\n20\n40\n60\n80\n100\nPercentage of GDP\nGeneral government debt\nSources: Bank for International Settlements and own calculations\n \n2009 Q1\n \nChange to date\nHungary\nBrazil\nIndia\nMalaysia\nArgentina\nSouth Africa\nPoland\nCzech Republic\nChina\nMexico\nTurkey\nThailand\nIndonesia\nChile\nRussia\n-20\n0\n20\n40\n60\n80\nPercentage of GDP\nHousehold debt\nSources: Bank for International Settlements and own calculations\n \n2009 Q1\n \nChange to date\nThailand\nChile\nChina\nSouth Africa\nPoland\nCzech Republic\nBrazil\nHungary\nTurkey\nIndonesia\nRussia\nMexico\nIndia\nArgentina\n-6\n-5\n-4\n-3\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\nOutput gap uncertainty\nPercentage of potential GDP\n2012\n2008\n2010\n2014\n2016\n2018\n 75%\n 50%\n 25%\n Output gap \n \nSource: South African Reserve Bank\n15\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nRecent growth outcomes\nIn the first quarter of 2016, growth was expected to be low, but it still \nsurprised on the downside at -1,2 per cent.11 The agricultural sector, which \nhad contracted throughout 2015, once again posted a negative growth \nrate – which was to be expected given the ongoing drought. The biggest \nsurprise in the data was the mining sector, which contracted by 18,1 per \ncent, contributing -1,5 percentage points to overall GDP growth.\nGrowth in the second quarter of the year was significantly stronger, at \n3,3 per cent. As anticipated, the mining sector rebounded, contributing \n0,8 percentage points to growth. The manufacturing sector added a further \n1,0 percentage point, largely due to strong vehicle exports. Although 3,3 per \ncent growth was above expectations, it should not be interpreted as clear \nevidence of a growth rebound. The quarterly base effects were flattering; \nin year-on-year terms, the growth rate was just 0,6 per cent. The second-\nquarter figures also pointed to some rotation in demand, with domestic \nexpenditure weakening and net exports serving as the main growth driver.\nGrowth forecasts and risks\nThe 2016 forecast was marked up for the September meeting of the MPC, \nfrom 0  per cent to 0,4 per cent, the first upward revision in a growth \nforecast since March 2013.12 Over the next two years, growth is expected \nto accelerate gradually, to 1,2 per cent in 2017 and 1,6 per cent in 2018. \nThese forecasts put growth much lower than historical norms, reflecting \nthe ongoing weakness of potential growth. They nonetheless portray a \nrebound in growth, which is based on several factors. First, world growth is \nexpected to improve, which – in combination with a competitive exchange \nrate – yields higher net exports. Second, investment should recover from \nthe 2016 contraction, mainly because of public sector investment growth. \nHousehold consumption should also move slightly higher. It is however \nexpected to grow more slowly than GDP in 2017 and 2018, with rising \nunemployment offsetting persistent real wage growth. Real government \nconsumption is expected to edge lower in 2017 and 2018, as per National \nTreasury’s consolidation strategy.\nThe principal downside risks to this forecast are that the household sector \ncould weaken more than expected and the external sector might not be \nas strong as forecast. However, there are also upside risks. The forecast is \nfor very low growth numbers, well below historical averages, and simple \nregression to the mean would imply a growth rebound. The upward revision \nto the 2016 growth estimates may mark the end of an extended period of \ngrowth projections being systematically too high.\nConclusion\nOne of the most difficult aspects of macroeconomic management is \ndistinguishing cyclical and structural growth patterns. South Africa’s \neconomy has decelerated steadily since 2011. This slowdown was initially \ndiagnosed as a cyclical problem, but it has since become clearer that it has \nmainly structural causes. Productivity growth has shifted to a lower level \nand investment growth has declined, with private-sector investment now \ncontracting. As a result, the economy’s potential growth rate has weakened \nto approximately 1,4 per cent, around half longer-run historical averages.\n11\t\nQuarter-on-quarter, seasonally adjusted annualised rate.\n12\t\nThat adjustment moved the 2013 annual growth forecast from 2,63 to 2,82 per cent.\nMonetary Policy Review October 2016\n16\nSouth African Reserve Bank\nWith growth falling below even these low levels in both 2015 and 2016, \nmonetary policy has helped support demand with low real interest rates. \nYet the fundamental problem is one of diminished potential, and restoring \ngrowth rates to historical averages will therefore require deeper, structural \nreforms. Without such measures, the economy is expected to expand at rates \nbetween 1 and 2 per cent for the foreseeable future, generating little or no \nimprovement in employment or individual living standards.\n17\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nInflation developments and outlook\nHeadline CPI has been outside the 3–6 per cent target range for much of the \nyear to date, and is expected to average 6,4 per cent for the year as a whole. The \nbreach of the inflation targets stems mainly from high food prices. Underlying \ninflation is also elevated, however, with core inflation at seven-year highs. This \nreflects pass-through from an extended period of currency depreciation, as well \nas pricing behaviour in labour and product markets, which generate persistent \nULC growth and ensure it is translated into higher prices. These inflationary \nfactors are being offset by a negative output gap and the credibility of monetary \npolicy, reinforced, more recently, by some exchange rate appreciation. Accordingly, \nheadline inflation is expected to trend lower over the forecast period, averaging \n5,8 per cent in 2017 and 5,5 per cent in 2018.\nFood prices\nSouth Africa’s worst drought in recent decades has lifted food prices, \npushing food and non-alcoholic beverages inflation from 4,4 per cent in \nthe third quarter of 2015 to 10,8 per cent in the second quarter of 2016. \nThe contribution to targeted inflation from this category has risen from \n0,7 percentage points to 1,7 percentage points. Food inflation is likely to \npeak above 12 per cent towards the end of 2016, and then fall to below \n6 per cent in the last few months of 2017, assuming more normal weather \nconditions and favourable base effects.13\nThe largest contributions to the acceleration in food price inflation have \ncome from two categories: fruit and vegetables, and bread and cereals. \nNeither of these food price drivers is expected to add to food price inflation \nbeyond late 2016; the fruit and vegetable category likely peaked in the \nsecond quarter of 2016 and bread and cereals should moderate after the \nfourth quarter. \n13\t\nTo gauge the impact of higher agricultural prices on food prices, the South African Reserve Bank has developed \na supplementary food model for the food supply chain. Results show that a 10 percentage point increase in \nagricultural food prices (from PPI) leads to a 3 percentage point increase in CPI food prices. In the model, half of the \nshock to agricultural prices (i.e. 1,5 percentage points) is transmitted to consumer food prices within three months, \nwhile the remaining half is passed through during the subsequent nine months.\nConsumer food price inflation\nPercentage change over 12 months and contributions in italics (percentage points)\nActual\nForecast\nActual\nForecast\nWeight\n2011–\n2014\n2015\n2016\n2017\n2015\nQ3\n2015\nQ4\n2016\nQ1\n2016\nQ2\n2016\nQ3\n2016\nQ4\n2017\nQ1\n2017\nQ2\n2017\nQ3\n2017\nQ4\nFood and \nnon-alcoholic \nbeverages............\n15,41\n6,9\n5,1\n10,8\n6,0\n4,4\n5,1\n8,3\n10,8\n11,8\n12,3\n8,2\n6,4\n5,5\n4,0\n1,1\n0,8\n1,7\n0,9\n0,7\n0,8\n1,3\n1,7\n1,8\n1,9\n1,3\n1,0\n0,9\n0,6\nBread and cereals\n3,56\n7,2\n5,0\n14,6\n8,5\n5,7\n7,3\n10,8\n14,7\n15,9\n16,7\n12,7\n8,8\n7,3\n5,7\n0,3\n0,2\n0,5\n0,3\n0,2\n0,3\n0,4\n0,5\n0,6\n0,6\n0,5\n0,3\n0,3\n0,2\nMeat....................\n4,56\n7,3\n5,9\n6,4\n8,5\n5,0\n4,2\n5,2\n6,1\n6,1\n8,1\n9,2\n9,1\n8,3\n7,6\n0,3\n0,3\n0,3\n0,4\n0,2\n0,2\n0,2\n0,3\n0,3\n0,4\n0,4\n0,4\n0,4\n0,3\nOils and fats.........\n0,55\n8,4\n4,0\n17,4\n6,4\n5,1\n11,9\n17,8\n19,4\n18,4\n14,5\n9,1\n7,1\n5,8\n3,9\n0,0\n0,0\n0,1\n0,0\n0,0\n0,1\n0,1\n0,1\n0,1\n0,1\n0,0\n0,0\n0,0\n0,0\nVegetables...........\n1,61\n7,2\n0,8\n16,3\n2,7\n-1,7\n4,0\n18,1\n20,9\n15,1\n11,1\n1,5\n-0,4\n5,9\n3,9\n0,1\n0,0\n0,3\n0,0\n0,0\n0,1\n0,3\n0,3\n0,2\n0,2\n0,0\n0,0\n0,1\n0,1\nSources: Statistics South Africa, South African Reserve Bank and own calculations\n0\n2\n4\n6\n8\n10\n12\n14\nPercentage change on a year earlier\n2012\n2008\n2010\n2014\n2016\n2018\nInflation target range\n* CPIX for metropolitan and other urban areas until the end\nof 2008; CPI for all urban areas thereafter\nSources: Statistics South Africa and South African Reserve Bank\nTargeted inflation* forecast\nPercentage change over 12 months (both scales)\nSelected agricultural prices and \nproducer price inflation\n-60\n-30\n0\n30\n60\n90\n120\n150\n180\n2014\n2015\n2016\n2017\n \nWhite maize\n \nYellow maize\n \nWheat\n \nAgricultural producer price inflation (left-hand scale)\nSources: Statistics South Africa, SAFEX and \n \n South African Reserve Bank\n \nWhite maize futures\n \nYellow maize futures\n \nWheat futures\n \n-10\n-5\n0\n5\n10\n15\n20\n25\n30\nForecast\nMonetary Policy Review October 2016\n18\nSouth African Reserve Bank\nMeat price inflation, however, is expected to be over 8 per cent from the \nfourth quarter of 2016 to the last quarter of 2017, with the peak due early \nin 2017. The lag in meat prices is explained by farmers withholding animals \nfrom markets, so as to replenish the stocks depleted during the drought phase.\nWhile local agricultural food prices have risen and placed pressure on \ndomestic food inflation, international agricultural food prices (in US dollar \nterms) have been in deflation for 52 of the last 57 months. This has, in \npart, been a story of generally good crops and much lower input costs due \nto cheaper oil. South African consumers have unfortunately lost out on the \nbenefits of cheaper world food prices due to persistent currency weakness. \nLooking ahead, world food prices are expected to be fairly stable, a forecast \npredicated on continued low international oil prices and broadly favourable \nweather conditions.\nPetrol prices\nPetrol prices have been in deflation in 19 of the past 22 months, the \nfirst quarter of 2016 being the only exception to the deflationary trend. \nAt present, around 45  per cent of local petrol prices is determined by \ninternational prices14, while the remaining 55 per cent is explained by \ndomestically determined taxes and margins. The first category is the main \nsource of volatility in local prices, however, both through fluctuating world \noil prices and the exchange rate of the rand.\nBrent crude oil has traded in a band of roughly US$30 to US$50 per barrel \nover the past year. Prices have risen somewhat from January 2016 lows, \nbut are still well below the 2011–14 average of US$108 per barrel. The \ncombination of continued low oil prices and the recent currency appreciation \nhas also helped to keep the local petrol price in deflation this year, subduing \nthe base effects which had previously been expected to exaggerate the 2016 \ninflation outcomes.\nThe plunge in international crude oil prices in late 2014 and early 2015 was \ndriven by both supply and demand factors. On the supply side, a decade of \nrelatively high prices incentivised oil companies to raise production. The \nensuing increase in supply coincided with slowing growth in large emerging \neconomies, leaving a supply glut. Producers have improved extraction \nefficiencies and cut costs so that global average oil production costs are now \nlower, averaging about US$45 per barrel. This means that more suppliers \ncan survive in a low-price environment. As a result, oil prices are less likely \nto rebound sharply over the medium term.\nIn the short run, various factors could contribute to persistent oil price \nvolatility. Over the past six months, for instance, supply disruptions have \nrestricted production in Canada, Nigeria and Venezuela. Such volatility \nposes a forecasting challenge, with the oil price assumption fluctuating from \nmeeting to meeting. The assumption for the March 2016 MPC meeting was \nlower across the forecast period compared with that of November 2015, \nbut the September 2016 assumption was somewhat higher: Brent crude oil \nprices were assumed to average US$44,30 for 2016 and US$53,50 for 2017, \nUS$7 and US$9 higher for these years than at the March 2016 MPC. \nBased on this most recent assumption, petrol price inflation is projected at \n1,0 per cent and 7,0 per cent in 2016 and 2017 respectively.\n14\t\nInternational prices are denominated in rands, meaning they include exchange rate effects and include refinery \ncosts, freight to South Africa and insurance.\nForecast\nPercentage change over 12 months (both scales)\nInternational food and crude oil prices\nin US dollar terms\n2008\n2010\n2012\n2014\n2016\n2018\nSources: International Monetary Fund, United Nations Food \n \nand Agriculture Organization (FAO), Reuters and\n \nown calculations\n \n \nFAO food price index\n \nBrent crude oil price (right-hand scale)\n \n-40\n-20\n0\n20\n40\n60\n-80\n-40\n0\n40\n80\n120\nPercentage change over 12 months (both scales)\nInternational food and crude oil prices\nin rand terms\n2008 09\n10\n11\n12\n13\n14\n15\n16\n17\n2018\nSources: International Monetary Fund, United Nations Food \n \nand Agriculture Organization (FAO), Reuters and\n \nown calculations\n-40\n-20\n0\n20\n40\n60\n80\n-80\n-40\n0\n40\n80\n120\n160\n \nFAO food price index\n \nBrent crude oil price (right-hand scale)\nForecast\nRands per litre\nEvolution of petrol price forecasts\nSources: Department of Energy and South African Reserve Bank\n \nActual\n \nMay 2015\n \nNovember 2015\n \nMarch 2016\n \nSeptember 2016\n2018\n2016\n2017\n2015\n2014\n10\n11\n12\n13\n14\n15\n16\nUS$ per barrel\nEvolution of crude oil price forecasts\nSources: Bloomberg and South African Reserve Bank\n \nActual\n \nMay 2015\n \nMarch 2016\n \nSeptember 2016\n \nNovember 2015\n \n2018\n2017\n2016\n2015\n2014\n30\n40\n50\n60\n70\n80\n90\n100\n110\n120\n19\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nElectricity prices\nForecasting electricity prices has been difficult in recent years because \nof changes to the multi-year pricing agreements. The existing agreement \nprovides for an average electricity price increase of 8 per cent annually for \nthe five financial years from 2013/14 to 2017/18. In August, the North \nGauteng High Court ordered Eskom to forgo part of the latest increase given \nmethodological errors in an earlier application for a higher tariff setting. If \nthis order still holds by the time municipal tariff increases are tabled in \nParliament – which must occur by 15 March 2017 – then electricity prices \ncould increase by only 3,4 per cent in 2017/18.\nGiven the uncertainty around this process, the Bank forecast does not \ninclude a sharp fall in electricity price inflation. Rather, the forecast \nassumption is for additional Eskom increases of 9 per cent and electricity \nCPI increases of 8 per cent for both 2017/18 and 2018/19. Should the lower \nnumber take effect, however, then headline inflation could be lower by \nabout 0,2 percentage points.\nCore inflation\nCore inflation is projected to increase from an average of 5,5 per cent in \n2015 to 5,7 per cent in 2016, before moderating to 5,6 per cent in 2017 and \n5,2 per cent in 2018. The outlook for core has improved recently, falling \n0,5 percentage points for 2016 from the 6,2 per cent predicted at the time of \nthe March 2016 MPC. However, even with this improvement core is still at \nits highest levels since late-2009.\nTargeted inflation\nPercentage change over 12 months and contributions in italics (percentage points)\n Actual\nForecast\nActual\nForecast\nWeight\n2011–\n2014\n2015\n2016\n2017\n2015\nQ3\n2015\nQ4\n2016\nQ1\n2016\nQ2\n2016\nQ3\n2016\nQ4\n2017\nQ1\n2017\nQ2\n2017\nQ3\n2017\nQ4\nTargeted inflation\n100,00\n5,6\n4,6\n6,4\n5,8\n4,7\n4,9\n6,5\n6,2\n6,2\n6,7\n6,2\n5,8\n5,8\n5,5\nCore inflation*....\n74,78\n4,7\n5,5\n5,7\n5,6\n5,3\n5,2\n5,5\n5,5\n5,7\n5,9\n5,8\n5,7\n5,5\n5,4\n3,5\n4,1\n4,3\n4,2\n4,0\n3,9\n4,1\n4,1\n4,3\n4,4\n4,3\n4,3\n4,1\n4,0\n\t Rentals..........\n16,18\n5,0\n5,0\n5,3\n5,2\n4,9\n5,0\n5,2\n5,2\n5,3\n5,4\n5,3\n5,3\n5,3\n5,1\n0,8\n0,8\n0,9\n0,8\n0,8\n0,8\n0,8\n0,8\n0,9\n0,9\n0,9\n0,9\n0,9\n0,8\n\t Insurance.......\n9,92\n6,8\n8,2\n7,5\n8,5\n8,2\n8,0\n7,6\n7,6\n7,3\n7,5\n8,1\n8,6\n8,7\n8,7\n0,7\n0,8\n0,7\n0,8\n0,8\n0,8\n0,8\n0,8\n0,7\n0,7\n0,8\n0,8\n0,9\n0,9\n\t Education .....\n2,95\n8,8\n9,2\n5,4\n7,2\n9,3\n9,3\n7,6\n4,6\n4,6\n4,7\n5,7\n7,7\n7,7\n7,7\n0,3\n0,3\n0,2\n0,2\n0,3\n0,3\n0,2\n0,1\n0,1\n0,1\n0,2\n0,2\n0,2\n0,2\n\t Vehicles.........\n5,98\n1,7\n4,5\n7,6\n5,3\n4,0\n4,0\n5,1\n7,5\n9,0\n8,8\n7,5\n5,6\n4,2\n3,9\n0,1\n0,3\n0,5\n0,3\n0,2\n0,2\n0,3\n0,4\n0,5\n0,5\n0,5\n0,3\n0,3\n0,2\nPetrol................\n5,68\n14,0\n-10,7\n1,0\n7,0\n-6,6\n-5,3\n11,2\n-1,6\n-4,6\n0,8\n6,2\n4,0\n7,9\n10,2\n0,8\n-0,6\n0,1\n0,4\n-0,4\n-0,3\n0,7\n-0,1\n-0,3\n0,0\n0,4\n0,2\n0,4\n0,6\nElectricity..........\n4,18\n11,9\n9,2\n9,2\n7,7\n11,2\n11,1\n11,2\n11,3\n7,4\n7,4\n7,4\n7,4\n7,9\n8,0\n0,5\n0,4\n0,4\n0,3\n0,5\n0,5\n0,5\n0,5\n0,3\n0,3\n0,3\n0,3\n0,3\n0,3\n*. CPI excluding food, non-alcoholic beverages, petrol and energy\nSources: Statistics South Africa, South African Reserve Bank and own calculations\nPercentage change over 12 months\nCore inflation and its components\nServices\nCore inflation\nCore goods\nSources: Statistics South Africa and South African Reserve Bank\n0\n2\n4\n6\n8\n10\n2009 2010\n2011 2012 2013 2014 2015 2016\nMonetary Policy Review October 2016\n20\nSouth African Reserve Bank\nThe rise in core inflation reflects accelerating inflation in core goods (which \nis all goods in the CPI less food, non-alcoholic beverages, petrol and energy). \nCore would not have reached its current high levels, however, without \nsubstantial contribution from service price inflation. This category – which \nfills about two-thirds of the core basket – has seen quite stable inflation in \nrecent years, but it has been stable at elevated levels. Since the start of 2011, for \ninstance, services inflation has averaged 5,8 per cent, and it has been higher \nthan the goods component of core in every month since December 2008.\nWithin the services category, a number of sub-categories stand out for \nhaving had unusually high inflation for an extended period of time. In \nparticular, health care and education costs have raced ahead of headline \ninflation: whereas the CPI has risen about 50 per cent from the start of \n2009, health care is up 60 per cent and education has climbed almost 90 per \ncent. Relatedly, the miscellaneous category has also outpaced CPI, pushed \nup by its medical insurance component, which has risen more than 70 per \ncent since 2009.\nThe category for restaurants and hotels has also been buoyant, with a \nrecent spike in the index likely explained by higher food costs. By contrast, \nthe education component has moderated following the decision not to \nincrease tertiary education fees for 2016. The forecast assumes that \neducation inflation as a whole will be under 8 per cent in 2017, with \ntertiary education at 6 per cent, down from an average of over 9 per cent \nbetween 2011 and 2015.\nInflation in the core goods category has trended upwards through most \nof the post-Crisis period. The clear exception is 2015, in which core goods \ndecelerated from 5,4 per cent to 4,2 per cent, chiefly due to pass-through \neffects from much lower petrol prices. In 2016 it has accelerated again, \nand is presently slightly above 5 per cent. An important contributor to this \ncategory is vehicles inflation, which is expected to peak at 8,8 per cent in the \nthird quarter of 2016, before declining quite sharply on base effects towards \nthe end of 2017, dropping to under 4 per cent. With a weight of nearly \n6 per cent in the headline basket, this category will at its peak contribute \n0,5 percentage points to headline inflation. Vehicles inflation is also \ninteresting because it provides one of the clearest indicators in the CPI \nof exchange rate passthrough from rand depreciation. In this case, weak \ndemand has not prevented a sharp rise in prices: new vehicles sales have \nbeen on a declining trend over the past few years, and have contracted \nespecially sharply this year: in August 2016, their year-on-year growth rate \nwas -9,5 per cent.\nPercentage change over 12 months\nVehicle prices at producer and consumer level\n \nVehicle PPI\n \nVehicle CPI\n Sources: Statistics South Africa and South African Reserve Bank\n2009\n2011\n2013\n2017\n2015\n-2\n0\n2\n4\n6\n8\n10\n12\n14\n16\n18\nForecast\nIndex: 2010 = 100\nTotal new vehicle sales\nSource: Statistics South Africa\n90\n100\n110\n120\n130\n140\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n21\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nInflation expectations\nIn a flexible inflation targeting framework, inflation is permitted to \ndepart from the target range in the event of temporary shocks. Inflation \nexpectations are crucial for gauging whether such shocks will indeed be \ntemporary. There are various expectations measures available to the Bank. \nPerhaps the one most often consulted is the BER’s survey of union leaders, \nbusiness people and financial analysts, which has recently shown longer-\nterm inflation expectations at 5,9 per cent, within the target range but still \nvery close to the upper bound. The expectations of business people, which \nare usually interpreted as a better guide to price-setting behaviour, remain \neither at or just above the upper target level.\nReuters’ survey of analysts has many of the same contributors as the BER \nanalyst measure. The results from both surveys are therefore broadly \ncomparable. For 2016 and 2017, the latest Reuters survey shows 6,4 per cent \nand 5,8 per cent respectively, compared to the BER analysts’ survey results \nof 6,2 per cent and 6,0 per cent.\nMarket-based measures of inflation expectations, in the form of break-even \ninflation rates, have improved recently compared to the levels reached in \nDecember 2015 and early January 2016. They are currently between 6 and \n7 per cent. Breakeven rates are not strictly comparable to inflation surveys. \nUsefully, unlike surveys, markets are not required to give only point \nBox 3\t Core inflation forecast accuracy\nThe South African Reserve Bank (the Bank) targets headline inflation.1 Nonetheless, poli­\ncymakers pay close attention to core inflation, which is headline inflation stripped of cer­\ntain large, volatile components. This measure of underlying inflation is an important guide \nto future inflation. Indeed, several studies have shown that core tends to be a more reli­\nable predictor of headline inflation than headline inflation itself.2 \nThe Bank has been forecasting core inflation in its current form (targeted inflation exclud­\ning food, non-alcoholic beverages, petrol and energy) since the September 2011. To \nevaluate the accuracy of these forecasts, we compare them with actual outcomes. We \nalso contrast the accuracy of the core forecasts with the headline inflation forecasts, and \ntest both for bias.3\nOn average, the forecast errors for both headline and core inflation are slightly positive. \nHowever, the scale of these errors is quite small. The simple average also obscures a \ndivergence between the near-term and longer-term forecasts. The forecasts have over-\nreported headline inflation up to five quarters ahead, and core inflation up to four quarters \nahead. For the remaining quarters, however, the forecasts have been biased downwards, \nand the scale of bias has been more marked for core inflation than for headline inflation.\nThe root mean square error (RMSE) reveals that the Bank’s core inflation forecast has \nbeen more accurate than its targeted inflation forecast for all but the first of the eight \nforecast quarters. RMSE measures of core inflation are lower than the corresponding \nmeasure of targeted inflation at 0,3 percentage points compared to 0,7 percentage points \nfour-quarters-ahead and 0,6 percentage points versus 0,8 percentage points eight-quar­\nters-ahead. This may be because core excludes the volatile components of the consumer \nprice index and is therefore relatively easier to forecast.\n1\t\nFor a recent evaluation of the accuracy of the Bank’s headline inflation and GDP growth forecasts, see \nBox 3 in the April 2016 MPR (pp. 16–17).\n2\t\nSee for instance ‘Measuring core inflation’ by Michael Bryan and Stephen Cecchetti published 1994, \nMonetary Policy, Chicago: University of Chicago Press, pp. 195–215 and ‘Evaluating measures of core \ninflation’ by Thérèse Laflèche and Jamie Armour published in 2006 (http://www.bankofcanada.ca/wp-\ncontent/uploads/2010/06/ lafleche.pdf).\n3\t\nThe average forecast error (AFE) and the root mean square error (RMSE) techniques are applied to evaluate \nthe forecasts. The AFE measures projection bias in terms of systematic over- or underestimation and the \nRMSE is a measure of the standard deviation or magnitude of the errors.\nPercentage points\nAverage forecast error\nRoot mean square error\nSources: Reuters consensus and own calculations \n \n \n \n \n \n \n \n \nPercentage points\nQuarters ahead\n-0,4\n-0,2\n0,0\n0,2\n0,4\n8\n7\n6\n5\n4\n3\n2\n1\nTargeted inflation\nCore inflation\nQuarters ahead\n0,0\n0,2\n0,4\n0,6\n0,8\n1,0\n8\n7\n6\n5\n4\n3\n2\n1\nTargeted inflation\nCore inflation\nPer cent\nSurvey-based inflation expectations*\n \nCurrent year\n \nOne year ahead\n \nTwo years ahead\n \nFive years ahead \n \nUpper end of inflation target range\n* Total, combining the expectations of labour, business and analysts\nSource: Bureau for Economic Research\n2011\n2013\n2012\n2014\n2015\n2016\n3,0\n3,5\n4,0\n4,5\n5,0\n5,5\n6,0\n6,5\nPer cent\nSurvey-based inflation expectations of \nbusiness\nSource: Bureau for Economic Research\n2011\n2012\n2013\n2015\n2016\n2014\n5,0\n5,5\n6,0\n6,5\n7,0\n \nOne year ahead\n \nTwo years ahead\n \nFive years ahead\n \nCurrent year\n \nUpper end of inflation target range\n \n \nMonetary Policy Review October 2016\n22\nSouth African Reserve Bank\nestimates for inflation. Instead, they also price in risks of inflation surprises. \nAs a result, break-evens incorporate an inflation risk premium, which helps \nexplain the large upward shift in these measures early in 2016.\nThese different measures support two broad conclusions. First, it appears \nthat the large shocks which have hit the economy recently, particularly \nthe drought and strong rand depreciation, have not de-anchored inflation \nexpectations so far. Break-evens moved abruptly in late 2015 and early 2016, \nbut have since shifted lower again. The survey-based measures have been \nmore stable. Fluctuations by 0,1 or 0,2 percentage points between surveys \nare quite normal and disclose little information; there is scarce evidence of \na larger shift in the data. Second, however, these different measures also \npoint to expectations very close to, or above, the upper end of the 3-6 per \ncent target range. None of them put inflation near the midpoint of the \ntarget range, even over longer time horizons. With inflation expectations \nalready so elevated, there is very little room for error. Given that inflation is \nstill expected to be above the target range until the second quarter of 2017, \nthis implies some ongoing risk of expectations adapting to higher inflation \noutcomes and drifting away from the target range.\nEmployment, remuneration \nand unit labour costs\nWage pressures on CPI inflation generally emanate from two elements: \nproductivity (how efficiently a good or service is produced) and salaries (what \nis paid for the labour used in production). Together, these elements make \nup ULC. Since the first quarter of 2011 the mean growth rate of wages and \nsalaries in South Africa has been sticky at 8,0 per cent. Subtracting average \nlabour productivity growth of 1,2 per cent (mean real GDP growth of \n2,0 per cent and employment growth of 0,8 per cent) gives an average ULC \ngrowth rate of 6,8 per cent for the post-Crisis period, which is substantially \nabove actual inflation outcomes as well as the inflation target range. Indeed, \nsince 2009 ULCs have grown by around 70 per cent in total, compared to \n50 per cent for headline inflation.\nThe latest forecasts for ULC growth show a spike in 2016 followed by more \nnormal growth in 2017 and 2018. The higher 2016 number is primarily a \nconsequence of weak output growth alongside persistent gains in average \nreal wages. The deceleration in ULC growth thereafter follows from better \nGDP outcomes and some labour shedding, which blunts the inflationary \nconsequences of continued real wage growth. Of course, there are risks to \nthis outlook. GDP growth might not improve in 2017 and 2018, which \ncould sustain ULC growth at high 2016 levels. Furthermore, wage and \nemployment dynamics may surprise – preferably in the direction of wage \nmoderation preventing job losses. \nExchange rates\nBoth emerging market and commodity currencies have strengthened since \nthe beginning of the year. Emerging markets are benefitting from a search \nfor yield given diverging policy rates compared with advanced economies, \nand a commodity price rebound. However, despite the improvement in \nthe rand this year, it remains undervalued by most measures. As of June \n2016, the most recent month for which data are available, the real effective \nexchange rate (REER) was still 17 per cent below the 20-year average of \nBreak-even inflation rates\n4\n5\n6\n7\n8\nSource: Bloomberg\n \nFive-year break-even inflation rate\n \nTen-year break-even inflation rate\nPer cent\n2015\n2016\n2014\n2013\nIndices: January 2011 = 100\nSouth African exchange rate measures\n \nUS dollar against the rand\n \nEuro against the rand\n \nNominal effective exchange rate of the rand\nSources: Bloomberg and South African Reserve Bank\n2011\n2013\n2014\n2015\n2016\n2012\n40\n60\n80\n100\n120\nForecast\n-4\n-2\n0\n2\n4\n6\n8\n10\n12\n-4\n-2\n0\n2\n4\n6\n8\n10\n12\nPercentage points\nPercentage change*\nUnit labour cost and its components\n \nReal GDP\n \nEmployment\nSource: South African Reserve Bank\n2011 2012 2013 2014 2015 2016 2017 2018\n \nAverage salaries\n \nUnit labour cost (left-hand scale)\n* Over four quarters\n23\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nthe Bank’s REER index, which takes account of producer price index (PPI) \ndifferentials. It was 24 per cent below the BIS’s REER measure, which is \nbased on CPI differentials (and 25 per cent for August 2016). Compared \nto the 61 other countries for which the BIS has data, only Argentina and \nMexico were at that point further from their long-term average REERs.\nA more sophisticated measure, one that aims to determine the ‘fair’ value of \nthe rand based on key macroeconomic fundamentals, yields more moderate \nresults.15 The model suggests that the REER was 18 per cent undervalued \nin the first quarter of 2016, but is now only around 5 per cent undervalued \ngiven the rand’s recent appreciation. In nominal, bilateral terms, this puts the \nfair price of a US dollar at roughly R13,30. The undervaluation would have \nbeen larger had the equilibrium exchange rate not declined since the Great \nFinancial Crisis, a fall caused by lower productivity levels relative to other \neconomies and weaker commodity prices, among other factors.\nActual market exchange rates can diverge from ‘fair’ values for extended \nperiods of time, however, and this model is not used in the MPC \nforecasts. Rather, the Bank relies on a constant real effective exchange rate \nassumption. Estimates of ‘fair’ value are mainly useful for contextualising \nthis assumption. Over the long term, the distance from ‘fair’ value suggests \nsome scope for currency appreciation. In the short and medium run, \nhowever, there are risks the currency could resume its depreciation trend.\nConclusion\nIn the post-Crisis period, South African inflation has repeatedly breached \nthe upper end of the 3-6 per cent target range. These breaches have been \ntemporary, lasting just a few months at a time. By contrast, in the latest \nepisode inflation is anticipated to be above target for all but two months of \n2016, and is expected to dip back into the target range only in the second \nquarter of 2017. The drivers of this target breach are clear. Severe drought \nhas boosted food prices. The exchange rate of the rand has weakened over \nan extended period of time and is now unusually depreciated, raising the \ncosts of tradeable goods. Meanwhile, wage and price rigidities have stopped \ninflation from declining in line with lower economic growth. Despite the \ntarget breach, inflation expectations have remained broadly in line with \nthe upper end of the inflation target range. This stability of expectations is \nreassuring. Nevertheless, inflation expectations remain uncomfortably close \nto the top of the target range and core inflation is at a seven-year high. This \nposes risks that future price shocks might cause more prolonged deviations \nfrom the inflation target range.\n15\t\nSee South African Reserve Bank Working Paper WP/12/02 by Shaun de Jager titled ‘Modelling South Africa’s \nequilibrium real effective exchange rate: AVECM approach’, April 2012.\nIndices: December 2001 = 100\nReal effective exchange rate of the rand\n2000\n2002 2004\n2006 2008 2010\n2012\n2014 2016\n \nBank for International Settlements\n \nSouth African Reserve Bank\nSources: Bank for International Settlements and \n \nSouth African Reserve Bank\n90\n105\n120\n135\n150\n165\n180\nForecast\nPercentage change over four quarters\nReal effective exchange rate and its \ncomponents\n \nNominal effective exchange rate of the rand\n \nDomestic producer inflation\n \nForeign producer inflation\n \nReal effective exchange rate of the rand\nSources: Statistics South Africa and South African Reserve Bank\n-32\n-24\n-16\n-8\n0\n8\n16\n24\n32\n40\n1997\n2001\n2005\n2013\n2009\n2017\nPer cent\nReal effective exchange rate gap\nSource: South African Reserve Bank\n2006\n2008\n2010\n2014\n2016\n2012\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\nOvervaluation\nUndervaluation\nMonetary Policy Review October 2016\n24\nSouth African Reserve Bank\nBox 4\t\nSouth African inflation: an international perspective1\nSouth Africa formally introduced inflation targeting in February 2000, with a target range \nof 3–6 per cent. That target range broadly reflected inflation rates abroad, with the \n3 per cent lower-bound roughly matching advanced economy inflation and the 6 per cent \nupper-bound covering emerging markets. Aiming for inflation rates similar to those of \nother countries is an important consideration in inflation target design, since large inflation \ndifferentials can – over time – affect competitiveness. This box compares South Africa’s \nconsumer price index (CPI) inflation outcomes with those of other countries, and finds \nthat South African inflation generally exceeds that of its trading partners, export rivals \nand emerging market peers. The differential has also been growing over time, as world \ninflation has fallen to long-time lows even as South African inflation has persisted around \nthe top of the inflation target range.\nAverage inflation rates, 2001–2015 \n(Per cent)\nSouth Africa...........................................................................................................\n5,8\nWorld median.........................................................................................................\n3,9\nEmerging market median.......................................................................................\n4,9\nTrading partners.....................................................................................................\n2,6\nExport rivals...........................................................................................................\n3,0\nWhile South Africa’s inflation rate averaged 5,8 per cent between 2001 and 2015, the \nmedian global inflation rate was 3,9 per cent and the emerging market median was \n4,9 per cent. Among its emerging market peers, South Africa managed to be within the \nquartile with the lowest inflation (i.e. at or below the 25th percentile) in only one year (2004). \nIn 2011, it ranked in the second quartile and subsequently slipped into the third quartile. \nOver the last three years South Africa’s inflation performance has never been below the 60th \npercentile, and forecasts for 2016 and 2017 pin South Africa at around the 75th percentile.\nAn alternative method, which underpins real effective exchange rate (REER) indices, uses \nthe inflation rates of South Africa’s trading partners. Between 2001 and 2015, South \nAfrica’s inflation was on average 3,2 percentage points higher than the weighted inflation \nrate of its 20 largest trading partners. Furthermore, the inflation differential between South \nAfrica and this group of countries has expanded in recent years, from 1,1 percentage \npoints in 2011 to 4,4 percentage points in 2014. Although this differential narrowed \nsomewhat to 3,7 percentage points in 2015 – a good year for South African inflation – \nthis differential is forecast to widen to 4,6 percentage points in 2016.\nTrade-weighted inflation rates, however, also have their disadvantages. To assess \ncompetitiveness, the more crucial comparison is with rival producer economies, not \ntarget markets. The United States, for example, is an important trading-partner of South \nAfrica and its inflation rate features prominently in the trade-weighted index. The goods \nAmericans buy from South Africa, they could however also source elsewhere. To succeed \nin the US market, South African prices need to be competitive with those of rival suppliers.\nAn estimate of export rival inflation can be obtained using the inflation rates of the countries \ncompeting in South Africa’s major export sectors. Considering the five major countries \nin each of the nine biggest sectors, South Africa’s inflation rate was 2,8 percentage \npoints higher than the average of its export rivals between 2001 and 2015. Moreover, \nthis differential has risen to an average of 3,1 percentage points since 2012, peaking at \n3,5 percentage points in 2014. This exercise also indicates that South African inflation is \nhigher than the average inflation rates of the countries competing in 90 per cent of our \nexport markets.\nOver the past 15 years, South Africa has experienced comparatively high inflation \nrelative to its peers. This is true irrespective of whether domestic inflation is compared \nto the emerging market median, the trading partner average, or the export rival average. \nMoreover, these differentials have widened in recent years. This has several implications. \nOne is that South Africans are having to cope with higher inflation than people in peer \ncountries. This also means that they are experiencing higher nominal interest rates, \nand possibly also higher real interest rates as a consequence of increased inflation risk. \nHigher inflation levels are associated with greater exchange rate volatility. Finally, there is \na competitiveness problem, which lowers potential growth. The depreciated exchange \nrate of the rand is, for the moment, keeping South African goods and services attractively \npriced in international marketplaces. However, with inflation rates permanently higher than \nmost other countries, these price advantages will fade quite quickly if the exchange rate \ncontinues to appreciate.\n1\t\nThis box is based on an internal South African Reserve Bank research project led by Theo Janse van \nRensburg.\nPercentage change\nForecast\nWorld and emerging market median inflation\n \nWorld median\nSources: International Monetary Fund and own calculations\n \nEmerging market median\n2018\n2016\n2013\n2010\n2007\n2004\n2001\n0\n2\n4\n6\n8\n10\n12\nPercentage change\nForecast\nEmerging market inflation comparison\n \nSouth Africa\n \n50th percentile\nSources: International Monetary Fund and own calculations\n \n25th percentile\n \n75th percentile\n2018\n2016\n2013\n2010\n2007\n2004\n2001\n0\n2\n4\n6\n8\n10\n12\n14\n16\n-4\n-2\n0\n2\n4\n6\n8\n10\n12\nPercentage change\nPercentage points\nForecast\nTrading partner inflation comparison\n \nSouth Africa minus trading partners (left-hand scale)\n \nTrading partner CPI inflation (weighted)\n \nSouth Africa CPI inflation \nSources: International Monetary Fund and own calculations\n2018\n2016\n2013\n2010\n2007\n2004\n2001\n-4\n-2\n0\n2\n4\n6\n8\n10\n12\n25\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nSummary\nSouth Africa’s slowdown has both cyclical and structural elements. The \neconomy has clearly been on a declining growth trend, and estimates of \npotential growth are now roughly half their longer run averages. Yet in \n2015, and more so in 2016, actual growth has slipped to below even these \nnew, lower estimates of potential growth.\nIn a cyclical downturn, an excess of saving is problematic as it deprives the \neconomy of scarce demand. In a structural slowdown, however, persistent \ndissaving is dangerous. One risk is a debt trap, in which debt service costs \nconsume a rising share of income and ultimately cannot be funded except \nby further borrowing. Another, which is particularly acute if rising debt \nlevels are financed from abroad, is a ‘sudden stop’ as foreign investors lose \nconfidence and cut off funds. Achieving the right diagnosis is crucial for \npolicymakers. Excessively tight policy can amplify a cyclical downturn, but \noverly loose policy during a structural slowdown can put an economy in an \nunsustainable position.\nRoom for policy error in South Africa has narrowed. When the Crisis hit \nin 2008, government had ample fiscal space from which to run large fiscal \ndeficits, borrowing both local and foreign savings to support domestic \ndemand. By 2016 much of this space had been exhausted, with South \nAfrica’s debt-to-GDP ratio roughly doubled and debt service costs the \nfastest growing part of the budget. As such, the risks to persisting with \naggressive fiscal stimulus have become much larger, and National Treasury \nhas responded appropriately with a fiscal consolidation programme.\nSimilarly, monetary policy is faced with diminished space for stimulus. \nInflation dynamics have deteriorated. Whereas in the years immediately \nafter the Crisis breaches of the inflation target range were brief and core \ninflation was near the middle of the range, more recent episodes have \nbeen protracted and core is very close to the top of the target range. High \nheadline inflation is partly a consequence of drought and therefore higher \nfood prices. It is underpinned by structural rigidities in product and labour \nmarkets which sustain inflation even when demand is weak. Yet it also \nreflects exchange rate depreciation related to investor concerns that South \nAfrica is borrowing too much from abroad, especially for an economy with \nweak growth prospects.\nThe combination of cyclical and structural weakness requires a policy mix \nthat blends support for growth with longer-term guarantees of sustainability. \nStructural reforms are crucial, but these are outside the ambit of monetary \npolicy. Instead, the monetary policy contribution has taken the form of a \ngradual increase in interest rates, supplemented by a communications strategy \nto guide expectations to well within the 3–6 per cent inflation target range.\nMonetary policy has so far avoided rapid increases in interest rates, and \nlow real rates are providing ongoing support to the economy. Inflation \nexpectations have also held fairly steady despite the ongoing inflation target \nbreach. This is protecting longer-term growth prospects, by preventing \nborrowing costs from rising on risks of higher inflation. But there is only \nso much monetary policy can do. Inflation is high, unemployment is rising \nand growth is extremely low. Achieving better outcomes will require a \nbroader reform agenda, including measures to bolster confidence, restore \nproductivity and investment growth, and improve the functioning of labour \nand product markets.\nPer cent\nSouth Africa’s nominal and real \nrepurchase rate\n \nOne-year-ahead targeted inflation forecast\n \nRepurchase rate\n \nReal repurchase rate\nSources: South African Reserve Bank and Reuters\n2009\n2011\n2013\n2015\n2017\n-2\n0\n2\n4\n6\n8\n10\n12\nForecast\nIndex\n10\n20\n30\n40\n50\n60\n70\n80\n90\nBusiness confidence\n1994\n1997\n2000\n2003\n2006\n2009\n2012\n2016\nSource: Bureau for Economic Research \nRMB/BER Business\nConfidence Index\nReal GDP and potential output\n \nReal GDP growth\n \nPotential output growth\nSources: Statistics South Africa and South African Reserve Bank\n96\n98\n02\n04\n06\n08\n10\n12\n14\n2000\n1994\n16-3\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\n7\nPercentage change over four quarters\nMonetary Policy Review October 2016\n26\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n19 May 2016\nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank, at a meeting of \nthe Monetary Policy Committee in Pretoria\nSouth Africa’s inflation and growth dynamics continue to highlight the policy dilemma \nfacing monetary policy. Although headline consumer price index (CPI) inflation has \nmoderated since February, the respite is expected to be temporary as food and petrol price \npressures continue to intensify. The recovery in the rand exchange rate in April also proved \nto be short-lived, as both domestic and external factors weighed on the currency. At the \nsame time, domestic economic growth continues to disappoint. While there are signs that \nthe economy may be reaching the low point in the growth cycle, the recovery is expected to \nbe slow with downside risks. Global economic growth and financial market conditions have \nstabilised somewhat since the previous Monetary Policy Committee (MPC) meeting, but a \nhigh degree of risk and uncertainty persists.\nThe year-on-year inflation rate as measured by the CPI for all urban areas moderated after \nreaching a recent high of 7,0 per cent in February. In March and April 2016, CPI inflation \nmeasured 6,3 per cent and 6,2 per cent respectively. Food price pressures continued unabated, \nwith food and non-alcoholic beverages inflation accelerating to 11,0 per cent in April, up \nfrom 9,5 per cent previously. Goods price inflation moderated from 6,9 per cent to 6,7 per \ncent, while services price inflation was unchanged at 5,7 per cent. The Bank’s measure of \ncore inflation, which excludes food, fuel and electricity measured 5,5 per cent, up from \n5,4 per cent in March. While the impact of the weaker exchange rate remains relatively low, \nthere are indications of increased pass-through in some categories, particularly new motor \nvehicles and appliances.\nProducer price inflation for final manufactured goods moderated significantly from 8,1 per \ncent in February to 7,1 per cent in March, mainly as a result of a sharp fall in fuel prices. \nManufactured food product price inflation accelerated to 10,5 per cent, with the food, \nbeverages and tobacco products category contributing 3,1 percentage points to the March \noutcome. Agricultural prices increased by 23,1 per cent in March, with cereal and other crop \nprices increasing by 50,0 per cent year on year.\nThe latest inflation forecast of the Bank shows a moderate near-term deterioration compared \nwith the previous forecast, but there is some improvement in the medium-term outlook. The \nbreach of the upper end of the target range, while still protracted, is now slightly shorter, \nwith inflation expected to fall within the range during the third quarter of 2017. Inflation \nis now expected to average 6,7 per cent in 2016 compared with 6,6 per cent previously \nforecast. In 2017 and 2018 inflation is expected to average 6,2 per cent and 5,4 per cent \nrespectively, marginally down from the previous forecast. The expected peak, at 7,3 per cent \nin the fourth quarter of 2016, is unchanged. The downward revisions are due in part to the \nhigher interest rate assumption, a slightly less depreciated exchange rate assumption, a wider \noutput gap and a lower electricity price assumption. These pressures are counteracted to \nsome extent by a higher near-term food price forecast and the impact of upward revisions to \nthe international oil price assumptions.\nThe forecast for core inflation is slightly improved, with a lower forecast for 2016 of 5,9 per cent \nfrom 6,2 per cent previously. Forecasts for 2017 and 2018 are unchanged at 5,7 per cent and \n5,2 per cent respectively. Core inflation is expected to breach the upper end of the target range \nin the third quarter of 2016 for four consecutive quarters, with a peak of 6,2 per cent (previously \n6,5 per cent) in the third and fourth quarters of 2016 and the first quarter of 2017.\nThe Bureau for Economic Research’s (BER) survey of inflation expectations is only due \nfor release in July 2016. The median expectations of economic analysts, as reflected in the \nReuters Econometer survey conducted in May, are more or less unchanged compared with \n27\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nthe previous survey, and are slightly higher than those of the Bank for 2016 and 2017. In the \nlatest survey, the median expectations for 2016 and 2017 were 6,7 per cent and 6,4 per cent \nrespectively, with inflation expected to be within the target range in 2018 at an average of \n5,7 per cent. Bond market expectations implicit in the break-even inflation rates are more or \nless unchanged since the previous meeting and remain at fairly elevated levels.\nGlobal growth remains hesitant following a disappointing first quarter in the United States \n(US) and the United Kingdom (UK) in particular. While labour market conditions in the \nUS have improved, low corporate profits have constrained investment. However, consensus \nforecasts show that a moderate improvement is expected in the coming months, but at a \nlower rate than previously expected. The outlook for the UK is clouded by the possibility \nof an exit from the European Union (EU), while the prospects for the Japanese economy \nremain uncertain. By contrast, the growth outlook in the euro area is more promising, \ndriven by improvements in Germany and France in particular, although there are concerns \nthat the recent momentum may be fading.\nDivergent prospects are evident in the emerging markets. Russia and Brazil remain in \nrecession, but there are signs of some stabilisation in China as the economy appears to be \nresponding to government policy initiatives. This improvement, along with a weaker US \ndollar, has resulted in some recovery in commodity prices as well as a pickup in portfolio \nflows to emerging markets. Of some concern is the persistent deterioration in growth \nforecasts for sub-Saharan Africa, which includes some of South Africa’s important trading \npartners. The region is now expected to underperform the global economy in 2016, for the \nfirst time in 16 years, as the effects of lower commodity prices and drought take their toll.\nGlobal inflation pressures remain benign, with low energy prices still having an impact, \nalthough this effect is likely to dissipate with the recent upward trend in oil prices. The \nlatest data show declining prices in the euro area and Japan, and low inflation in the US \nand the UK. Inflation has remained relatively higher in a number of Latin American \neconomies, particularly those experiencing currency depreciation. As a result of these trends, \nasynchronous monetary policies persist. While policies are generally accommodative amid \nsubdued growth, particularly in many advanced economies, a number of emerging markets \nhave maintained a tightening bias in response to inflation pressures. The US Federal Reserve \n(Fed) is expected to continue with its slow pace of policy rate normalisation but there is a \nhigh degree of uncertainty regarding the timing of the next increase.\nThe rand exchange rate has remained volatile, and following a few weeks of relative strength \nhas resumed a weakening path, and continues to pose an upside risk to the inflation outlook. \nSince the previous meeting of the MPC, the rand has traded in a range of between R14,20 \nand R15,90 against the US dollar, and has depreciated by 1,5 per cent against the dollar, by \n0,9 per cent against the euro, and by 1,2 per cent on a trade-weighted basis.\nDuring this period the rand was initially favourably impacted by improved commodity \nprices, the narrower trade balance, and expectations of a slower pace of US Fed monetary \npolicy tightening. However, these gains were reversed as global growth concerns resurfaced \nin early May and other domestic factors, including the low growth outlook, concerns about \na possible ratings downgrade and, more recently, heightened political uncertainty impacted \nadversely on the currency.\nAlthough the capital flow environment for emerging markets has improved recently, this has \nnot applied to equity flows. South Africa’s experience has mirrored this, but with stronger \nequity outflows. According to the JSE Limited, since the beginning of the year, net sales of \ndomestic equities by non-residents have amounted to R56 billion. By contrast, non-residents \nhave been net purchasers of domestic government bonds (year-to-date R23 billion), although \nthe past two weeks have seen net sales.\nThe domestic economic growth outlook remains weak, with the Bank’s gross domestic \nproduct (GDP) growth forecast for 2016 revised down from 0,8 per cent to 0,6 per cent. \nMonetary Policy Review October 2016\n28\nSouth African Reserve Bank\nWhile a recovery is still expected in the next two years, the forecasts for both these years have \nbeen revised down by a 0,1 percentage point to 1,3 per cent and 1,7 per cent in 2017 and 2018 \nrespectively. With the estimates of potential output unchanged, the output gap is expected to \nwiden over the forecast period. The Bank’s leading indicator of economic activity continued its \ndownward trajectory in February, consistent with the constrained outlook.\nRecent high-frequency data paint a particularly bleak picture of the first quarter of this year, \nfollowing a sharp contraction in mining output, minimal growth in the manufacturing \nsector, and declines in electricity production and consumption. While the Bank’s forecast \nfor GDP growth in the quarter is barely positive, it does represent the low point of the \nforecast, and a slow upward trend is expected going forward. This view is consistent with \nthe favourable developments in the Barclays Purchasing Managers’ Index (PMI) which has \nrecovered fairly strongly to above the neutral 50-point level for the past two months. The \nreal value of building plans passed, particularly non-residential, increased markedly on a \n3-month-to-3-month basis, indicative perhaps of some life in the construction sector, despite \nvery low levels of business confidence in the sector.\nHowever, while the recent modest recovery in commodity prices may impact positively on \nmining output, prices remain low and the sector remains beset by higher input costs and \nregulatory uncertainty. The continuing drought is also expected to put further strain on the \nagricultural sector.\nThe economic slowdown is also reflected in labour market trends, with the unemployment \nrate rising to 26,7 per cent in the first quarter of 2016, from 26,4 per cent a year earlier. \nAlthough employment growth was positive over the year to the first quarter, the year-on-\nyear growth rate moderated significantly, with employment losses recorded in a number of \nsectors, including manufacturing, agriculture and transport.\nHousehold consumption expenditure also remains subdued, with low growth in retail \nsales in the first quarter. While there was a welcome increase in exports, new vehicle sales \nalso continue to decline. The First National Bank/Bureau for Economic Research (FNB/\nBER) Consumer Confidence Index recovered to some extent in the first quarter of the year, \nalthough it still remains at depressed levels, and indicates a low willingness to spend and \nutilise credit among consumers.\nThe constrained outlook for household consumption expenditure is indicative of the absence \nof demand pressures in the economy. This is also confirmed in the weak wealth effects and \nthe continued slow pace of credit extension to households. Although some improvement \nhas been seen in this regard, growth remains negative in real terms and is mainly related \nto mortgage advances and general loans, particularly unsecured lending. Growth in credit \nextension to corporates remains strong, but moderated in March.\nWage growth appears to be moderating, with growth in nominal remuneration per worker \nin the formal non-agricultural sector declining to below 6 per cent in the fourth quarter of \n2015, mainly due to lower private-sector remuneration growth. Once adjusted for labour \nproductivity, growth in unit labour costs remained unchanged at 5,0 per cent in that quarter.\nFood prices remain a significant risk to the inflation outlook in the face of persistent \ndrought and exchange rate weakness. These pressures are evident in both the consumer \nprice and producer price indices. Although for some time the MPC had been expecting \nan acceleration in food price inflation, the recent increases have surprised on the upside, \nand more aggressive food price increases are now forecast for the near term. The Bank now \nexpects food price inflation to peak at around 12 per cent in the final quarter of this year. \nHowever, should food prices stabilise or decline later in the year, there is the potential for \ndownside base effects next year. Futures prices suggest that both maize and wheat prices are \nexpected to remain elevated for the rest of the year, reinforced by a sizeable increase in the \ndomestic wheat import tariff.\n29\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nThe international oil price assumptions in the forecasting model have been increased, with \nthe price of Brent crude oil remaining firmly above the US$40 per barrel level since the \nsecond week of April. Demand has surprised on the upside and, despite an increase in supply \nfrom Iran, output has declined in a number of countries. This upward price trend may, \nhowever, be contained by high levels of inventories. Domestic petrol prices have increased \nby a cumulative R1,00 per litre since March, mainly due to higher international prices and \nan increase in the fuel levy. Should current exchange rate and international oil price trends \npersist, a further significant increase can be expected in June.\nThe MPC faced the continuing dilemma of upside risks to the inflation forecast and a \nworsening growth outlook. The risks to the growth outlook are assessed to be on the \ndownside, particularly in the short term, despite the downward revision to the forecast. \nBoth the mining and agricultural sectors are expected to weigh heavily on the first quarter \ngrowth outcome, and the outlook is therefore dependent in part on whether these sectors \nrebound in the coming quarters.\nThe Committee remains concerned about the inflation outlook and the extended breach \nof the target. Although the inflation forecast has shown a moderate improvement over the \nmedium term, the risks are still assessed to be on the upside. The exchange rate remains \nhighly sensitive to domestic political developments and risks of an earlier-than-expected \ntightening in US monetary policy. The exchange rate implicit in the forecast is stronger than \nthe current level, imparting a significant degree of upside risk. While pass-through from the \nexchange rate to inflation remains relatively subdued, there are indications that this may be \nincreasing. There is also some upside risk to the international oil price assumption.\nThe Committee remains concerned that inflation expectations remain at uncomfortably \nhigh levels. Although core inflation has remained relatively contained in recent months, \nwith a lower peak now expected, it is forecast to accelerate and exceed the upper end of the \ninflation target range for four quarters in response to exchange rate and wage pressures.\nSome countervailing risks are also evident. While there is a risk that food prices may accelerate \nfaster in the near term, the longer-term forecast assumes that food prices will stabilise by year \nend, allowing for favourable base effects next year. However, should food prices, particularly \ngrains, decline in response to a normalisation of weather patterns, a much sharper downward \nfood inflation trajectory could transpire. The absence of demand pressures and risks to \nconsumption expenditure growth may also contribute to downside risks.\nThe increase in the repurchase rate at the previous MPC meeting contributed to the \nimprovement in the longer-term inflation forecast, and that move should be seen in \nconjunction with previous actions in the cycle and the lagged effects of monetary policy. \nThe MPC felt that there is some room to pause in this tightening cycle and accordingly \ndecided to keep the repurchase rate unchanged for now at 7,0 per cent per annum. \nFive members preferred no change, while one member preferred a 25 basis point increase.\nThe MPC remains focused on its inflation mandate, but sensitive to the extent possible to \nthe state of the economy. The MPC will not hesitate to act appropriately should the inflation \ndynamics require a response, within a flexible inflation-targeting framework. Future moves, \nas before, will continue to be highly data-dependent.\nMonetary Policy Review October 2016\n30\nSouth African Reserve Bank\nSummary of assumptions: Monetary Policy Committee\nmeeting on 19 May 2016*\n1.\t Foreign-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1.\t Real GDP growth in South Africa’s major trading-partner countries...\n2,9%\n3,1%\n2,8%\n2,7%\n3,1%\n3,4%\n(2,8%)\n(3,2%)\n(3,5%)\n2.\t International commodity prices in US$ (excluding oil)..........................\n-6,4%\n-9,8%\n-19,3%\n-9,0%\n1,0%\n1,5%\n(-13,2%)\n(2,0%)\n(3,0%)\n3.\t Brent crude (US$/barrel)........................................................................\n108,8\n99,2\n52,5\n42,0\n52,0\n57,5\n(37,0)\n(45,0)\n(50,5)\n4.\t World food prices (US$).........................................................................\n-1,6%\n-3,8%\n-18,7%\n-7,4%\n2,0%\n3,0%\n(-3,0%)\n(2,0%)\n(3,0%)\n5.\t International wholesale prices................................................................\n0,3%\n-0,1%\n-3,5%\n-1,2%\n0,9%\n1,1%\n(-1,5%)\n(0,8%)\n(1,0%)\n6.\t Real effective exchange rate of the rand (index 2010 = 100)................\n81,91\n79,17\n80,08\n74,00\n75,00\n75,00\n(71,27)\n(71,27)\n(71,27)\n7.\t Real effective exchange rate of the rand...............................................\n-10,1%\n-3,3%\n1,1%\n-7,6%\n1,4%\n0,0%\n(-11,0%)\n(0,0%)\n(0,0%)\n2.\t Domestic-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1.\t Real government consumption expenditure.....................................\n3,3%\n1,9%\n0,3%\n1,5%\n1,0%\n1,0%\n(1,5%)\n(1,0%)\n(1,0%)\n2. \t Administered prices...........................................................................\n8,7%\n6,7%\n1,7%\n6,1%\n8,5%\n8,1%\n(5,3%)\n(8,4%)\n(8,7%)\n\t\n– Petrol price.....................................................................................\n11,8%\n7,2%\n-10,7%\n3,8%\n11,5%\n8,7%\n(0,0%)\n(10,2%)\n(9,4%)\n\t\n– Electricity price..............................................................................\n8,7%\n7,2%\n9,4%\n9,6%\n8,5%\n9,0%\n(10,1%)\n(9,5%)\n(10,0%)\n3.\t Potential growth..................................................................................\n2,1%\n1,8%\n1,6%\n1,5%\n1,6%\n1,8%\n(1,5%)\n(1,6%)\n(1,8%)\n4.\t Repurchase rate (per cent)................................................................\n5,00\n5,57\n5,89\n6,91\n7,00\n7,00\n(6,71)\n(6,75)\n(6,75)\nThe figures in brackets represent the previous assumptions of the Monetary Policy Committee.\n*\t For an explanation of foreign-sector assumptions and domestic-sector assumptions, see pages 45 and 46.\n31\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nSelected forecast results: Monetary Policy Committee meeting on 19 May 2016\nSelected forecast results (annual)\nPer cent\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1. Real gross domestic product (GDP) growth.............................\n2,2% \n1,5%\n1,3% \n0,6% \n1,3%\n1,7%\n(0,8%)\n(1,4%)\n(1,8%)\n2. Current account as a ratio to nominal GDP..............................\n-5,8 \n-5,4\n-4,4 \n-4,6 \n-4,7\n-4,9\n(-4,6)\n(-4,7)\n(-4,9)\nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nSelected forecast results (quarterly)\nYear-on-year percentage change\nActual\nForecast\n1\n2\n3\n4\n2015\n1\n2\n3\n4\n2016\n1\n2\n3\n4\n2017\n1\n2\n3\n4\n2018\n1. Headline inflation.............................\n4,2\n4,6\n4,7\n4,9\n4,6\n6,5\n6,4\n 6,8\n7,3\n6,7\n7,0\n6,4\n5,8\n5,5\n6,2\n5,4\n5,4\n5,4\n5,5\n5,4\n(6,4)\n(6,0)\n (6,6)\n(7,3)\n(6,6)\n(7,1)\n(6,9)\n(6,1)\n(5,5)\n(6,4)\n(5,4)\n(5,5)\n(5,6)\n(5,7)\n(5,5)\n2. Core inflation...................................\n5,7\n5,6\n5,3\n5,2\n5,5\n5,5\n5,8\n6,2\n6,2\n5,9\n6,2\n6,0\n5,3\n5,1\n5,7\n5,1\n5,1\n5,2\n5,3\n5,2 \n(5,7)\n(6,1)\n(6,5)\n(6,5)\n(6,2)\n(6,4)\n(6,0)\n(5,3)\n(5,0)\n(5,7)\n(5,0)\n(5,2)\n(5,2)\n(5,3)\n(5,2 )\nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nMonetary Policy Review October 2016\n32\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n21 July 2016\nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank, at a meeting of \nthe Monetary Policy Committee in Pretoria\nThe United Kingdom (UK) vote to leave the European Union has dominated the global \nlandscape in the past month. The outlook for the global economy has become more \nuncertain as the potential consequences of this development are being assessed. The lack \nof clarity regarding the process going forward has had significant implications for global \ngrowth and interest rates as the prospects for further near-term monetary policy tightening \nby the United States (US) Federal Reserve (Fed) recede. While there have been spillovers \nto the South African financial markets, particularly the exchange rate, the direct short-\nterm impact on South African growth and trade is likely to be fairly limited. Domestic \ngrowth has surprised further on the downside, and the outlook remains constrained. At the \nsame time, domestic inflation outcomes have surprised marginally on the downside, but an \nextended breach of the target is still expected.\nThe year-on-year inflation rate as measured by the consumer price index (CPI) for all urban \nareas moderated to 6,1 per cent in May, before rising to 6,3 per cent in June. Food price \ninflation measured 11,0 per cent in June, below the recent peak of 11,3 per cent in April, \nand was marginally negative on a month-on-month basis. Goods price inflation measured \n6,7 per cent, up from 6,6 per cent in May, while services increased by 5,8 per cent, up from \n5,7 per cent in May. The Bank’s measure of core inflation, which excludes food, fuel and \nelectricity, measured 5,6 per cent, up from 5,5 per cent previously.\nProducer price inflation for final manufactured goods continued its downward trend, \ndeclining from 7,0 per cent in April to 6,5 per cent in May, mainly due to a further \nmoderation in price inflation of food, beverages and tobacco products. This was below the \nconsensus forecast of 6,9 per cent. The impact of the drought is still evident in the increase \nin prices of agricultural products, particularly cereals and other crops as well as live animals \nand animal products.\nThe latest inflation forecast of the Bank shows a marginal improvement compared to the \nprevious forecast. Nevertheless, inflation is still expected to accelerate further this year and \nis only expected to return to within the target range of 3–6 per cent during the third quarter \nof 2017. Inflation is now expected to average 6,6 per cent in 2016 and 6,0 per cent in \n2017, compared with 6,7 per cent and 6,2 per cent previously. In 2018 inflation is expected \nto average 5,5 per cent, marginally up from the previous forecast. The expected peak, at \n7,1 per cent in the fourth quarter of 2016, is down from 7,3 per cent. The downward revisions \nare partly due to lower administered price inflation (mainly petrol), despite a small upward \nadjustment in the international oil price assumption.\nThe forecast for core inflation is lower than the previous forecast in the near term, mainly \ndue to the lower starting point, but higher in the outer period. Core inflation is expected \nto moderate from an average of 5,8 per cent in 2016 to 5,3 per cent by 2018. Whereas \npreviously core inflation was expected to breach the upper end of the target range in the \nthird quarter of 2016 for four consecutive quarters, a one-quarter breach, at 6,1 per cent, is \nnow expected in the fourth quarter of this year.\nInflation expectations as reflected in the survey conducted by the Bureau for Economic \nResearch (BER) have remained relatively anchored at the upper end of the inflation target \nrange. In the second quarter, average expectations for 2016 were 6,3 per cent, up from \n6,2 per cent. Average expectations for 2017 were unchanged at 6,2 per cent and were \nmarginally down to 5,9 per cent for 2018. Expectations of business people were more or \nless unchanged compared to the previous quarter. Both market analysts and trade union \nofficials revised their near-term forecasts upward, while forecasts for 2018 were revised \n33\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nlower. Average five-year inflation expectations declined from 6,1 per cent to 5,9 per cent in \nthe second quarter, with downward revisions by all groups.\nThe median expectations of market analysts, as reflected in the Reuters Econometer survey \nconducted in July, show a moderate decline since May. Inflation expectations declined from \n6,7 per cent and 6,4 per cent in 2016 and 2017, to 6,6 per cent and 6,1 per cent respectively. \nThe yield differential between inflation-linked bonds and conventional government bonds \n(break-even inflation expectations) declined across all maturities, but remain elevated.\nThe global economic outlook has been influenced by the outcome of the UK referendum. \nThe financial markets displayed a high degree of volatility in the immediate aftermath \nof the outcome, but have since stabilised to some extent. Nevertheless, the longer-term \nreal impacts are expected to be negative for global growth, particularly for the UK and \nEurope, as investment decisions are put on hold during the transition period. A high degree \nof uncertainty is expected to persist for some time as the magnitude of this slowdown is \nstill unclear and dependent on the nature and speed of the UK disengagement. Since the \nreferendum, global growth forecasts have generally been revised downwards.\nThe outlook for emerging markets has remained relatively subdued, with further downside \nrisks in Turkey following the recent coup attempt and terrorist attacks. Recent outcomes \nin China indicate some improvement in the growth prospects in response to government \nstimulus packages, and this has underpinned a stabilisation and moderate upward trend \nin commodity prices. The International Monetary Fund (IMF) growth forecasts released \nearlier this week have revised sub-Saharan African growth downwards. The region has been \nnegatively impacted by lower commodity prices and severe drought in some parts.\nInflation in the advanced economies remains low and still generally below target. The Brexit \nvote has also modified expectations regarding monetary policy in these economies. Although \nthe Bank of England kept policy rates on hold at its most recent meeting, expectations are \nfor a reduction in the policy rate in the near future, with the prospect of a resumption of \nquantitative easing. Markets are now expecting the US policy rate to remain unchanged \nfor some time. Simultaneously, the highly accommodative monetary policy stances of the \nEuropean Central Bank (ECB) and Bank of Japan are expected to persist, with the possibility \nof additional stimulus.\nThese developments have reinforced the global search for yield, as yield curves flattened \nacross major advanced economy markets. The number of government bonds trading with \nnegative yields increased further. This has provided additional impetus to renewed capital \nflows to emerging markets observed since earlier this year. While these flows are expected to \npersist, they remain sensitive to changes in expectations regarding US monetary policy and \ngeneral global risk perceptions.\nThe recent volatility experienced by the rand exchange rate has been driven mainly by external \nfactors and changes in global risk perceptions. Although the rand depreciated sharply in the \nimmediate aftermath of the Brexit vote, it has reversed these losses, and more so against the \nBritish pound. Since the previous meeting of the Monetary Policy Committee (MPC), the \nrand has traded in a range of R15,80 and R14,22 against the US dollar, and has appreciated by \n11,0 per cent against the US dollar, by 12,9 per cent against the euro and by 23,0 per cent against \nthe British pound. On a trade-weighted basis, the rand has appreciated by 12,2 per cent.\nThe rand has been supported by the global search for yield. There was a sharp increase in \nnon-resident inflows to the domestic bond and equity markets in June and July. Since the \nbeginning of June, net purchases of R107,3 billion by non-residents have been recorded. The \nrand also responded positively to the improvement in commodity prices and the unexpectedly \nlarge trade surplus recorded in May, which followed a small surplus in April. Despite this \nrecent strength, the rand remains vulnerable to possible ‘risk-off’ global scenarios; changes \nin US monetary policy expectations; and domestic concerns, including the possibility of \nratings downgrades later in the year.\nMonetary Policy Review October 2016\n34\nSouth African Reserve Bank\nThe domestic economic growth outlook remains extremely challenging, following the \ncontraction in gross domestic product (GDP) in the first quarter of this year. Although this \nis anticipated to have been the low point of the cycle, the recovery is expected to be weak. \nThe Bank’s latest forecast is for zero per cent growth in 2016, compared with 0,6 per cent \npreviously. Growth rates of 1,1 per cent and 1,5 per cent are forecast for the next two years, \ndown from 1,3 per cent and 1,7 per cent previously. The Bank’s estimate of potential output \nhas been revised down marginally to 1,4 per cent in 2016, rising to 1,7 per cent in 2018. \nThis growth outlook is corroborated by the persistent negative trend in the Bank’s leading \nindicator of economic activity. Business confidence remains low with the Rand Merchant \nBank (RMB)/BER business confidence indicator falling to its lowest level since 2009 in the \nsecond quarter of this year.\nRecent economic data suggest that positive growth was recorded in the second quarter, \nwith the mining and manufacturing sectors expected to add positively to growth. The more \npositive trend in manufacturing is consistent with the Barclays Purchasing Managers’ Index \n(PMI) which has been above the neutral 50-point level since March. The BER manufacturing \nconfidence index also improved, but still remains at low levels. The real value of building \nplans passed is indicative of some improvement in the sector, particularly with respect to \nresidential construction. However, this is not reflected in the First National Bank (FNB)/\nBER building confidence index which declined further in the second quarter.\nUnderlying the negative performance of the economy during the first quarter was the \nsharp contraction in growth in gross fixed capital formation for the second consecutive \nquarter by both the private sector and general government. These trends have contributed \nto the persistence of high rates of unemployment in the economy. Although formal non-\nagricultural employment increased in the first quarter of 2016, this was largely due to \ntemporary employment opportunities created by the Independent Electoral Commission \nin preparation for the local government elections. By contrast, private-sector employment \ncontracted during the first quarter.\nGrowth in consumption expenditure by households also contracted in the first quarter, with \na sharp slowdown in expenditure on durable goods in particular. The FNB/BER consumer \nconfidence index declined in the second quarter to low levels, following a moderate \nimprovement in the previous quarter. The BER retail confidence index also declined sharply \nin the second quarter. While new vehicle sales remained weak, vehicle exports recorded \nstrong growth in the second quarter.\nDespite the surprise increase in retail and wholesale trade sales in May, consumption \nexpenditure by households is expected to remain subdued given the low consumer confidence, \nhigh debt levels, rising costs of debt servicing and slow employment growth. Consumption \nexpenditure has been further constrained by the absence of significant wealth effects owing \nto the weak performance of asset markets, particularly the housing market. Credit extension \nto households also remains weak, with negative real rates of growth. Average wage growth \nhas remained relatively stable, but there are risks of increases in excess of inflation and \nproductivity gains.\nThere are still no clear signs of a recovery in the agricultural sector, and food price inflation is \nexpected to remain elevated for some time. The Bank expects food price inflation to peak at \n12,6 per cent during the final quarter of this year. There are some encouraging signs of \nmoderation in some food categories at both the producer and consumer price levels, and \nfutures prices of grains have declined markedly. Should food prices stabilise or decline in the \ncoming months, a potential exists for significant downside base effects next year. Exchange \nrate developments will also be critical in this respect as will global food prices which have \nreversed their recent negative trend.\nDespite supply disruptions and curtailments by a number of producers, the price of Brent crude \noil has mostly traded within a band of US$45 and US$50 since the previous meeting of the \nMPC. The Bank’s model assumes a very moderate upward trend in oil prices over the forecast \n35\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nperiod, but there may be a degree of downside risk in the short term, with some upside risk in the \nouter period as global demand recovers. The domestic petrol price increased by a cumulative \n60 cents per litre in the past two months due to both the exchange rate and international \nprices. However, the recent appreciation of the rand coupled with a lower average oil price \nhas resulted in a substantial recovery in the petrol price, and a sizeable reduction in retail \nprices is expected in August.\nThe MPC remains concerned about the weak economic growth outlook and the medium-\nterm inflation trajectory which will remain outside the target range of 3–6 per cent until \nthe second half of next year. Nevertheless, there have been some improvements in the near-\nterm inflation prospects following successive downside surprises. This is also the case for \ncore inflation, where the expected breach of the upper end of the target range is now less \nprotracted. While the risks to the inflation forecast are assessed to remain on the upside, \nthese risks have moderated somewhat.\nGlobal uncertainties appear to have delayed monetary policy tightening in advanced \neconomies. The impact of the more appreciated rand exchange rate on the inflation outlook \nwill depend to a large extent on whether the exchange rate is sustained at these stronger \nlevels. Current exchange rate levels are stronger than those implicit in the forecast, providing \nsome buffer to the projections. The rand remains sensitive to both domestic and external \ndevelopments, and the recent trends can be quickly reversed.\nThe outlook is clouded by the uncertainty surrounding the longer-term market and global \ngrowth implications of Brexit. The implications for the rand and domestic growth, and \nultimately inflation, could vary quite significantly depending on which scenario plays out.\nA weaker global growth scenario could also imply that there may be a degree of downside \nrisk to the international oil price assumption, which was adjusted upward. A combination \nof a stronger exchange rate and subdued international oil prices would have a favourable \nimpact on domestic petrol prices in the coming months. However, the MPC assesses the \nlonger-term risk to this assumption to be on the upside as global growth and oil demand are \nexpected to recover.\nFood prices remain an upside risk in the near term. However, there could be a sharp decline \nin agricultural prices next year, should favourable weather patterns transpire as forecast. \nThe absence of demand pressures and weak consumption expenditure growth may also \ncontribute to downside risks.\nWhile the MPC remains concerned about the overall inflation trajectory, the assessment of \nthe balance of risks to the inflation outlook and the weak domestic economy has provided \nsome room to delay further tightening of the monetary policy stance for now. Accordingly, \nthe MPC has unanimously decided to keep the repurchase rate unchanged at 7,0 per cent \nper annum.\nThe MPC is aware that some of the favourable factors that contributed to this decision could \nreverse quickly and it remains ready to react appropriately to any significant change in the \ninflation outlook.\nMonetary Policy Review October 2016\n36\nSouth African Reserve Bank\nSummary of assumptions: Monetary Policy Committee\nmeeting on 21 July 2016*\n1.\t Foreign-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1.\t Real GDP growth in South Africa’s major trading-partner countries...\n3,0% \n3,1% \n2,8% \n2,7% \n3,0% \n3,3% \n(2,9%)\n(3,1%) \n(3,4%) \n2.\t International commodity prices in US$ (excluding oil)..........................\n-6,4% \n-9,8% \n-19,3% \n-8,5% \n1,0% \n1,5% \n(-9,0%) \n \n \n3.\t Brent crude (US$/barrel)........................................................................\n108,8 \n99,2 \n52,5 \n44,6 \n53,5 \n57,5 \n(42,0) \n(52,0) \n \n4.\t World food prices (US$).........................................................................\n-1,6% \n-3,8% \n-18,7% \n-6,0% \n2,0% \n3,0% \n(-7,4%) \n5.\t International wholesale prices................................................................\n0,3% \n-0,1% \n-3,5% \n-1,3% \n1,0% \n1,2% \n(-1,2%) \n(0,9%) \n(1,1%) \n6.\t Real effective exchange rate of the rand (index 2010 = 100)................\n81,91 \n79,17 \n80,08 \n74,01 \n75,00 \n75,00 \n(74,00) \n \n \n7.\t Real effective exchange rate of the rand...............................................\n-10,1% \n-3,3% \n1,1% \n-7,6% \n1,3% \n0,0% \n \n(1,4%) \n2.\t Domestic-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1.\t Real government consumption expenditure.....................................\n3,8% \n1,8% \n0,2% \n1,5% \n1,0% \n1,0% \n(3,3%) \n(1,9%)\n(0,3%) \n2. \t Administered prices...........................................................................\n8,7% \n6,7% \n1,7% \n5,7% \n7,4% \n7,9% \n(6,1%) \n(8,5%) \n(8,1%) \n\t\n– Petrol price.....................................................................................\n11,8% \n7,2% \n-10,7% \n2,2% \n7,6% \n7,9% \n(3,8%) \n(11,5%) \n(8,7%) \n\t\n– Electricity price..............................................................................\n8,7% \n7,2% \n9,4% \n9,6% \n8,5% \n9,0% \n3.\t Potential growth..................................................................................\n2,0% \n1,7% \n1,5% \n1,4% \n1,5% \n1,7% \n(2,1%)\n(1,8%)\n(1,6%)\n(1,5%) \n(1,6%) \n(1,8%) \n4.\t Repurchase rate (per cent)................................................................\n5,00 \n5,57 \n5,89 \n6,91 \n7,00 \n7,00 \nThe figures in brackets represent the previous assumptions of the Monetary Policy Committee.\n*\t For an explanation of foreign-sector assumptions and domestic-sector assumptions, see pages 45 and 46.\n37\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nSelected forecast results: Monetary Policy Committee meeting on 21 July 2016\nSelected forecast results (annual)\nPer cent\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1. Real gross domestic product (GDP) growth.............................\n2,3% \n1,6% \n1,3% \n0,0% \n1,1% \n1,5% \n(2,2%) \n(1,5%) \n(0,6%) \n(1,3%) \n(1,7%) \n2. Current account as a ratio to nominal GDP..............................\n-5,9 \n-5,3 \n-4,3 \n-4,2 \n-4,4 \n-4,7 \n(-5,8) \n(-5,4) \n(-4,4) \n(-4,6) \n(-4,7) \n(-4,9) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nSelected forecast results (quarterly)\nYear-on-year percentage change\nActual\nForecas\n1\n2\n3\n4\n2015\n1\n2\n3\n4\n2016\n1\n2\n3\n4\n2017\n1\n2\n3\n4\n2018\n1. Headline inflation.............................\n4,2\n4,6\n4,7\n4,9\n4,6\n6,5\n6,2 \n6,5 \n7,1 \n6,6 \n6,6 \n6,1 \n5,8 \n5,5 \n6,0 \n5,4 \n5,5 \n5,5 \n5,6 \n5,5 \n(6,4) \n(6,8) \n(7,3) \n(6,7) \n(7,0) \n(6,4) \n(5,8) \n(5,5) \n(6,2) \n(5,4) \n(5,4) \n(5,4) \n(5,5) \n(5,4) \n2. Core inflation...................................\n5,7\n5,6\n5,3\n5,2\n5,5 \n5,5 \n5,5 \n5,9 \n6,1 \n5,8 \n6,0 \n5,9 \n5,4 \n5,2 \n5,7 \n5,2 \n5,2 \n5,3 \n5,4 \n5,3 \n(5,8) \n(6,2) \n(6,2) \n(5,9) \n(6,2) \n(6,0) \n(5,3) \n(5,1) \n(5,7) \n(5,1) \n(5,1) \n(5,2) \n(5,3) \n(5,2) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nMonetary Policy Review October 2016\n38\nSouth African Reserve Bank\nStatement issued by the South African \nReserve Bank\n25 July 2016\nIncorrect data for the trading of equities by non-residents\nThe South African Reserve Bank (the Bank) has noted the announcement yesterday (24 July \n2016) by the JSE Limited (JSE) that a programming error resulted in incorrect data for the \ntrading of equities by non-residents for the period 31 May to 20 July 2016 being reported. \nThe error has since been corrected and the JSE has reassured the Bank that steps are being \ntaken to prevent a reoccurrence.\nThe JSE’s announcement means that incorrect data (combined bond and equity net purchases \nby non-residents) was quoted in the July 21 Monetary Policy Committee (MPC) statement. \nThe incorrect data did not have any bearing on the Committee’s decision.\nThe revised data for equity transactions by non-residents as published by the JSE yesterday \nis: May 2016 (net sales of R16,1 billion); June 2016 (net sales of R20,3 billion); July 2016 \nto date (net purchases of R0,05 billion). The incorrect data recorded net purchases by non-\nresidents as R6,4 billion (May 2016); R63,8 billion (June); and R27,9 billion (July to date).\nData for the net purchases of South African bonds by non-residents was not affected by the \nprogramming error. Net purchases totalled R7,0 billion in June and for July to date have \namounted to R8,6 billion.\n39\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nStatement of the Monetary Policy Committee\n22 September 2016\nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank, at a meeting of \nthe Monetary Policy Committee in Pretoria\nHeadline consumer price inflation declined to within the target range of 3–6 per cent \nin August, in line with the expectations of the South African Reserve Bank (the Bank). \nNevertheless, higher inflation outcomes are forecast in the near term before a sustained \nreturn to within the target range during 2017. While domestic economic growth prospects \nappear more favourable following the positive surprise in the second quarter of this year, the \noutlook remains constrained against a backdrop of weak domestic fixed investment and low \nlevels of business and consumer confidence. \nRisks from the global environment persist, although the volatility in global financial markets \nin the wake of the Brexit decision has subsided. Prospects for a resumption of monetary policy \ntightening in the United States (US) remain a key risk to the pattern of global capital flows \nand to emerging market exchange rates in general, with continued uncertainty regarding the \ntiming and pace of future moves.\nThe year-on-year inflation rate, as measured by the consumer price index (CPI) for all urban \nareas, measured 6,0 per cent and 5,9 per cent in July and August respectively, down from \n6,3 per cent in June. Food price inflation accelerated to a recent high of 11,6 per cent, with \nthe category of food and non-alcoholic beverages contributing 1,7 percentage points to the \noverall inflation outcome. Goods price inflation measured 6,1 per cent in August, down \nfrom 6,5 per cent in July, while services price inflation was unchanged at 5,7 per cent. \nThe Bank’s measure of core inflation – which excludes food, fuel and electricity – was also \nunchanged at 5,7 per cent.\nProducer price inflation for final manufactured goods increased in June and July to 6,8 per \ncent and 7,4 per cent respectively, following a decline to 6,5 per cent in May. This acceleration \nwas mainly due to the impact of the drought on manufactured food price inflation, which \nmeasured 12,6 per cent in July. This was its highest level since January 2009. Producer price \ninflation for agricultural products also remained elevated at around 20 per cent.\nThe latest inflation forecast of the Bank has improved over the first four quarters of the \nforecast horizon, and remains more or less unchanged for the rest of the period. Inflation \nis expected to peak at 6,7 per cent in the fourth quarter of this year, compared with 7,1 per \ncent previously, with an earlier sustained return to within the target range now forecast to \noccur during the second quarter of 2017. Inflation is expected to average 6,4 per cent in \n2016 and 5,8 per cent in 2017, compared with 6,6 per cent and 6,0 per cent previously. The \nforecast for 2018 is unchanged at an average of 5,5 per cent. The downward revisions are due \nin part to a lower starting point, lower administered price inflation assumptions (including \npetrol, electricity, and rates and taxes inflation) as well as a less depreciated exchange rate \nassumption.\nCompared with the previous forecast, core inflation is expected to average 0,1 percentage \npoint less, at 5,7 per cent in 2016 and 5,6 per cent in 2017, and is unchanged at 5,3 per \ncent in 2018. Core inflation is expected to remain within the target range over the forecast \nperiod, with a peak of 5,9 per cent in the final quarter of this year.\nInflation expectations, as reflected in the survey conducted by the Bureau for Economic \nResearch, have remained relatively unchanged, but with some variations between the \ndifferent groups of respondents. Average inflation expectations declined by 0,2 per cent \nto 6,0 per cent for 2017 and remained unchanged at 5,9 per cent for 2018. While the \nexpectations of both analysts and business people declined, those of trade union officials \nremained unchanged for 2017 but increased for 2018. The long-term, five-year-ahead \ninflation expectations are unchanged at 5,9 per cent, and remain uncomfortably close to the \nupper end of the target range.\nMonetary Policy Review October 2016\n40\nSouth African Reserve Bank\nThe inflation expectations of analysts, as reflected in the Reuters Econometer survey, have \nalso shown successive declines during the past few months, with the median expectation for \ninflation to return to within the target range during the second quarter of 2017. The longer-\nterm expectations of market participants implicit in the break-even inflation rates (the yield \ndifferential between conventional bonds and inflation-linked bonds) declined further since \nthe previous meeting of the Monetary Policy Committee (MPC), although they remain \nabove the upper end of the inflation target range.\nThe global growth outlook remains subdued, amid slowing growth in the advanced economies \nand a general downward revision to forecasts. Although prospects for the US economy \nremain relatively favourable, outcomes have not been consistently positive, as evidenced by \nthe recent weak consumer expenditure and manufacturing sector data. Nevertheless, labour \nmarket conditions have improved and the investment slowdown appears to have bottomed. \nAlthough the short-term impacts of the Brexit vote on the economy of the United Kingdom \n(UK) have not been as negative as initially feared, growth forecasts have been revised down \nas concerns persist regarding the longer-term investment outlook. The euro area recovery \nremains steady but subdued. The Japanese economy remains caught in a deflation and low \ngrowth bind, following a weak second quarter.\nThe recent firmer trend in commodity prices has improved growth prospects for commodity-\nproducing emerging markets in particular, along with more favourable capital inflows. It is \nunclear how long these positive developments will continue. Indications are that the negative \ngrowth cycles in both Russia and Brazil have turned; both countries are expected to record \npositive, but weak rates of growth in the near term. The Chinese economy appears to have \nstabilised following concerns about a slowdown earlier in the year, but concerns regarding \nthe financial sector persist.\nGiven the broadly benign global inflation environment, apart from in some emerging \nmarkets, monetary policies have generally remained accommodative, with further loosening \nor a loosening bias in a number of the advanced economies. A notable exception is the \nUS, where the bias remains for a resumption of interest rate normalisation but the timing \nremains uncertain. Following the decision of the Federal Reserve yesterday to keep rates \nunchanged, the market expectation is for the next move to be in December. The data-\ndependent nature of future decisions means that these prospects are likely to change with \nnew data releases, imparting a degree of volatility to financial markets and to global capital \nflows. The US policy rate trajectory is still expected to be moderate.\nThe exchange rate of the rand has been affected by these global events, but has also been \nimpacted by domestic fundamentals and political developments. Since the previous meeting \nof the MPC, the rand has traded in a range of R13,28 and R14,73 against the US dollar – \nand has appreciated by 6,3 per cent against the US dollar, by 4,3 per cent against the euro, \nand by 5,2 per cent on a trade-weighted basis.\nThe rand initially appreciated markedly in line with other emerging market currencies as the \nchances of US Federal Reserve tightening receded in August following disappointing labour \nmarket data. At that stage, the rand recorded its strongest level since October 2015. This \ntrend was reversed following increased domestic risk perceptions, which were also reflected \nin rising domestic government bond yields. More recently, the rand has been positively \naffected by the stronger gross domestic product (GDP) growth outcome and a significant \nnarrowing of the current account deficit, following a sizeable trade account surplus in the \nsecond quarter. Although this may in part reflect a delayed adjustment to the depreciated \nexchange rate of the rand, the trade surplus is not expected to be sustained at similar levels \nin the coming months.\nThe marked appreciation of the rand during the past few days appears to be driven by expectations \nof unchanged US monetary policy as well as by speculation regarding possible purchases of the \nrand related to a major M&A transaction. The rand, however, remains vulnerable to future \nchanges in the US monetary policy stance, domestic political developments as well as to the \n41\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nrisk of a possible ratings downgrade later in the year. Nevertheless, the upside risk to inflation \nfrom the exchange rate appears to have moderated somewhat.\nThe domestic economy remains weak despite the positive growth surprise in the second \nquarter of 2016, when an annualised growth rate of 3,3 per cent was recorded. This was \ndriven by a rebound in the primary sector and a surge in real exports. Mainly as a result of \nthe higher starting point, the Bank’s forecast for economic growth for 2016 has been revised \nupwards: from 0 per cent to 0,4 per cent. The forecasts for the next two years have been \nincreased too, albeit marginally by 0,1 percentage points, to 1,2 per cent and 1,6 per cent \nrespectively. Estimates of potential output growth are unchanged, implying a persistence of \nbelow-potential growth. The trend in the Bank’s composite leading indicator of economic \nactivity remains indicative of subdued growth.\nWhile the second quarter growth performance was more favourable, data for July suggest \nthat this improvement is unlikely to be sustained in the third quarter. Both the mining \nand manufacturing sectors recorded negative month-to-month growth rates in July, and \nthe Barclays Purchasing Managers’ Index (PMI) declined sharply in August following \nfive consecutive months above the neutral 50-point mark. Stresses are also evident in the \nconstruction sector, with a further sharp decline in building plans passed during July.\nA key constraint to the growth outlook remains the sluggish state of domestic gross fixed \ncapital formation, which contributed negatively to GDP growth during the first two \nquarters of this year. In the second quarter of 2016, domestic fixed investment contracted \nin both the private and the public sectors (including government and public corporations). \nPrivate-sector fixed investment has recorded negative or zero growth for six consecutive \nquarters, reflecting low levels of business confidence. The Rand Merchant Bank/Bureau for \nEconomic Research (RMB/BER) business confidence index remains below the neutral level \ndespite an improvement in the third quarter.\nThis adverse investment climate and rising costs have contributed to the further deterioration \nin employment prospects, particularly in the mining and manufacturing sectors. The official \nunemployment rate increased to 26,6 per cent in the second quarter, from 25,0 per cent a year \nearlier. The increase in employment that was recorded in the second quarter was almost entirely \nattributable to temporary employment opportunities related to the municipal elections.\nConsumption expenditure by households remains weak, despite a return to positive growth \nfollowing the first-quarter contraction. The annualised growth of 1,0 per cent suggests that \nconsumers remain under pressure. Durable goods consumption continued to contract in the \nsecond quarter and is consistent with the further decline in the First National Bank/Bureau \nfor Economic Research (FNB/BER) consumer confidence index. In July, retail trade sales \ndeclined further, in contrast to positive wholesale trade sales. Domestic new vehicle sales \ncontinued their negative trend in July and August, while exports of motor vehicles have \nremained robust. \nThe outlook for consumption expenditure growth is expected to remain constrained given \nthe unfavourable employment outlook, the absence of significant positive wealth effects, and \nthe slow pace of growth in the real disposable income of households. Average wage growth \nand wage settlement rates have declined slightly, but there are risks of increases in excess of \ninflation and productivity gains. \nCredit extension to households continues to contract in real terms, likely driven by both \nsupply- and demand-side considerations. However, there has been a moderate increase in \nmortgage credit extension. As before, growth in credit extension to the corporate sector has \nbeen more resilient but below its recent peaks.\nFood prices remain a significant driver of inflation given the persistent drought, although \nlong-range weather forecasts suggest improved rainfall prospects in the coming months. \nFood price inflation is still expected to reach a peak in the fourth quarter of this year, at \nMonetary Policy Review October 2016\n42\nSouth African Reserve Bank\naround 12,3 per cent, slightly lower than forecast previously. Spot and futures prices of \nwheat and maize have declined in recent weeks, but meat prices are expected to rise further \nas farmers restock their herds. Global food price inflation has increased, mainly due to an \nacceleration in the price of sugar. \nInternational oil prices have fluctuated between US$40 and US$50 per barrel for the past \nsix months, amid uncertainty relating to a possible supply freeze by the Organization of the \nPetroleum Exporting Countries (OPEC). The assumption for Brent crude oil in the Bank’s \nforecasting model is unchanged, and assumes a moderate increase over the forecast period. \nAfter two consecutive months of price declines totalling R1,17 per litre, the domestic petrol \nprice is expected to increase in October due to adverse movements in both the exchange rate \nand international product prices.\nThe MPC has noted improvements in the expected inflation trajectory during the course of \nthe year. Apart from the tighter stance of monetary policy, this has also been driven by lower \nstarting points, as inflation surprised at times on the downside, and changed assumptions \nunderlying the forecast. The expected peak in headline inflation is notably lower, and an \nearlier return to within the target range is also expected. Most of the changes have been \nfor the current and coming year, whereas the changes in the forecast for 2018 have been \nmarginal. Changes to the core inflation forecast have been less pronounced, but it is no \nlonger expected to breach the upper end of the target range. Despite these improvements, \nthe longer-term inflation trajectory remains uncomfortably close to the upper end of the \ntarget range, with high wage settlement rates and inflation expectations contributing to this \npersistence.\nThe MPC assesses the risks to the inflation forecast to be more or less balanced at this \nstage. The current level of the rand is stronger than that implicit in the forecast, and, in \nconjunction with continued low levels of pass-through from the rand to inflation, the risks \nare assessed to have moderated somewhat. However, some of the positive factors impacting \non the rand may be temporary, and the currency remains vulnerable to both domestic and \nexternal shocks. \nThe other major risk to the inflation outlook relates to food prices. The forecast still expects \nfood prices to peak in the final quarter of this year. The future trajectory of these prices will \nbe highly dependent on the normalisation of rainfall in the coming months. Favourable \nweather patterns could see food price inflation falling faster than that implicit in the forecast. \nDespite the improved growth performance in the second quarter, the growth outlook \nremains constrained, as reflected in the more or less unchanged outlook for the next two \nyears. The MPC assesses the risk to the growth forecast to be broadly balanced as growth \nprospects remain dependent on global conditions, the implementation of structural reforms \nas well as changes in business and consumer confidence. \nGiven the improvements in the inflation forecast, the weak domestic economic outlook \nand the assessment of the balance of risks, the MPC has unanimously decided to keep the \nrepurchase rate unchanged at 7,0 per cent per annum. \nThe MPC remains concerned about the overall inflation trajectory which remains in the \nupper end of the inflation target range. The MPC is of the view that, should the current \nforecasts transpire, we may be close to the end of the tightening cycle. The MPC is aware \nthat a number of the favourable factors which have contributed to the improved outlook \ncan change very quickly, resulting in a reassessment of this view. The bar for monetary \naccommodation, by contrast, remains high, as the MPC would need to see a more significant \nand sustained decline of the inflation trajectory to within the inflation target range.\n43\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nSummary of assumptions: Monetary Policy Committee\nmeeting on 22 September 2016*\n1.\t Foreign-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1.\t Real GDP growth in South Africa’s major trading-partner countries...\n3,0% \n3,1% \n2,8% \n2,7% \n2,9% \n3,1% \n \n(3,0%) \n(3,3%) \n2.\t International commodity prices in US$ (excluding oil)..........................\n-6,4% \n-9,8% \n-19,3% \n-4,5% \n5,5% \n1,0% \n(-8,5%) \n(1,0%) \n(1,5%) \n3.\t Brent crude (US$/barrel)........................................................................\n108,8 \n99,2 \n52,5 \n44,3 \n53,5 \n57,5 \n(44,6) \n \n4.\t World food prices (US$).........................................................................\n-1,6% \n-3,8% \n-18,7% \n-4,9% \n3,0% \n3,0% \n(-6,0%) \n(2,0%) \n5.\t International wholesale prices................................................................\n0,3% \n-0,1% \n-3,5% \n-1,1% \n1,1% \n1,2% \n(-1,3%) \n(1,0%) \n \n6.\t Real effective exchange rate of the rand (index 2010 = 100)................\n81,91 \n79,17 \n80,08 \n75,67 \n78,00 \n78,00 \n(74,01) \n(75,00) \n(75,00) \n7.\t Real effective exchange rate of the rand...............................................\n-10,1% \n-3,3% \n1,1% \n-5,5% \n3,1% \n0,0% \n(-7,6%) \n(1,3%) \n \n2.\t Domestic-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1.\t Real government consumption expenditure.....................................\n3,8% \n1,8% \n0,2% \n1,5% \n1,0% \n1,0% \n2. \t Administered prices...........................................................................\n8,7% \n6,7% \n1,7% \n5,1% \n6,7% \n7,3% \n(5,7%) \n(7,4%) \n(7,9%) \n\t\n– Petrol price.....................................................................................\n11,8% \n7,2% \n-10,7% \n1,0% \n7,0% \n7,9% \n(2,2%) \n(7,6%) \n \n\t\n– Electricity price..............................................................................\n8,7% \n7,2% \n9,4% \n9,3% \n7,7% \n8,0% \n(9,6%) \n(8,5%) \n(9,0%) \n3.\t Potential growth..................................................................................\n2,0% \n1,7% \n1,5% \n1,4% \n1,5% \n1,7% \n4.\t Repurchase rate (per cent)................................................................\n5,00 \n5,57 \n5,89 \n6,91 \n7,00 \n7,00 \nThe figures in brackets represent the previous assumptions of the Monetary Policy Committee.\n*\t For an explanation of foreign-sector assumptions and domestic-sector assumptions, see pages 45 and 46.\nMonetary Policy Review October 2016\n44\nSouth African Reserve Bank\nSelected forecast results: Monetary Policy Committee meeting on 22 September 2016\nSelected forecast results (annual)\nPer cent\nActual\nForecast\n2013\n2014\n2015\n2016\n2017\n2018\n1. Real gross domestic product (GDP) growth.............................\n2,3% \n1,6% \n1,3% \n0,4% \n1,2% \n1,6% \n(0,0%) \n(1,1%) \n(1,5%) \n2. Current account as a ratio to nominal GDP..............................\n-5,9 \n-5,3 \n-4,3 \n-4,0 \n-4,2 \n-4,4 \n \n(-4,2) \n(-4,4) \n(-4,7) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nSelected forecast results (quarterly)\nYear-on-year percentage change\nActual\n Forecast\n1\n2\n3\n4\n2015\n1\n2\n3\n4\n2016\n1\n2\n3\n4\n2017\n1\n2\n3\n4\n2018\n1. Headline inflation.............................\n4,2\n4,6\n4,7\n4,9\n4,6\n6,5\n6,2 \n6,2 \n6,7\n6,4 \n6,2 \n5,8 \n5,8 \n5,5 \n5,8\n5,4 \n5,4 \n5,5 \n5,6 \n5,5 \n(6,2) \n(6,5) \n(7,1) \n(6,6) \n(6,6) \n(6,1) \n(5,8) \n(5,5) \n(6,0) \n(5,4) \n(5,5) \n(5,5) \n(5,6) \n(5,5) \n2. Core inflation...................................\n5,7\n5,6\n5,3\n5,2\n5,5 \n5,5 \n5,5 \n5,7 \n5,9 \n5,7 \n5,8 \n5,7 \n5,5 \n5,4 \n5,6 \n5,3 \n5,3 \n5,3 \n5,4 \n5,3 \n(5,5) \n(5,9) \n(6,1) \n(5,8) \n(6,0) \n(5,9) \n(5,4) \n(5,2) \n(5,7) \n(5,2) \n(5,2) \n(5,3) \n(5,4) \n(5,3) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\n45\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nForeign-sector assumptions\n1.\t Trading-partner gross domestic product (GDP) growth is determined broadly using \nthe Global Projection Model (GPM) of the International Monetary Fund (IMF), which \nis then adjusted to aggregate the GDP growth rates of South Africa’s major trading \npartners on a trade-weighted basis. Individual projections are done for the four largest \ntrading partners: the euro area, China, the United States (US) and Japan. The remaining \ntrading partners are grouped into three regions: emerging Asia (excluding China), Latin \nAmerica, and the Rest of Countries bloc. The assumption takes account of country-\nspecific ‘consensus’ forecasts as well as IMF regional growth prospects.\n2.\t The commodity price index is a weighted aggregate price index of the major South \nAfrican export commodities based on 2010 prices. The composite index represents the \ntotal of the individual commodity prices multiplied by their smoothed export weights. \nCommodity price prospects generally remain commensurate with global liquidity as well \nas commodity supply/demand pressures as reflected by the pace of growth in the trading-\npartner countries.\n3. \tThe Brent crude oil price is expressed in US dollar per barrel. The assumption incorporates \nan analysis of the factors of supply, demand (using global growth expectations) and \ninventories of oil (of all grades) as well as the expectations of the US Energy Information \nAdministration (EIA), the Organization of the Petroleum Exporting Countries (OPEC) \nand Reuters.\n4. \tWorld food prices uses the composite food price index of the Food and Agriculture \nOrganization of the United Nations (FAO) in US dollar. The index is weighted using \naverage export shares and represents the monthly change in the international prices of \na basket of five food commodity price indices (cereals, vegetable oil, dairy, meat and \nsugar). World food price prospects incorporate selected global institution forecasts for \nfood prices as well as imbalances from the anticipated trend in international food supplies \nrelative to expected food demand pressures.\n5.\t International wholesale prices refers to a weighted aggregate of the producer price \nindices (PPIs) of South Africa’s major trading partners, as per the official real effective \nexchange rate calculation of the South African Reserve Bank (the Bank). Although \nindividual country consumer price index (CPI) inflation forecasts provide a good \nindication for international wholesale price pressures, the key drivers of the assumed \ntrend in global wholesale inflation are oil and food prices as well as expected demand \npressures emanating from the trends in the output gaps of the major trading-partner \ncountries. Other institutional forecasts for international wholesale prices are also \nconsidered.\n6. \tThe real effective exchange rate is the nominal effective exchange rate of the rand \ndeflated by the producer price differential between South Africa and an aggregate of its \ntrading-partner countries (as reflected in the Quarterly Bulletin published by the Bank). \nAlthough the nominal rate is a weighted average of South Africa’s 20 largest trading \npartners, particular focus is placed on the rand outlook against the US dollar, the euro, \nthe Chinese yuan, the British pound and the Japanese yen. The assumed trend in the \nreal effective exchange rate remains constant from the latest available quarterly average \nover the projection period. However, due to the time delay in the calculation of the real \neffective exchange rate, the most recent trend in the nominal effective exchange rate is \nadjusted with the assumed trend for the domestic and foreign price differential for the \ncurrent quarter. This may result in a technical annual adjustment over the current and \nnext forecast year that differs from zero.\nMonetary Policy Review October 2016\n46\nSouth African Reserve Bank\nDomestic-sector assumptions\n1.\t Government consumption expenditure (real) is broadly based on the most recent \nNational Treasury budget projections. However, since these projections take place \ntwice a year, the most recent actual data points also play a significant role in the \nassumptions process.\n2.\t Administered prices represent the total of regulated and non-regulated administered \nprices as reflected by Statistics South Africa (Stats SA). Their weight in the consumer \nprice index basket is 18,48 per cent and the assumed trend over the forecast period is \nlargely determined by the expected pace of growth in petrol prices, electricity tariffs, \nschool fees as well as water and other municipal assessment rates.\n\t\nThe petrol price is an administered price and comprises 5,68 per cent of the overall \nbasket. The basic fuel price (which currently accounts for roughly half of the petrol price) \nis determined by the exchange rate and the price of petrol quoted in US dollars at refined \npetroleum centres in the Mediterranean, the Arab Gulf and Singapore. The remainder \nof the petrol price is made up of wholesale and retail margins as well as the fuel levy and \ncontributions to the Road Accident Fund (RAF). Since most taxes and retail margins \nare changed once a year, the assumed trajectory of the petrol price largely reflects the \nanticipated trend in oil prices and the exchange rate.\n\t\nThe electricity price is an administered price measured at the municipal level with a \nweight of 4,13 per cent in the CPI basket. Electricity price adjustments generally take place \nin July and August of each year, and the assumed pace of increase over the forecast period \nreflects the multi-year price determination (MYPD) by the National Energy Regulator in \nrespect of Eskom, with a slight adjustment for measurement at municipal level.\n3. \tThe pace of potential growth is derived from the Bank’s semi-structural potential \noutput model. The measurement accounts for the impact of the financial cycle on \nreal economic activity and introduces economic structure via the relationship between \npotential output and capacity utilisation in the manufacturing sector (see South African \nReserve Bank Working Paper Series WP/14/08).\n4. \tThe repurchase rate (commonly called the ‘repo rate’) is the official monetary policy \ninstrument and represents the interest rate at which banks borrow money from the Bank. \nAlthough the rate is held constant over the forecast period, this assumption is relaxed in \nalternative scenarios where, for instance, the policy rate responds to deviations of output \nfrom its potential and the gap between future inflation and the inflation target, in other \nwords, via a stylised ‘Taylor rule’, one that is based on market expectations of the future \npath of the policy rate, and other paths (as requested).\n47\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nGlossary\nAdvanced economies: Advanced economies are countries with high levels of gross domestic \nproduct per capita. These countries are sometimes described as industrialised. With further \ngrowth, however, they have tended to diversify, with particular emphasis on services sectors.\nBalance of payments: This is a record of transactions between the home country and the \nrest of the world over a specific period of time. It includes the current and financial accounts. \nSee also ‘current account’ below.\nBudget deficit: A budget deficit indicates the extent to which government expenditure \nexceeds government revenue (a budget surplus occurs when revenue exceeds expenditure).\nBusiness and consumer confidence: These are economic indicators that measure the state \nof optimism about the economy and its prospects among business managers and consumers.\nCentral projection: This is the most likely outcome for the variable of interest over the \nperiod, according to forecast of the South African Reserve Bank (the Bank).\nCommodity currencies: Commodity currencies are currencies from countries whose \nexports include substantial quantities of commodities (e.g. iron ore or gold).\nCommodity prices: Commodities can refer to energy, agriculture, metals and minerals. \nMajor South African-produced commodities include platinum and gold.\nConsumer price index (CPI): The CPI provides an indication of aggregate price changes \nin the domestic economy. The index is calculated using a number of categories forming a \nrepresentative set of goods and services bought by consumers.\nCore inflation: Core generally refers to underlying inflation, excluding volatile elements \n(e.g. food and energy prices). The Bank’s forecasts and discussions refer to headline CPI \nexcluding food, non-alcoholic beverages, petrol and electricity prices.\nCrude oil price: This is the US dollar price per barrel of unrefined oil (Brent crude refers \nto unrefined North Sea oil).\nCurrent account: The current account of the balance of payments consists of net exports \n(exports less imports) in the trade account, as well as the services, income and current \ntransfer account.\nEmerging markets: Emerging markets are countries with low to middle income per capita. \nThey are advancing rapidly and are integrating with global (product and capital) markets.\nExchange rate depreciation (appreciation): Exchange rate depreciation (appreciation) \nrefers to a decrease (increase) in the value of a currency relative to another currency.\nExchange rate pass-through: This is the effect of exchange rate changes on domestic \ninflation (i.e. the percentage change in domestic CPI due to a 1 per cent change in the \nexchange rate). Changes in the exchange rate affect import prices, which in turn affect \ndomestic consumer prices and inflation.\nFlexible inflation targeting: This refers to inflation-targeting regimes that consider \nchanges in inflation and other variables affecting the real economy in the short term. Under \nstrict inflation targeting only inflation matters, but flexible inflation-targeting takes into \naccount other variables, such as output.\nForecast horizon: This is the future period over which the Bank generates its forecasts, \ntypically between two and three years.\nMonetary Policy Review October 2016\n48\nSouth African Reserve Bank\nGross domestic product (GDP): GDP is the total market value of all goods and services \nproduced in a country. It includes total consumption expenditure, capital formation, \ngovernment consumption expenditure and the value of exports less the value of imports.\nGross fixed capital formation (investment): The value of acquisitions of capital goods \n(e.g. machinery, equipment and buildings) by firms, adjusted for disposals, constitutes gross \nfixed capital formation.\nHeadline consumer price index (CPI): Headline CPI refers to CPI for all urban areas that \nis released monthly by Statistics South Africa. Headline CPI is a measure of price levels in \nall urban areas. The 12-month percentage change in headline CPI is referred to as ‘headline \nCPI inflation’ and reflects changes in the cost of living. This is the official inflation measure \nfor South Africa.\nHousehold consumption: This is the amount of money spent by households on consumer \ngoods and services.\nInflation (growth) outlook: This outlook refers to the evolution of future inflation \n(growth) over the forecast horizon.\nInflation targeting: This is a monetary policy framework used by central banks to steer \nactual inflation towards an inflation target level or range.\nLeverage: This refers to the process of borrowing money to buy assets or fund consumption; \nhighly leveraged entities are those with a large amount of outstanding debt.\nMedian: This is a statistical term used to describe the observed number that separates \nordered observations in half.\nMonetary policy normalisation: This refers to the unwinding of unusually accommodative \nmonetary policies. It could also mean adjusting the economy’s policy rate towards its real \nneutral policy rate.\nNominal effective exchange rate (NEER): A NEER is an index that expresses the value \nof a country’s currency relative to a basket of other (trading-partner) currencies. An increase \n(decrease) in the effective exchange rate indicates a strengthening (weakening) of the domestic \ncurrency with respect to the selected basket of currencies. The weighted average exchange rate \nof the rand is calculated against 15 currencies. The weights of the five major currencies are as \nfollows: euro (34,82), US dollar (14,88), Chinese yuan (12,49), British pound (10,71) and \nJapanese yen (10,12). Index: 2000 = 100. See ‘Real effective exchange rate’\nOutput gap/potential growth: Potential growth is the rate of GDP growth that could \ntheoretically be achieved if all productive assets in the economy were employed in a stable \ninflation environment. The output gap is the difference between actual growth and potential \ngrowth, which accumulates over time. If this is negative, then the economy is viewed to be \nunderperforming and demand pressures on inflation are low. If the output gap is positive, \nthe economy is viewed to be overheating and demand pressures are inflationary.\nProducer price index (PPI): This index measures changes in the prices of goods at the \nfactory gate. Stats SA currently produces five different indices that measure price changes at \ndifferent stages of production. Headline PPI is the index for final manufactured goods. PPI \nmeasures indicate potential pressure on consumer prices.\nProductivity: Productivity indicates the amount of goods and services produced in relation \nto the resources utilised in the form of labour and capital.\n49\nMonetary Policy Review October 2016\nSouth African Reserve Bank\nPurchasing power parity (PPP): PPP is based on the law of one price, assuming that \nin the long run, exchange rates will adjust so that purchasing power across countries is \napproximately the same. It is often used to make cross-country comparisons without the \ndistortionary impact of volatile spot exchange rates.\nReal effective exchange rate (REER): The REER is the NEER adjusted for inflation \ndifferentials between South Africa and its main trading partners. See ‘Nominal effective \nexchange rate’.\nRepurchase (repo) rate: This is the policy rate that is set by the Monetary Policy Committee \n(MPC). It is the rate that commercial banks pay to borrow money from the Bank.\nReal repo rate: This is the nominal repo rate, as set by the MPC, adjusted for expected \ninflation.\nTaper tantrum: The term ‘taper tantrum’ is widely used to describe the strong reaction of global \nfinancial markets to comments by the US Federal Reserve (Fed) chairman in May 2013 that the \nFed would likely start to reduce (or ‘taper’) the pace of its asset purchases later that year.\nTerms of trade: This refers to the ratio of export prices to import prices.\nUnit labour costs: A unit labour cost is the labour cost to produce one ‘unit’ of output. This \nis calculated as the total wages and salaries in the non-agricultural sector divided by the real \nvalue added at basic prices in the non-agricultural sector of the economy.\nUnsecured lending: These are loans extended without any collateral (guarantees or \nunderlying assets) as security to protect the value of the loan.\nMonetary Policy Review October 2016\n50\nSouth African Reserve Bank\nAbbreviations\nAFE\t\naverage forecast error\nBER \t\nBureau for Economic Research\nBIS\t\nBank for International Settlements\nCAD\t\ncurrent accound deficit\nCDS\t\ncredit default swaps\nCPI \t\nconsumer price index\nCPIX\t\nconsumer price index for metropolitan and other urban \nareas, excluding the interest cost on mortgage bonds\nECB\t\nEuropean Central Bank\nEMBI+\t\nJPMorgan Emerging Market Bond Index Plus\nEU\t\nEuropean Union\nFAO\t\nUnited Nations Food and Agriculture Organization\nFNB \t\nFirst National Bank\nGDP \t\ngross domestic product\nIMF \t\nInternational Monetary Fund\nJSE\t\nJSE Limited\nMPC\t\nMonetary Policy Committee\nMPR \t\nMonetary Policy Review\nPPI\t\nproducer price index\nREER \t\nreal effective exchange rate\nrepo (rate) \t\nrepurchase (rate)\nRMB\t\nRand Merchant Bank\nRMSE\t\nroot mean square error\nSACU\t\nSouthern African Customs Union\nSSA\t\nsub-Saharan Africa\nStats SA \t\nStatistics South Africa\nthe Bank\t\nSouth African Reserve Bank\nthe Fed \t\nUnited States Federal Reserve\nUK\t\nUnited Kingdom\nULC \t\nunit labour cost\nUS \t\nUnited States", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/MPROctober2016 (1).pdf"}
\ No newline at end of file