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+{"doc_id": "1b00c0e579bf25b11b166e16bf35cdcb", "text": "Monetary Policy Review \nApril 2017\nSouth African Reserve Bank\nMonetary Policy Review\nApril 2017\nMonetary Policy Review April 2017\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 means, electronic, mechanical, photo-\ncopying, recording or otherwise, without fully acknowledging the Monetary Policy Review of the South African Reserve Bank as the source. The contents of this publication \nare intended for general information only and are not intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of information, \nthe South African Reserve Bank shall not 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.resbank.co.za\t\n\t\n\t\n\t\n\t\n\t\n ISSN: 1609-3194\nMonetary Policy Review April 2017\nPreface\nThe primary mandate of the South African Reserve Bank (SARB) is to achieve and maintain price stability in the interest of \nbalanced and sustainable economic growth. In addition, the SARB has a complementary mandate to oversee and maintain \nfinancial stability. \nPrice stability helps to protect the purchasing power and living standards of all South Africans. It provides a favourable \nenvironment for investment and job creation, and also helps to maintain and improve international competitiveness. The goal \nof price stability is quantified by the setting of an inflation target by government after consultation with the SARB. The SARB \nhas operational independence. Monetary policy decisions are made by the SARB’s Monetary Policy Committee (MPC), which \nis chaired by the Governor and includes the deputy governors as well as other senior officials of the SARB. \nThe MPC conducts monetary policy to keep inflation within a target range of 3–6%. This inflation targeting framework is \nflexible, meaning that inflation may be temporarily outside the target range, under certain circumstances. The MPC takes \ninto account the time lags between policy adjustments and economic effects. This provides for interest rate smoothing over \nthe cycle, and contributes towards more stable economic growth. The decision of the MPC, together with a comprehensive \nstatement, is communicated at a media conference at the end of each meeting. \nThe Monetary Policy Review (MPR) is published twice a year and is aimed at broadening public understanding of the objectives \nand conduct of monetary policy. The MPR covers domestic and international developments that affect inflation and that \nimpact on the monetary policy stance. It is fundamentally a forward looking document which focuses on the outlook for the \nSouth African economy, in contrast to the Quarterly Bulletin which records and explains recent economic developments. \nThe MPR is presented by senior officials of the SARB at monetary policy forums in various centres across South Africa in an \neffort to develop a better understanding of monetary policy through direct interaction with stakeholders.\nMonetary Policy Review April 2017\nContents\nExecutive summary..........................................................................................................................................\t\n1\nOverview of the world economy.......................................................................................................................\t\n5\nOverview of financial markets...........................................................................................................................\t\n10\nOverview of the real economy..........................................................................................................................\t\n13\nInflation developments and outlook..................................................................................................................\t\n21 \nSummary.........................................................................................................................................................\t\n31\nBoxes\nBox 1\tAn asymmetric Phillips Curve?..............................................................................................................\t\n19\nBox 2\tReweighting and rebasing the consumer price index – implications for the forecast.............................\t\n23\nBox 3\tComparing the accuracy of CPI forecasts.............................................................................................\t\n29\nStatements issued by Lesetja Kganyago, Governor of the South African Reserve Bank\nStatement of the Monetary Policy Committee \n24 November 2016..........................................................................................................................................\t\n33\nStatement of the Monetary Policy Committee \n24 January 2017..............................................................................................................................................\t\n38\nStatement of the Monetary Policy Committee \n30 March 2017.................................................................................................................................................\t\n43\nGlossary..........................................................................................................................................................\t\n50\nAbbreviations..................................................................................................................................................\t\n52\n1\nMonetary Policy Review April 2017\nExecutive summary\nSouth Africa’s macroeconomic imbalances have eased \nsomewhat, with household balance sheets as well as fiscal \nand current account deficits all moving towards more \nsustainable levels. Inflation is falling back within the target \nrange, and is expected to average 5.4% in 2018 and 5.5% in \n2019. Meanwhile, gross domestic product (GDP) growth is \nprojected to pick up from 2016’s post-crisis low. The short-\nterm growth improvement largely reflects a recovery in the \nprimary sector (agriculture and mining). Over the medium \nterm, output is expected to benefit from renewed investment, \nstronger household consumption and improved global growth. \nGrowth prospects, however, remain subdued, while inflation is \nstaying relatively high despite receding shocks.\nThe previous Monetary Policy Review (MPR), published in \nOctober 2016, welcomed an improvement in global conditions. \nThis progress has mostly been sustained. Pessimism about \nworld growth has faded somewhat, with themes of secular \nstagnation and ultra-low long term interest rates retreating in \nfavour of reflation and a degree of optimism. In the United States \n(US), measures of policy uncertainty are elevated, yet volatility \nis unusually low while equity markets are close to record highs. \nInflation is reverting to target levels following half a decade of \noutcomes below 2%, and employment gains remain robust. \nIn this context, the US Federal Reserve (Fed) is moving with \na new resolve towards policy normalisation. Yet the prospect \nof higher interest rates, which previously sent shockwaves \nthrough financial markets, now seems to be inspiring more \nconfidence than fear. Meanwhile, policy stimulus in China \nappears to have stabilised growth at relatively high levels. This \nhas allayed fears of a sharper slowdown and has breathed new \nlife into industrial commodities. \nIn this environment, South Africa’s terms of trade have \nrebounded to a five-year high. The exchange rate has recovered \nsome ground: 2016 was the first year this decade in which the \nrand was stronger in December than it had been in January. \nThese experiences have parallels across the emerging market \nspace, with peer countries including Brazil, Chile, Colombia \nand Russia all experiencing stronger capital inflows and \ncurrency appreciation. However, the rising tide is not lifting all \nboats. In particular, Turkey (where macroeconomic imbalances \nremain acute) and Mexico (which is especially vulnerable to US \npolicy risk) stand out as exceptions to the emerging market \ntrend.\nAs in 2013, investors appear to be differentiating between \nemerging markets based on country specific characteristics. \nSouth Africa has benefited from its improved economic \nfundamentals. The current account deficit is likely to reach \n3.2% of GDP this year, from 5.9% in 2013, reflecting a lower \nexternal financing requirement. Fiscal consolidation has so far \nreduced the fiscal deficit to 3.9% of GDP in 2016/17, from 4.4% \nin 2013/14, and the debt to GDP ratio is expected to stabilise \n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\n10\n* CPI for all urban areas\nSources: SARB and Stats SA\nPercentage change on a year earlier\nTargeted inflation* forecast\n2009\n2011\n2013\n2015\n2017\n2019\nInflation target range\n* At seasonally adjusted annualised rates\nSources: SARB and Stats SA\nPercentage change*\nReal GDP\n2009\n2011\n2013\n2015\n2017\n2019 -8\n-6\n-4\n-2\n0\n2\n4\n6\n8\nIndices: 1 January 2016 = 100\nJan\nMar\nMay\nJul\nSep\nNov\nJan\nMar\n2017\n2016\nEmerging market currencies\n \nJPM EM Currency Index\n \nTurkish lira\n \nIndonesian rupiah\n \nRussian ruble\n \nMexican peso\n \nColombian peso\nSources: Bloomberg and SARB\n \nSouth African rand\n \nIndian rupee\n \nBrazilian real\n \nChinese yuan\n \nHungarian forint\n70\n80\n90\n100\n110\n120\n130\nMonetary Policy Review April 2017\n2\nby 2018/19. Household debt stocks – which peaked at nearly \n90% of disposable incomes in 2008 – are now back to 2006 \nlevels, slightly above 70%. This suggests the hangover from \nthe pre-crisis debt boom may at last be fading. Inflation is \nslowing and should be back within the target range during the \nsecond quarter of 2017. These macroeconomic improvements \nare complemented by other positive outcomes, ranging from \nnormalising rainfall patterns to a sharp reduction in the number \nof work days lost to strikes. The combined effect is somewhat \nbetter economic prospects over the medium term, potentially \nreversing the trend of slower growth and rising inflation which \nhas dogged South Africa through the post-crisis period and \n2016 in particular. \nOverview of the policy stance\nThe repurchase (repo) rate has been stable at 7.0% for a year. \nDuring this period, the medium-term inflation forecast, which is \nthe relevant time frame for monetary policy, has been similarly \nstable. Indeed, the forecast for 2018 has stayed within a narrow \nrange of 5.4–5.5% at every Monetary Policy Committee (MPC) \nmeeting to date. The 2019 forecast, which became available \nonly for the March 2017 meeting, also shows inflation within the \ntarget range, at 5.5%. The existing monetary policy settings are \ntherefore proving adequate to return inflation within the target \nrange over the policy horizon, of around 12–24 months.\nThis outlook is quite favourable compared to a year ago. It \nnonetheless poses two sorts of policy problems. There are \nrisks to this forecast which, on balance, incline towards higher \ninflation. Furthermore, projected inflation remains relatively \nhigh, close to the top end of the 3–6% target range throughout \n2018 and 2019.\nThe exchange rate is the biggest risk to the forecast trajectory. \nThe past year has seen sustained rand appreciation, breaking \na five-year depreciation trend. The currency has weakened \nsharply on occasions during this period – for instance, following \nthe US election result – but it has made up its losses relatively \nquickly. Furthermore, it has recently shrugged off US monetary \ntightening, despite previous sensitivity to Fed moves. In late \nMarch, however, it weakened abruptly following the Cabinet \nreshuffle. In time this may be identified as a new turning point \nfor the currency, but at present the outlook is uncertain. The \nlatest forecast starts with the implied dollar/rand exchange rate \nat about R13.40. That level is close to the actual rates prevailing \nat the start of the second quarter, and well above the first \nquarter strong point of about R12.30. The risk is that the rand \ncould follow a more depreciated path than expected, which \nwould, other things being equal, raise inflation.\nThe second problem is that, given the assumptions, forecast \ninflation is still relatively high. Although headline is decelerating as \ndrought effects fade, underlying inflation remains elevated. Core \ninflation reached a post-crisis high of 5.9% in December 2016, \nand is likely to trend only moderately lower over the medium \nPercentage change over four quarters\n2015\n2016\n2017\n2018\n2019\nChanges to SARB CPI forecast*\n \nMarch 2016 \n \nJuly 2016 \n \nNovember 2016 \n \nMarch 2017 \n* Dotted lines indicate forecasts\nSources: SARB and Stats SA\n \nMay 2016 \n \nSeptember 2016 \n \nJanuary 2017\n \nActual \n4.0\n4.5\n5.0\n5.5\n6.0\n6.5\n7.0\n7.5\nPercentage change over four quarters\n2000 2002 2004 2006 2008\n2010 2012 2014 2016\nBER average inflation expectations since 2000*\n \nTwo years ahead\n* CPIX for metropolitan and other urban areas until the end of 2008;\nCPI for all urban areas thereafter\nSource: BER\n \nFive years ahead\n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\n3\nMonetary Policy Review April 2017\nterm, at no point falling below 5.0%. Furthermore, disinflation in \ncore is driven almost exclusively by goods prices responding to \nexchange rate effects. Core goods inflation is projected at close \nto 4% through 2018 and 2019. By contrast, services inflation is \nmuch closer to 6% across the medium term.\nAn important aspect of the problem is the relatively high level of \ninflation expectations. Surveyed expectations for 2018 have not \nyet declined in line with the South African Reserve Bank’s (SARB) \nforecast, remaining close to 6.0%. Furthermore, expectations \nfor the period five to ten years ahead, as derived from surveys, \nmarket indicators or independent forecasts, all appear similarly \nhigh, at or above the top end of the inflation target range.\nWhile stable expectations were welcome so long as they were \nresistant to higher inflation, their persistence becomes more \nproblematic as inflation falls. The fact that expectations seem \nto be stuck close to 6.0% helps explain why inflation does \nnot slow more rapidly over the forecast period. The relevant \nhorizon for monetary policy now falls across 2018 and 2019. \nWhen these years arrive, shocks to food and petrol prices are \nexpected to have dissipated. The exchange rate forecast for \nthis period is stable in real terms.1 Economic growth, while \nslightly improved, will likely remain low, and employment is \nanticipated to have declined. Yet inflation is still projected well \nabove the midpoint of the target range. Unfortunately, with \nunderlying inflation as well as inflation expectations pinned to \nthe upper-end of the target range, even small negative shocks \nare likely to cause target breaches.\nIn recent years, policymakers have confronted the challenge \nof rising inflation alongside slowing growth. The forecast now \nshows some signs of improvement on both counts. Inflation \nappears to be returning to target, while ‘green shoots’ of growth \nhave been visible following the disappointments of 2016. \nFurthermore, smaller current account deficits are reducing \nexternal financing requirements, while debt trajectories in \nboth the household and public sectors appear more clearly \nsustainable. These developments have permitted a clearer \nsense over the past three MPC meetings that additional policy \ntightening may not be necessary.\nNonetheless, this fledgling recovery is vulnerable to shocks. \nThe expected degree of improvement for both growth and \ninflation is modest at best. Forecast inflation and inflation \nexpectations remain relatively high, constraining prospects for \nrate cuts. The economy is on a path back to full production, \nbut progress is expected to be gradual, with the output gap \neffectively closed only by the end of 2019 despite sustained \nmonetary and fiscal support to growth. Furthermore, even at full \ncapacity the economy’s growth rate will remain unsatisfactory, \nbelow historical averages and only slightly above the growth \nrate of the population. Improving the long run potential of the \neconomy to grow requires reforms to boost investment and \nimprove the functioning of key markets, but such initiatives are \nmostly outside the responsibilities of the central bank.\n1\t\nIn fact, in the forecasting model the longer-run exchange rate does \nnot cause inflation but responds to it, with the nominal exchange rate \ndepreciating from its current starting point in line with inflation differentials.\nPer cent\n2009 2010\n2011\n2012\nDate of forecast\n4.5\n5.0\n5.5\n2013\n2014\n2015\n2016\nSouth Africa’s five year ahead inflation forecast\n \n \nSource: IMF\n4.0\n4.5\n5.0\n5.5\n6.0\nPercentage of potential GDP\n2008\n2010\n2012\n2014\n2016\n2018\nOutput gap with confidence bands\n \n75%\n \n25%\nSource: SARB\n \n50%\n \nOutput gap\n-6\n-4\n-2\n0\n2\n4\n6\nPer cent\n2000 2002 2004 2006 2008 2010 2012 2014 2016\nSouth Africa repurchase and prime rate\n \nRepurchase rate\nSource: SARB\n \nPrime rate\n4\n6\n8\n10\n12\n14\n16\n18\nMonetary Policy Review April 2017\n4\nMonetary policy continues to be supportive of the recovery. \nReal interest rates remain low in historical perspective, thereby \ncontributing to demand and helping to close the output gap. \nSouth Africa has been buffeted by severe inflation shocks since \nthe global financial crisis, including currency depreciation and \ndrought. To prevent a deterioration in inflation expectations, \npolicy accommodation has been somewhat reduced since \n2014. With the appreciation of the exchange rate, weaker \ngrowth last year and expected moderation in food prices, that \npolicy adjustment has appeared sufficient to return inflation to \nwithin the upper part of the target range and to keep it there \nacross the forecast period. The outlook, however, is unusually \nuncertain.\n5\nMonetary Policy Review April 2017\nOverview of the world economy\nGlobal growth is expected to improve from 2016’s post-crisis \nlow. A number of major emerging markets (Russia, Brazil, \nNigeria) are exiting recessions, while the largest (China and \nIndia) appear capable of maintaining growth near current levels. \nMajor advanced economies are in a cylical upturn, with the US, \neuro area and Japan all expected to close their output gaps \nover the next few years. Meanwhile, inflation rates are generally \nmoving back towards targets, from being too high in some \nemerging markets or too low in many advanced economies. \nDespite these positive trends, the shape of the global recovery \nremains unclear, due in particular to policy uncertainty in the \nUS, debt overhangs in China and persistent risks in Europe.\nAdvanced economies \nAdvanced economies are starting 2017 on a much stronger \nfooting than 2016, and arguably any period since the global \nfinancial crisis. Industrial production is accelerating, drag from \ninventories is receding, asset price growth has been vigorous \nand household balance sheets are supporting stronger \ndomestic demand. The Purchasing Managers’ Index (PMI) \nfor the Group of Three (G3) economies has improved from \nan average of just under 51 for the first half of 2016 to over \n56 in February 2017, its highest level since 2011.2 Accordingly, \nadvanced economy growth is expected to reach 1.9% in 2017 \nand 2.0% in 2018, up from 1.6% in 2016.\nThe US economy should contribute significantly to this \nacceleration, with growth in excess of 2.0% over the next \nthree years. The starting point is a good one. Employment \ngains have been healthy, averaging 190 000 jobs per month \nduring 2016, and unemployment has fallen somewhat below \n5.0% – reaching levels consistent with Fed estimates of the \nlong-run natural rate of unemployment. The new administration \nhas brought with it a sharp increase in policy uncertainty. \nNonetheless, financial markets have welcomed the prospect \nof tax cuts, infrastructure expenditure and lighter financial \nregulation. The Standard & Poor’s (S&P) 500 index and Dow \nJones industrial average have gained over 10% since the US \nelections, achieving new highs in early March. Consumer and \nsmall business confidence indicators have also picked up, \nwith various measures reaching their strongest levels in over a \ndecade. Growth forecasts have improved slightly: consensus \nforecasts for 2017 and 2018 growth were revised up by 0.1 \nand 0.2 percentage points respectively in February 2017 \ncompared with three months ago. Accordingly, the output \ngap – which the Congressional Budget Office puts at around \n-0.5% of potential GDP for 2016 – is likely to turn positive by \n2018 as robust demand pushes growth above potential. These \ndevelopments indicate that the Fed will be able to proceed \n2\t\nThe G3 PMI includes the US, euro area and Japan. It is weighted using an \naverage of 2014–2016 real GDP adjusted for purchasing power parity.\nForecast\nAnnual percentage change\n2008\n2010\n2012\n2014\n2016\n2018\nWorld real GDP growth*\n \nWorld real GDP\n* Trade weighted based on South African exports. Projections are\nbased on the Global Projection Model\nSources: IMF and SARB\n \nWorld output gap\n-3\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\nPercentage change over 12 months\n2012\n2013\n2014\n2015\n2017\n2016\nUS inflation\n \nPCE price index\nSource: US Bureau of Economic Analysis\n \nInflation target\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n3.0\nPer cent\nJ M M J S N J M M J S N J M M J S N J M M J S N\n2016\n2017\n2018\n2019\nFederal funds rate \n \nEffective federal funds rate\n \n17 November 2016\nSources: CME Group, Fed and SARB\n \n1 November 2016\n \n3 April 2017\n0.2\n0.4\n0.6\n0.8\n1.0\n1.2\n1.4\n1.6\n1.8\n2.0\n2.2\nMonetary Policy Review April 2017\n6\nwith monetary policy normalisation, in line with its projections. \nBoth the Fed dot plots and market expectations indicate \nthree hikes in 2017, lifting the Fed funds rate to between \n1.25 and 1.5%.\nOther major advanced economies are also expected to close \noutput gaps over the next few years. Despite lower potential \ngrowth, the degree of slack in the euro area and Japan is \napproximately twice that in the US, reflecting a longer period of \nunderperformance.3 In the euro area, significant progress has \nbeen made in lowering the unemployment rate, with the region \nas a whole having added 4.6 million jobs since the first half of \n2013. Yet wage growth remains muted, registering a nominal \nincrease of 1.3% in the third quarter of 2016 versus almost 3.0% \npre-crisis. The number of hours worked has also not recovered \nto pre-crisis levels. Forecasts indicate growth of 1.6% in both \n2017 and 2018, which should aid the labour market recovery. \nIn Japan, economic growth surprised on the upside in 2016, \nsupported by fiscal stimulus and stronger exports. Over the \nnext two years, Japan is expected to benefit from stronger \nglobal demand and a relatively depreciated currency, as well \nas continued fiscal stimulus. These should permit growth rates \nof around 1%, slightly above that economy’s potential.\nEmerging market economies\nEmerging markets faced difficult conditions during 2016. Over \nthe first half of the year, the BRICS4 weighted PMI averaged \n49.1, with only India’s manufacturing sector still expanding. \nProspects have since improved, with the PMI moving into \npositive territory, reaching 51.1 in February 2017. In line with this \nupward trend, the International Monetary Fund (IMF) expects \ngrowth in emerging markets to reach 4.8% by 2018, from \n4.1% in 2016.\nRecessions in several major regional players are expected \nto end soon. Brazilian output is projected to start growing \nagain towards the end of 2017, having contracted throughout \n2015 and 2016. Russia’s economy is likely to return to growth \nsooner, possibly from the beginning of 2017, having also shrunk \nover the past two years. Nigeria slipped into recession at the \nstart of 2016 and should similarly be growing again sometime \nthis year. Better performance in these economies will be \nreplicated in their respective regions. Both Latin America and \nthe Commonwealth of Independent States are forecast to see \na return to growth in 2017, with the pace of expansion rising \nover 2.0% by 2019. Sub-Saharan Africa is also expected to \naccelerate from current lows, with growth picking up from \n1.6% in 2016 to slightly over 4.0% by 2019.\nThe direction of growth in emerging Asia depends chiefly on \nprospects for the two regional giants, China and India. \n3\t\nThere is disagreement on the size of the Japanese output gap. The \nInternational Monetary Fund estimate the output gap at -1.7% of potential \nGDP in 2016, while the Bank of Japan and the Cabinet Office predict an \noutput gap of -0.3% and -0.5% respectively in 2016Q3. In contrast, the \nOrganisation for Economic Co-operation and Development estimates the \noutput gap at 0.5% in 2016. On balance, estimates suggest the output \ngap is negative.\t\n4\t\nBRICS refers to Brazil, Russia, India, China and South Africa.\t\nIndices\n2008\n2010\n2012\n2014\n2016\nManufacturing purchasing managers’ indices\n \nG3 (GDP PPP weighted)\n \nJPMorgan global manufacturing PMI\nSources: IMF, JPMorgan and SARB\n \nBRICS (GDP PPP weighted)\n30\n35\n40\n45\n50\n55\n60\n7\nMonetary Policy Review April 2017\nRebalancing in China should cause growth to slow towards \n6.0% from 6.7% in 2016. India, by contrast, is expected to retain \nits title as the fastest growing major economy, achieving growth \nrates closer to 8.0% over the next two years. The net effect of \nthese trends is that emerging Asian growth decelerates slightly \nfrom 6.5% in 2016 to approximately 6.3% over the next two \nyears, a rate sufficient for emerging Asia to remain the world’s \nfastest growing region.\nImproved inflation dynamics\nInflation dynamics are improving across most of the world’s \neconomies. In many cases, chiefly advanced economies, \nthis entails reflation following an extended period of price \nstagnation. For a range of emerging markets, by contrast, \ninflation is subsiding towards more desirable levels.\nThe reflation trend reflects higher energy and food costs \nalongside improving growth. Producer prices for final demand \ngoods in the US moved from deflation for the better part of \n2015 to growth of 2.2% in February 2017. In China and the \neuro area, where producer price deflation dates back to \n2012 and 2013 respectively, price changes have also turned \npositive. Rising producer prices have already translated into \nhigher consumer prices in most advanced economies, moving \ninflation closer to central bank targets. Advanced economy \nconsumer prices have risen from an average of 0.3% in 2015 \nto 1.5% in December 2016. The IMF projects that inflation in \nadvanced economies will reach 1.9% by 2018.\nIn some major economies, particularly the euro area and \nJapan, stronger headline inflation has not been accompanied \nby a rise in underlying inflation. In the euro area, core inflation \n(which excludes food and energy) was 0.9% in February 2017, \nretreating from a peak of 1.1% in October 2015. There is, \nhowever, a wide dispersion in inflation rates, with Austria and \nBelgium at 1.6%, the Netherlands and Germany at 1.3%, France \nand Ireland at 0.2% and Greece at -0.4%. In Japan, consumer \ninflation less fresh food remains in deflation, contracting by \n0.2% on an annual basis in December 2016. Market indicators, \nhowever, have started to show rising inflation expectations in \nthese economies, a necessary condition for a pick-up in core \ninflation. The five-year, five-year forward inflation expectations \nin the euro area and Japan have both risen by over 30 basis \npoints since September 2016. Signs of inflation in the euro \narea, particularly in Germany, suggest that the onset of policy \nnormalisation may come sooner than currently anticipated.\nIn other major economies such as the US and China, by contrast, \ncore and headline are more closely connected. Core Personal \nConsumption Expenditure (PCE) inflation in the US rose to \n1.9% in February 2017 from a low of 1.4% in July 2015. Rising \ncore inflation is underpinned by accelerating average hourly \nearnings. Inflation expectations – again as measured by five-\nyear, five-year forward expectations – have made comparable \ngains, rising to 2.4%. Survey-based measures of expectations \nPer cent\n2010\n2012\n2014\n2016\nProducer price inflation\n \nUS\n \nChina\nSource: Haver Analytics\n \nJapan\n \nUK\n-6\n-4\n-2\n0\n2\n4\n6\n8\n \nEuro area\nPer cent\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n2017\nFive-year, five-year forward inflation swap rate\n \nEuro area\nSource: Bloomberg\n \nJapan\n \nUS\n-1.0\n-0.5\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n3.0\n3.5\n4.0\nMonetary Policy Review April 2017\n8\nhave not followed this upward trend, but nonetheless remain \nabove 2%. In China, core inflation registered 1.8% in February \n2017 from a low of 1.3% in February 2016. Higher inflation \nrepresents rising producer prices and improving near-term \neconomic conditions due to policy stimulus.\nEmerging markets as a whole are achieving disinflation despite \nrising commodity prices. Average inflation has fallen from a \nrecent peak of 6.8% in January 2016 to 4.2% in December, \nand IMF forecasts suggest it will stabilise close to these levels \n(4.5% in 2017 and 4.4% in 2018). Disinflation has been driven \npredominantly by policy adjustments and currency rebounds, as \nwell as fading supply shocks. Russia and Brazil are prominent \nexamples of these phenomena. In Brazil, headline inflation has \nfallen from a peak of 10.7% in January 2016 to 4.8% in February \n2017. In Russia, inflation has slowed from 16.9% in March 2015 \nto 4.6% in February 2017. Following substantial tightening during \nthe inflation upsurge (with the policy rate up by 700 basis points \nin Brazil, and 1 150 in Russia) both these countries now have \nspace to ease, leading to rate cuts totalling 200 basis points in \nBrazil and 725 basis points in Russia to date.\nHeightened policy uncertainty\nThis relatively optimistic assessment of the global economic \noutlook offered in this section confronts risks on at least three \nfronts. First, the election of Donald Trump in the US has opened \nspace for abrupt and wide-ranging policy changes. In its first \nmonths in office, the new administration has attempted travel \nbans, withdrawn from the Trans-Pacific Partnership (TPP)5 and \nchallenged the fairness of exchange rate policies in Japan, the \neuro area and China. These moves signal a more protectionist \napproach to trade, potentially weakening an important driver \nof global growth.\nThe new leadership in Washington has also proposed \nsubstantial investments in infrastructure as well as tax cuts \nfor individuals and companies. The initial market responses \nwere positive, although implementation risks have recently \ndiluted this enthusiasm. Unlike trade restrictions, infrastructure \ninvestment and tax cuts should improve potential growth in the \nUS and boost consumer expenditure, provided these policies \ndo not seriously compromise debt sustainability. President \nTrump has also ordered a review of the Dodd-Frank Act, \nthe centrepiece of post-crisis financial reform, arguing that it \nimposes excessive burdens on companies and stifles lending. \nLooser financial regulation may well yield short term benefits, \nbut these gains should be set against the risks of large and \npersistent costs from financial crises.\n5\t\nTPP is a multilateral trade deal between 12 countries including the US, \nCanada, Mexico, Chile, Peru, Malaysia, Japan, Vietnam, Singapore, \nAustralia, New Zealand and Brunei. It was aimed at lowering tariffs and \nimproving economic relationships between member nations.\nIndex\n2008\n2010\n2012\n2014\n2016\nGlobal economic policy uncertainty\nSource: Baker, Bloom and Davis (2016)\n50\n100\n150\n200\n250\n300\n9\nMonetary Policy Review April 2017\nThe second front is the debt overhang in China. Policymakers \nhave chosen to maintain economic stability and higher growth \nat the cost of worsening imbalances. Total social financing, a \nbroad measure of credit in the economy, has risen to 213% \nof GDP in 2016 from close to 100% in 2010. Policymakers \nhave also used close to US$1 trillion of foreign reserves \nsince mid-2014 to stabilise the exchange rate. The near-term \nconsequences of policy stimulus are rising commodity prices \nto the benefit of the relevant exporting countries. However, the \nlonger-term risks to growth are rising.\nThe third front is in Europe, where the ‘European project’ of \ncloser political and economic union remains in crisis. The \nUnited Kingdom (UK) is in the process of negotiating the terms \nof its exit from the European Union (EU) (so called Brexit). \nThe short term consequences have been relatively benign \nto date, with consumer confidence and a more competitive \nexchange rate sustaining demand in Britain, although sterling \ndepreciation is expected to produce a period of above-\ntarget inflation. The longer term consequences are likely to \nbe less favourable, particularly if investment suffers as firms \nrelocate to more attractive jurisdictions. For the remaining \nparts of the EU, the economic spillovers from Brexit have \nbeen minimal. The more serious implications may take the \nform of demonstration effects, bolstering nationalist, populist \nfigures in other European countries. In this vein, the upcoming \nFrench presidential elections might conceivably install an anti-\neuro, anti-Brussels leader in Paris. Italy is another prominent \ncandidate for disruption, given the prospect of early elections \nin the context of continued economic underperformance and \na troubled banking sector. Finally, Greece’s ongoing recession \nand large debt burden is a persistent source of crisis summits \nand policy dissension.\nConclusion\nThe global economy started 2017 on a stronger footing. \nGrowth prospects in several major economies are improving \nand inflation is generally moving back towards target levels. \nAnimal spirits, which have been dormant since the global \nfinancial crisis, appear to have revived. It is difficult to judge \nwhether the new optimism is justified by fundamentals and \nrisks. The policy direction in the US is uncertain but outcomes \nacross issues such as trade and financial regulation may well \nprove negative for the global economy over the longer term. \nPolicy stimulus in China has stabilised growth and benefitted \ncommodity exporting economies, but at the cost of rapid \nand potentially unproductive debt growth. There are multiple \nflashpoints in Europe, including Brexit, French elections, the \nItalian banking system and Greek debt. The forecast anticipates \na steady improvement in global growth over the medium term, \neliminating negative output gaps, but the risks to this forecast \nare skewed to the downside.\nIndex\nIndices: January 2012 = 100\n2012\n2014\n2013\n2015\n2016\n2017\nChinese economy and commodity prices\n \nIron ore (left-hand scale)\n \nCoal (left-hand scale)\n \nChinese purchasing managers index\nSource: Bloomberg\n48\n49\n50\n51\n52\n53\n54\n0\n20\n40\n60\n80\n100\n120\nMonetary Policy Review April 2017\n10\nOverview of financial markets\nGlobal financial conditions have been exceptionally calm lately. \nDespite an unusually high degree of policy uncertainty, financial \nmarkets have benefitted from expectations of more corporate \nfriendly US policies and economic stabilisation in China. \nThese global conditions, combined with signs of domestic \nstabilisation, have supported prices of South African assets.\nThe changing relationship between \nFed tightening and risk assets\nAs highlighted in the world economy section of this MPR, \nUS economic conditions have made the Fed more confident of \nreaching its dual goals of full employment and price stability. \nConsequently, the Fed has raised rates twice in four months, \nwith both markets and the Fed’s own projections indicating two \nmore increases this year. Coupled with proposals by the newly \nelected US administration for sizable tax cuts and a boost \nto infrastructure spending, this has led to an upward shift of \nthe US yield curve. From around 1.6% in early October 2016, \nthe US 10-year yield rose to a high of 2.6% on 15 December, \nbefore easing back in recent months.\nIn contrast with what happened during the ‘taper tantrum’ of \n2013, the prospect of an upward adjustment in what is \nessentially the world’s risk free rate is not proving detrimental \nfor riskier assets. For example, since the beginning of October \n2016, the S&P 500 index of US equities has risen by close to \n10%, while spreads of BBB and A-rated corporate debt over \nUS Treasuries have narrowed by 10–15 basis points.\nThe pattern has been the same outside the US. Global equities \nhave rallied, with the MSCI World Index gaining 7% and the \nMSCI Emerging Market Index up 3%. Long-term bond yields \nin Germany, Japan and the UK have risen by only 10–40 basis \npoints (although German yields benefitted from a perceived \nrise in political risk within the single-currency bloc). Meanwhile, \nemerging market debt has remained attractive to investors: \nJP Morgan’s Emerging Markets Bond Index Plus (EMBI+) spread \nhas narrowed by about 70 basis points from early November \nhighs, reversing an earlier sell-off; its emerging local currency \nmarket index (ELMI) has mirrored these developments.6\nIn foreign exchange markets, the dollar has appreciated \nfurther. However, the additional gains in recent months have \nbeen relatively limited. Whereas the Fed’s broad dollar index is \nnow 22% higher than it was at the start of 2014, it is only 1.1% \nhigher than it was at the start of November 2016. In turn, the \nrelatively moderate appreciation of the US dollar has enabled \nemerging market currencies to recoup, on average, all of their \nlosses incurred in the immediate aftermath of the US election.\nAs of late March, the JPMorgan Emerging Market Currency \nIndex was slightly (0.5%) above its 1 November 2016 level.\n6\t\nThe JPMorgan EMBI+ includes US dollar denominated debt (bonds or \nloans), issued by emerging market sovereigns and tracks total returns for \nactively traded external debt instruments in these markets.\nIndex\n2010\n2012\n2014\n2016\nUS volatility and policy uncertainty (news based)\n \nVIX volatility index (left-hand scale)\n \nPolicy uncertainty index (news based) \nSources: Bloomberg and Economic Policy Uncertainty\n50\n100\n150\n200\n250\n300\n10\n15\n20\n25\n30\n35\n40\n45\nIndex\nIndex\nIndex\nOct\nNov\n2016\n2017\nDec\nJan\nFeb\nMar\nMSCI emerging market and world equity indices\n \nMSCI EM Index (left-hand scale)\n \nMSCI World Index\nSource: Bloomberg\n1 650\n1 675\n1 700\n1 725\n1 750\n1 775\n1 800\n1 825\n1 850\n1 875\n1 900\n825\n840\n855\n870\n885\n900\n915\n930\n945\n960\n975\nYield to maturity (per cent)\nYears to maturity\nTreasury nominal coupon yield curves\n \nOctober 2016\nSource: Bloomberg\n \nDecember 2016\n \nMarch 2017\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n3.0\n3.5\n30\n10\n5\n3\n2\n1\n11\nMonetary Policy Review April 2017\nEconomic fundamentals help explain this decoupling of rate \nexpectations and risk assets. Whereas in 2013 Fed tightening \ncould have been interpreted as premature, it is now more clearly \njustified by an improved outlook for growth and inflation – with \na range of commentators even suggesting the Fed has fallen \nbehind the curve. Furthermore, the macroeconomic imbalances \nwhich distinguished vulnerable emerging markets during the \n‘taper tantrum’ have in most cases moderated. Finally, the \nadverse scenarios which preoccupied financial markets earlier \nin 2016 have not materialised. In particular, there has been no \naggressive devaluation of the Chinese renminbi. Furthermore, the \nUK decision to leave the EU has not yet produced the negative \nmacroeconomic consequences which many observers feared, \nalthough the terms of Brexit remain unknown. The conclusion \nis that normalisation of US monetary policy is a more benign \nprospect now than it was four years ago.\nMixed fortunes for South African assets\nLocal financial market developments have not followed a \nconsistent trend. Much of the past year was characterised \nby more positive perceptions of South African assets in the \ncontext of a favourable global environment. By contrast, the \ntrend has recently reversed following the cabinet reshuffle and \nthe subsequent credit ratings downgrade by S&P.\nThe South African rand initially out-performed most of its \nemerging market peers. From January 2016 to mid-March \n2017, it appreciated by 21.7% against the US dollar and 22.4% \non a trade-weighted basis. However, the currency resumed \nits depreciating trend late in March as speculation mounted \nthat the Finance Minister would be replaced. The rand has \nsince become the worst performing currency compared to its \nemerging market peers.\nSouth African bonds have echoed the rand’s fortunes, starting \nwith a comparatively strong performance but finishing relatively \nweakly. The yield on the benchmark R186 bond, maturing in \n2026, stood at 8.5% at the start of March. By early April it \nhad breached the 9.0% level, while the spread over its US \nequivalent had widened by 67 basis points.\nThe initial gains for South African assets reflected a more \npositive turn in the South Africa investment narrative. This \nwas based on a range of factors, including a narrower current \naccount deficit, evidence of an upward turn in the economic \ncycle and moderating inflation which supported real yields. \nFurthermore, the 2017 Budget confirmed that consolidation \nplans were ongoing despite the challenges of disappointing \nrevenue growth. However, some of the positive impact \nfrom these earlier developments was eroded by the policy \nuncertainty introduced by the reshuffle.\nIn contrast to both local bonds and the rand, South African \nequities have tended to stagnate throughout the past year, \nunder-performing both global and emerging-market equity \nindices. As of 3 April, the JSE Limited (JSE) All-Share Index \n(Alsi) was 1.2% lower than on 1 October 2016, with a brief New \nYear rally having proved short-lived. In part, the appreciation \nof the rand has weighed on the equity market, in particular \nBasis points\nSouth Africa five-year CDS\nJ\nM\nM\nJ\nS\nN\nJ\nM\nM\nJ\nS\nN\nJ\nM\n2015\n2016\n2017\nSouth Africa credit default swap\nSource: Bloomberg\n150\n200\n250\n300\n350\n400\nIndices: 22 May 2013 = 100\nEMBI+ spread and US corporate 10-year spread\n \nUS corporate 10-year spread\n \nEMBI+ sovereign spread\nSource: Bloomberg\n60\n80\n100\n120\n140\n160\n180\n200\n2013\n2014\n2015\n2016\n2017\nMonetary Policy Review April 2017\n12\nshares of companies such as mining firms which generate \na large portion of profits overseas and which investors treat \nas rand hedges. At the same time, investigations into alleged \ncolluding practices of banks in their foreign exchange trading \nbusinesses have slightly depressed banking stocks.\nShort term interest rates\nExchange rate developments have helped shape expectations \nof future domestic policy rate movements. As of mid-March, \nBloomberg surveys of private sector economists indicated \ninterest rate cuts, with the average expectation for the repo \nrate down by 25 basis points to 6.75% for the first quarter of \n2018. Similarly, market indicators have until recently pointed to \nlower rates. By mid-March forward rate agreements were fully \npricing in at least one repo rate reduction in 2018. Towards the \nend of March, however, these measures moved back towards \nno rate changes, in line with renewed rand depreciation, and \nby early April had shifted to indicating approximately one more \nrepo rate increase within the next 12 months.\nSignificant risks threaten financial \nmarket improvement\nBoth domestic and external risk factors could prompt a \ncorrection in financial markets in coming quarters. In the US, \nupside inflation surprises could force a faster pace of interest \nrate hikes – especially if the new administration’s proposed \ntax cuts provide a sizable boost to demand in an environment \nof reduced slack. This could restore the link between Fed \ntightening and weakness of riskier assets.\nAt the same time, overheating in segments of China’s economy \n– especially the property market – may force authorities to \ntighten policy more aggressively, with potentially negative \nconsequences for global market sentiment and commodity \nprices. Finally, within European markets, elections in France and \nGermany in 2017 may show a further rise in anti-EU sentiment. \nWhile opinion polls currently do not point to the formation of \ngovernments that support abandoning the euro, this risk could \nat some point prove highly disruptive to the orderly functioning \nof global financial markets.\nOn the domestic front, the biggest risk now stems from additional \nrating downgrades, especially as S&P kept a negative outlook \non its sovereign ratings. While local currency ratings remain \ninvestment grade at present, further downgrades (by one notch \nfrom S&P and two notches from Moody’s) would see South \nAfrica excluded from the Citigroup World Government Bond \nIndex (WGBI).7 This would require some foreign investors to \nsell their domestic bonds. Rising uncertainty about the future \ndirection of economic policy could prompt capital outflows in \nanticipation of such downgrades. These outflows would, in \nturn, raise borrowing costs and place the rand under renewed \ndownward pressure, potentially accelerating inflation.\n7\t\nFitch ratings are not used for WGBI inclusion.\nIndices: 1 September 2016 = 100\nSep\nOct\n2016\nNov\nDec\n2017\nJan\nFeb\nMar\nJSE All-Share, mining and banking indices\n \nJSE Alsi\n \nJSE Alsi (Banking)\nSources: Bloomberg and SARB\n \nJSE Alsi (Mining)\n90\n95\n100\n105\n110\n115\n120\n125\nPer cent\n2014\n2015\n2016\n2017\n2018\nRepo rate expectations\n \nRepo rate\nSources: Bloomberg and SARB\n \nBloomberg consensus forecast\n5.0\n5.5\n6.0\n6.5\n7.0\n7.5\nForward rate spread\nRand per US$\nForward rate spread and exchange rate of the rand\n \nRand against the US dollar (left-hand scale)\n \nFRA spread (12*15 and 3*6)\nSource: Bloomberg\n-0.6\n-0.3\n0.0\n0.3\n0.6\n0.9\n1.2\n1.5\n1.8\n4\n6\n8\n10\n12\n14\n16\n18\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n2017\n13\nMonetary Policy Review April 2017\nOverview of the real economy\nSouth African GDP growth has eased steadily over the past \nfive years. It is likely 2016 was the low point, with output \nexpanding just 0.3%, compared to 1.3% in 2015 and forecasts \nof 1.2% in 2017, 1.7% in 2018 and 2.0% in 2019. The projected \nimprovement in growth over the medium term stems from a \nmild recovery in investment as well as improved household \nconsumption, supported by smaller contributions from net \nexports. Potential growth, the rate of expansion possible \nwithout accelerating inflation, remains below 2.0% over the \nmedium term, well below historical averages.\nExpenditure components* of real gross domestic product\nAnnual percentage change\nActual\nForecast\nComponents\n2015\n2016\n2017\n2018\n2019\nHousehold consumption.....\n1.7\n0.8\n1.4\n1.3\n1.8\n1.0\n0.5\n0.9\n0.8\n1.1\nGovernment consumption...\n0.5\n2.0\n1.0\n1.0\n1.0\n0.1\n0.4\n0.2\n0.2\n0.2\nInvestment..........................\n2.3\n-3.9\n0.2\n1.6\n2.0\n0.5\n-0.8\n0.0\n0.3\n0.4\nOther..................................\n0.2\n-1.0\n0.5\n0.0\n0.0\nExports...............................\n3.9\n-0.1\n0.2\n3.8\n3.8\nImports...............................\n5.4\n-3.7\n1.6\n2.7\n2.8\nNet exports.........................\n-0.5\n1.1\n-0.4\n0.3\n0.3\nGDP....................................\n1.3\n0.3\n1.2\n1.7\n2.0\n*\n\tPercentage points contributions of expenditure components to growth in real\nGDP are in italics\nSources: SARB and Stats SA\nLow growth in context\nAlthough recent fluctuations in South Africa’s growth rate have \nstemmed from exogenous shocks, including drought, the \nunderlying trend remains very subdued. As noted in previous \nMPRs, growth close to 1% compares unfavourably with longer \nterm South African growth averages of around 3%. It is also \ndistant from the National Development Plan aspiration of over 5%.\nInternational comparisons provide another perspective on \nSouth Africa’s weak growth. Although the pace of world \neconomic expansion slowed in the aftermath of the global \nfinancial crisis, South Africa has decelerated more abruptly. \nIn the years preceding the crisis, South Africa ranked slightly \nabove the global median for growth. In both 2004 and 2005, for \ninstance, it was growing more rapidly than 54% of countries. \nThis ranking has slipped steadily after the crisis, with South \nAfrica falling into the bottom third of countries by 2014; in \n2016 South Africa is projected to have outgrown just 15% of \ncountries. Global growth is anticipated to accelerate in 2017, \nso South Africa’s own growth acceleration does not improve \nits ranking.8 \n8\t\n2016 and 2017 rankings are based on the SARB growth forecasts. The \nIMF’s forecasts for South Africa are slightly lower.\nPercentage points\nAnnual percentage change \n2011 2012 2013 2014 2015 2016 2017 2018 2019\nGDP and its expenditure contributors\nGovernment consumption\nOther\nHousehold consumption\nSources: SARB and Stats SA\nNet exports\nInvestment\nGDP (left-hand scale)\nForecast\n-3\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\n-3\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\nPercentage\nSouth Africa percentage ranking and share of\ncountries growing faster/slower than SA \nShare of countries growing faster than South Africa \nShare of countries growing slower than South Africa \nSouth Africa (percentage rank)\nSources: IMF, SARB and Stats SA\n0\n10\n20\n30\n40\n50\n60\n70\n80\n90\n100\n2017\n2015\n2012\n2011\n2009\n2007\n2005\n15\n53\nForecast\nPercentage change\nReal GDP\nCommodity countries\nWorld\nSources: IMF, SARB and Stats SA\n2017\n2015\n2013\n2011\n2009\n2007\n2005\n-2\n0\n2\n4\n6\n8\n10\nSouth Africa\nMonetary Policy Review April 2017\n14\nThere are a range of factors underpinning South Africa’s post-\ncrisis growth slowdown. Some are relatively deep-rooted, \nsuch as household debt overhangs and declining commodity \nprices. Others have intervened more unexpectedly, including \ndrought and shocks to confidence. The scale of South \nAfrica’s slowdown, both in absolute terms and relative to \nother economies, demonstrates that these challenges have \nbeen both severe and concentrated. It is also becoming \nclearer, however, that the slowdown has helped effect a partial \nrebalancing of the economy. In particular, fiscal consolidation, \nhousehold deleveraging and smaller current account deficits \nprovide a sounder foundation for future growth. Furthermore, \nlower inflation will boost spending power and help moderate \nlong term borrowing costs.\nThe role of the primary sector\nExtremely low growth in 2016 largely reflects underperformance \nin the primary sector, with both agriculture and mining \ncontracting. Absent these shocks, growth in 2016 would \nprobably have been over 1%. In turn, a rebound in the primary \nsector helps explain the growth acceleration anticipated for \n2017. For agriculture, this is a result of rainfall normalising \nfollowing two years of drought across much of the country. The \nagricultural sector (including forestry and fishing) is relatively \nsmall – around 2% of the total economy – but it contracted \nsharply in 2016, falling by 7.8%. Its recovery in 2017 is likely \nto add around 0.3 percentage points directly to total growth \nfor the year. The mining sector is larger than the agricultural \nsector, at around 7.0% of GDP. It shrank by 4.7% in 2016, but is \nexpected to rebound in 2017, growing more than 2%, supported \nby inventory restocking and the uptick in commodity prices. \nIts recovery should directly contribute about 0.2 percentage \npoints to annual growth.\nHousehold consumption\nReal household consumption growth has been mediocre \nin historical perspective, averaging just over 1.0% for the \npast three years, versus 3.4% on average since 1994. It has \nnonetheless outpaced overall GDP growth in recent quarters \nand is expected to do so again in 2017. This is mainly due \nto ongoing real wage gains which are boosting disposable \nincome. Households will also benefit from declining inflation, \nparticularly for food and fuels. Furthermore, wealth effects \nshould become supportive later in the forecast period as asset \nprices recover from a period of stagnation. By contrast, other \nfactors are constraining households. Tax increases announced \nin the 2017 Budget will cut into disposable incomes. \nEmployment is projected to decline until the middle of 2019, \ndue to a difficult environment for job creation without sufficient \noffsetting wage moderation. Finally, debt levels remain quite \nhigh and households are expected to continue deleveraging.\nThe latest data indicate a slight downturn in debt service \ncosts, as a proportion of disposable income, reflecting stable \ninterest rates alongside declining debt burdens. Indeed, debt \nRatio\nRatio\n2006\n2008\n2010\n2012\n2014\n2016\nHousehold debt and debt service costs\n \nHousehold debt to disposable income (left-hand scale)\n \nDebt service cost to disposable income\nSource: SARB\n7\n8\n9\n10\n11\n12\n13\n14\n15\n70\n72\n74\n76\n78\n80\n82\n84\n86\n88\n90\n15\nMonetary Policy Review April 2017\nstocks relative to incomes have now fallen to levels last seen \nin early 2006. This development favours the long term financial \nsecurity of households and should, with time, support stronger \ncredit growth. Over the medium term, however, households \nare unlikely to achieve debt or income levels adequate to drive \nmore rapid economic growth.\nHousehold income levels\nAnnual percentage change\nActual\n SARB forecast\n2015\n2016\n2017\n2018\n2019\nReal disposable income..............\n2.5\n1.2\n1.4\n1.2\n1.8\nReal wealth.................................\n1.6\n-0.4\n0.7\n1.7\n1.8\nEmployment................................\n0.0\n-0.2 \n-0.8\n-0.4\n0.1\nReal household consumption......\n1.7\n0.8\n1.4\n1.3\n1.8\n Source: SARB\nInvestment\nInvestment was the worst performing component of GDP in \n2016 – contracting by 3.9% over the year – and is forecast to lag \nagain in 2017, growing by just 0.2%. It is expected to rebound \nin 2018 and 2019, becoming the fastest growing portion of \nthe economy.\nThe ongoing investment slump has two components. The first \nis weak private sector investment. This is broadly explained \nby a collapse in business confidence, which has been \nsubdued throughout the post crisis period but deteriorated \nespecially markedly in recent years. During this period, the \nelectricity constraint became binding with the advent of load \nshedding. Business sentiment was further undermined by the \npersistent threat of a sovereign credit ratings downgrade to \nbelow investment grade, threatening both higher long term \nborrowing costs and the reputational burden of ‘junk status’. \nFinally, confidence suffered from acute political shocks, also \nvisible in indicators such as credit default swaps and survey-\nbased indicators of policy uncertainty. The forecast implies a \nrecovery in confidence which strengthens private investment, \ngenerating growth of 1.1% in 2018 and 1.4% in 2019. But that \nrecovery is far from assured.\nThe second component of the recent investment slump is an \nunexpected contraction in public-sector investment. This was \nmainly driven by state-owned companies (SOCs) (of which \nEskom and Transnet account for about 80%) which continue \nto underspend and delay investment plans. For instance, in \n2015/16 SOCs spent R20.9 billion less than what was expected \nat the time of the 2015 Budget. However, the most recent \nestimates indicate that there will be a return to growth in SOC \ninvestment spending in nominal terms. Unfortunately, a portion \nof higher spending will not translate into real gains given cost \noverruns in a variety of projects. SOC spending is expected to \nbe slower over the forecast period, relative to recent years, as \ncorporations are at or near the end of major projects (such as \nthe Medupi and Kusile power plants).\nPercentage change over four quarters\nIndex\nForecast\n2001 2003 2005 2007 2009 2011 2013 2015 2017 2019\nBusiness confidence and real fixed investment\n(private business)\n \nRMB/BER Business Confidence Index (left-hand scale)\n \nReal fixed investment by private business\nSources: RMB/BER and SARB \n-30\n-25\n-20\n-15\n-10\n-5\n0\n5\n10\n15\n20\n25\n0\n10\n20\n30\n40\n50\n60\n70\n80\n90\nPercentage of GDP\n2000\n2004\n2002\n2006\n2008\n2010\n2012 2014\n2016\nFixed investment\n \nGeneral government\n \nPrivate business\nSource: SARB\n \nPublic corporations\n \nTotal \n0\n5\n10\n15\n20\n25\nPercentage change \n2000\n2004\n2002\n2006\n2008\n2010\n2012 2014\n2016\nFixed investment growth\n \nGeneral government\n \nPrivate business\nSource: SARB\n \nPublic corporations\n \nTotal \n-25\n-15\n-5\n5\n15\n25\n35\n45\nMonetary Policy Review April 2017\n16\nGeneral government also contributed to the weakness of \npublic investment, registering slightly positive growth in 2016, \nwell below previous levels. This appears to reflect one-off \nfactors, including a base effect from 2015. It is not simply \nexplained by fiscal consolidation because investment budgets \nhave been protected (although at lower levels of government, \nfunds may nonetheless have been diverted into consumption). \nGeneral government investment is expected to pick up in 2017 \nand 2018, leading the overall recovery in public investment.\nInvestment (March 2017 forecast)\nPercentage of GDP\nActual\nSARB forecast\n2014\n2015\n2016\n2017\n2018\n2019\nGeneral government................\n8.7\n13.4\n1.1\n4.0\n3.0\n4.0\nPublic corporations.................\n-0.6\n2.8\n-1.6\n-0.5\n1.5\n2.0\nPrivate business enterprises....\n0.8\n-0.5\n-6.0\n-0.7\n1.1\n1.4\nTotal........................................\n1.7\n2.3\n-3.9\n0.2\n1.6\n2.0\n Source: SARB\nGovernment consumption and \nfiscal dynamics\nPerhaps unexpectedly, government consumption expenditure \nwas the fastest growing component of GDP in 2016, expanding \nby 2.0%, up from just 0.5% in 2015. However, this uptick is \nmostly explained by hiring for the 2016 local government \nelections, and will therefore not be sustained. Accordingly, \ngovernment consumption is projected to moderate over \nthe forecast period, growing at a stable 1.0% between 2017 \nand 2019.\nThese growth rates are lower than they were in the early post-\ncrisis years, owing to the fiscal consolidation programme \nrequired to rein in public debt growth. They nonetheless entail \nsmall positive contributions to overall GDP growth across the \nforecast horizon, given that government spending continues to \nrise in real terms. The implication is that fiscal policy remains \nrelatively supportive of demand. As a result, the main budget \ndeficit is expected to narrow slightly over the medium term \nand a primary surplus is now only expected in 2018/19, one \nyear later than planned in the 2016 Budget. The debt peak is \nnow anticipated at nearly 53% of GDP in 2018/19 – versus, \nfor instance, the 2016 Budget forecast of 51% in 2017/18. \nEstimates of the structural budget balance, which excludes \ncyclical fluctuations in tax revenue and expenditure, suggest \nthe structural deficit is around 3% of GDP.\nPercentage of GDP\n2014/15 2015/16 2016/17 2017/18 2018/19 2019/20\nGross debt \n \nMTBPS 2015\n \nMTBPS 2016 \n \nSource: National Treasury\n \nBudget 2016\n \nBudget 2017\n46\n47\n48\n49\n50\n51\n52\n53\n54\nForecast\nIndices: 2010 = 100\n2008\n2010\n2012\n2014\n2016\n2018\nSouth African terms of trade\n \nNovember 2016 MPC\nSource: SARB \n \nMarch 2017 MPC\n85\n90\n95\n100\n105\n110\nPercentage of GDP\nGovernment balances\n \nMain primary balance – 2017 Budget\n \nMain primary balance – 2016 Budget\n \nMain budget balance – 2017 Budget\n \nMain budget balance – 2016 Budget\nSource: National Treasury\n-5\n-4\n-3\n-2\n-1\n0\n1\n2019/20\n2017/18\n2015/16\n2013/14\n17\nMonetary Policy Review April 2017\nNet exports and the balance \nof payments\nNet exports are expected to subtract from growth in 2017, \nfollowing a relatively strong 2016 performance. They recover \nin 2018 and 2019, contributing approximately 0.3 percentage \npoints to growth in each year. Exports are likely to benefit \nfrom stronger world growth as well as favourable commodity \nprices. However, these factors are offset in the forecast by a \nless depreciated outlook for the exchange rate, which limits \ncompetitiveness, as well as higher imports from increased \ninvestment (a category which tends to be import-intensive).\nCurrent account* (March 2017 forecast)\nPercentage of GDP\nActual\nSARB forecast\n2015\n2016\n2017\n2018\n2019\nCurrent account.............\n-4.4\n-3.3\n-3.2\n-3.9\n-4.0\n-4.3\n-4.0\n-4.2\n-4.4\nTrade and services.........\n-1.1\n0.1\n0.3\n-0.7\n-0.5\n-1.0\n-0.3\n-1.1\n-1.4\nIncome and transfers \naccount..........................\n-3.3\n-3.4\n-3.4\n-3.2\n-3.5\n-3.3\n-3.6\n-3.1\n-2.9\n*\t September 2016 MPC forecasts in italics \nSource: SARB\nThe balance on the current account was previously anticipated \nto reach its narrowest point in the cycle during 2016. However, \ncurrent account narrowing is now projected to continue \ninto 2017, with the deficit reaching -3.2% of GDP this year. \nThereafter the deficit widens somewhat to -3.9% in 2018 and \n-4.0% in 2019.\nThe improvement in the current account outlook is premised on \nmore favourable terms of trade, with the peak occurring in the \nfirst quarter of this year. Prices for base metals and coal have \nbeen very buoyant lately, but these gains are not expected to \npersist over the forecast period as longer term fundamentals \nstart to outweigh the short term momentum in prices. By \ncontrast, precious metals are expected to trend modestly higher \nas investors seek safe haven assets to hedge against policy \nuncertainty and rising global inflation. Meanwhile, oil prices are \nlikely to be roughly stable at current levels. As a result, South \nAfrica’s terms of trade are expected to reach their highest level \nin six years – and their second highest level on record – early in \n2017, before trending moderately lower in 2018 and 2019.\nIn comparative perspective, it is unusual for a country to be \nrunning a current account deficit of 3–4% of GDP with growth \nunder 1%. In South Africa, this is not simply a problem of \nimports staying too high and exports too low. Rather, the \ntrade balance of the current account has adjusted significantly, \nfrom around -2% of GDP in 2013 to 0.1% in 2016. Instead, \nthe persistent deficit on the current account is a consequence \nUS$ per ounce\n2005\n2007\n2009\n2011\n2013\n2015\n2017\n2019\nPrecious metals prices\n \nPlatinum\nSources: Bloomberg and SARB\n \nGold\n400\n600\n800\n1 000\n1 200\n1 400\n1 600\n1 800\n2 000\n2 200\nForecast\nUS$ per metric tonne\n2005\n2007\n2009\n2011\n2013\n2015\n2017\n2019\nIndustrial commodity prices\n \nCoal\nSources: Bloomberg and SARB\n \nIron ore\n20\n40\n60\n80\n100\n120\n140\n160\n180\n200\nForecast\nPercentage points\nPercentage of GDP\n2000\n2004\n2002\n2006\n2008\n2010\n2012\n2014\nForeign debt of South Africa\n \nRand denominated debt\n \nTotal foreign debt (left-hand scale)\nSource: SARB\n \nForeign-currency denominated debt \n0\n5\n10\n15\n20\n25\n30\n35\n40\n45\n50\n0\n5\n10\n15\n20\n25\n30\n35\n40\n45\n50\nMonetary Policy Review April 2017\n18\nof the service, income and current transfers account, which \ntypically registers deficits in excess of 3% of GDP. (The average \nsince 2011 is -3.7% of GDP, with a standard deviation of \n0.4 percentage points.) Although the services component of this \naccount has come into balance – roughly in line with the trade \naccount – current transfers have remained between -0.5% and \n-1.0% of GDP, mostly due to Southern African Customs Union \n(SACU) transfers. Furthermore, net interest payments under \nthe income account have been rising, reflecting the growth in \nSouth Africa’s total foreign debt to around 40% of GDP, and \nnow stand at around 1.4% of GDP. The forecast anticipates \nthat the income and transfer payments deficit will persist \nacross the medium term at a little more than 3% of GDP. As \nusual, the scale of the current account deficit therefore chiefly \nreflects this component, even as swings in the trade account \nexplain most of the variations in the overall current account.\nPotential growth and the output gap\nSince the previous MPR, published in October 2016, potential \ngrowth and the output gap appear to have been broadly \nstable. There have been minor downward revisions of short \nterm potential, to a low of 1.3% for 2016, but the estimate for \n2018 remains 1.5%. The output gap continues to be negative, \nwith most of the accumulated shortfall between potential and \nactual output coming from late 2015 and 2016. The gap is \nexpected to widen slightly in 2017, given growth of 1.2% versus \npotential of 1.4%. It then begins to narrow gradually over the \nfollowing two years, and is almost closed by the end of 2019.\nOutput gaps are unobservable. This makes them difficult \nto quantify, and their interpretation is a perennial source of \ncontroversy. At present, there is little or no evidence that the \neconomy is overheating. Manufacturing capacity utilisation is \nclose to historical averages. Credit growth is subdued, with \nlending to households declining in real terms. Furthermore, \nit is unlikely that potential growth will be revised much lower, \nbelow even the growth rate of the population. Nonetheless, \nthe output gap may be overstated. To the extent that it reflects \nprimary sector weakness – recall that the current output gap \nis almost entirely a legacy of the past year and a half, in which \nthe primary sector underperformed – it may be a poor guide \nfor monetary policy. (Because output in the primary sector is \nstrongly affected by sector specific factors, such as rainfall, \nsome central banks exclude it from their output gap estimates.9) \nFurthermore, the output gap has been consistently wrong in \nreal time, with estimates changing after the fact by as much \nas 4% of potential GDP. In recognition of this problem, the \nSARB’s output gap estimates are reported with error bands \nto convey uncertainty. Research to refine these estimates is \nalso ongoing.\n9\t\nSee for instance Central Bank of Chile, 2015. ‘Potential GDP, the output \ngap and inflation’, Monetary Policy Report p. 35.\nPercentage of GDP\nPercentage points\n2000\n2002\n2004\n2006 2008\n2010\n2012\n2014\n2016\nServices, income and transfer account components\n \nTransfers\n \nOther income\n \nDividends\nSource: SARB\n \nServices\n \nInterest\n \nSIT account (left-hand scale)\n-7\n-6\n-5\n-4\n-3\n-2\n-1\n0\n1\n7\n6\n5\n4\n3\n2\n1\n0\n1\nPercentage of production capacity\n1994\n98 2000\n96\n02\n04\n06\n08 2010 12\n14\n16\nManufacturing production capacity utilisation\n \nDownward phase of the business\nSources: SARB and Stats SA\n \nUtilisation of production capacity of total goods\n \nLong-term average (1971-2016)\n76\n78\n80\n82\n84\n86\n88\nPercentage change\n2003\n2005\n2007\n2009 2011\n2013\n2015\n2017\n2019\nReal GDP, potential GDP and population growth\n \nPopulation\n \nPotential GDP\nSources: SARB and Stats SA\nForecast\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\n \nReal GDP\n19\nMonetary Policy Review April 2017\nConclusion\nOver the forecast period, which stretches to 2019, growth \nis expected to improve slightly from 2016 lows. The largest \nportion of this growth comes from household consumption, \nwith investment and net exports making positive contributions \nin 2018 and 2019. Government consumption is projected to \ngrow marginally in all three forecast years, fiscal consolidation \nnotwithstanding. The economy’s fundamentals are becoming \nless unstable, which helps explain why growth is accelerating \nagain. Growth is nonetheless weak by almost any standard.\nHeadline CPI inflation (per cent)\nThe output gap and inflation\n \nSources: SARB and Stats SA \n-3\n-2\n-1\n0\n1\n2\n3\n4\n5 3\n4\n5\n6\n7\n8\n9\n10\n11\n12\n13\nOutput gap (percentage of potential GDP)\nTrendline\nPass-through to inflation\nThe output gap and pass-through to inflation\n \nNon-linear\nSource: SARB\n \nLinear\n-4\n-2\n0\n2\n4\n6\n-1.0\n-0.5\n0.0\n0.5\n1.0\n1.5\n2.0\nBox 1\t An asymmetric Phillips Curve?\n1\t\nFedderke, J and Liu, Y. 2016. ‘Inflation in South Africa: an assessment of \nalternative inflation models’. SARB Working Paper 16(5).\n2\t\nKabundi, A, Schaling, E and Some, M. 2016. ‘Estimating a time-varying \nPhillips Curve for South Africa’. SARB Working Paper 16(5).\nThe Phillips Curve describes the relationship between inflation and \nsome measure of economic slack (originally unemployment, but often \nthe output gap). It is both one of the most foundational and most \ncontentious concepts in modern economics. In its Keynesian heyday, \nit was interpreted as a trade-off. Policymakers were advised to \nchoose their preferred mix of the two variables, with more inflation \nproviding less unemployment and vice versa. The stagflationary \nexperiences of the 1970s, however, showed that rising inflation and \nrising unemployment could go together. Meanwhile, the theoretical \nunderpinnings of the Phillips Curve were weakened by new arguments \nthat the trade-off should be temporary and unstable. Over time, price \nand wage setters would incorporate expectations of rising inflation in \ntheir demands. Prices would then rise with no change in output.\nThe literature on the South African Phillips Curve is simultaneously \nextensive and inconclusive. Fedderke and Liu (2016) point out that for \nall the interest in the subject, the relationship is hard to identify \nempirically.1 There are also better predictors of inflation than the \noutput gap, especially wages. However, the relationship must exist in \nsome form if interest rate changes are to raise or lower demand and \ntherefore affect inflation. The problem is describing the relationship \naccurately. Kabundi, Schaling and Some (2016) have provided one \nimportant contribution by showing that the Phillips Curve in South \nAfrica is time-varying.2 The relationship was quite weak in the 1990s, \nstronger in the 2000s, and weaker again after the global financial \ncrisis. More recent work provides a complementary insight: \nthe Phillips Curve in South Africa may be non-linear, with a much \nstronger relationship when the economy is overheating than when it is \nunderperforming.\nThis asymmetric Philips Curve emerges from inflation data which have \nbeen econometrically corrected for supply shocks (which would affect \nprices independent of demand). Inflation responds strongly when the \noutput gap is positive, but less so when demand is weak and the \noutput gap is negative.\nMonetary Policy Review April 2017\n20\nPercentage points\nPer cent\n2000 2002 2004 2006 2008 2010 2012 2014 2016 2018\nDirect impact of output gap on inflation based on\nPhillips Curve specification\n \nNon-linear\nSources: SARB and Stats SA\n \nLinear\n \nHeadline CPI inflation\n-1.0\n-0.5\n0.0\n0.5\n1.0\n1.5\n2.0\n0\n2\n4\n6\n8\n10\n12\n14\nBy ignoring this distinction, forecasts will tend to under-predict \ninflation when the economy is operating above potential. Where \ndemand is already weak, forecasts will also underestimate the \npolicy adjustments required to reduce inflation. This last point \npresents a difficult policy problem, because it implies a worse \ndisinflation/output trade-off. In such circumstances, policymakers \nmay prefer to rely more heavily on other transmission mechanisms, \nespecially communication, to achieve their inflation targets. \nThis does, however, require that policymakers have credibility, \nmeaning they should be seen as willing and able to meet their \ntargets over time.\n21\nMonetary Policy Review April 2017\nInflation developments \nand outlook\nHeadline inflation is currently outside the 3-6% target range, \nbut is expected to moderate to 5.4% in 2018 and 5.5% in 2019. \nFood and oil price shocks provided the nudge to inflation \nwhich pushed it over 6%. Underlying inflation, however, has \nbeen elevated, meaning even relatively small shocks would \nhave been sufficient to push inflation above the target range. \nCore inflation is expected to decline from its peak in December \n2016, benefitting from the more appreciated level of the \nexchange rate. Services inflation nonetheless remains sticky \naround 6%, in line with inflation expectations, which prevents \ncore from falling more markedly and keeps headline inflation in \nthe upper portion of the target range.\nFood prices\nFood and non-alcoholic beverages (NAB) inflation averaged \n10.6% in 2016, versus a post-crisis average of 6.8%, contributing \n1.6 percentage points to headline inflation. The peak came in \nthe final quarter of 2016, with prices rising 11.7% (slightly below \nthe 12.3% forecast published in the October 2016 MPR). Food \nand NAB inflation is expected to average 7.4% this year, adding \n1.3 percentage points to headline inflation (although this would \nhave been 1.1 percentage points with the previous consumer \nprice index weights), followed by 5.2% in 2018 and 5.5% \nin 2019.\nWeather conditions have improved across much of the \ncountry. February was an exceptional rainfall month, with \nSouth African dams regaining two years of losses in just a few \nweeks. Early indications from government’s Crop Estimates \nCommittee suggests that the maize harvest will be 14.3 million \ntons in 2017, back near the record levels achieved in 2014 \nand about double the 2016 harvest. The significant gap that \nopened up between white and yellow maize prices from early \n2015 has disappeared. Maize spot and futures prices have \nboth declined, with futures prices below current spot prices \nand only rising again from later in the year. Wheat production \nis also responding positively, rising to a five-year high. Lower \ngrain prices will benefit the bread and cereals component of \nfood and NAB inflation. Combined with the high base created \nin 2016, inflation in this category will likely moderate to 1.1% \nby the final quarter of 2017, before picking up to 4.8% in 2018.\nWhile the large contributors to 2016 food inflation (fruit and \nvegetables, and bread and cereals) moderate throughout 2017, \nthese disinflationary effects will be partially offset by a continued \nrise in meat price inflation. Forecasts for this category have \nshifted higher and later. The peak is now expected at 11.4%, \nversus 9.1% in the October MPR, and is likely to be reached in \nthe third quarter rather than at the start of 2017.\nPercentage change over 12 months (both scales)\n2015\n2016\n2017\n2018\nSelected agricultural and producer prices\n-10\n0\n10\n20\n30\n-70\n0\n70\n140\n210\n \nWhite maize\n \nYellow maize\n \nWheat\n \nAgricultural producer prices (left-hand scale)\nSources: SAFEX, SARB and Stats SA\n \nWhite maize futures\n \nYellow maize futures\n \nWheat futures\n \nForecast\nPercentage points\nPercentage change over 12 months\n2010\n2012\n2014\n2016\n2018\nMeat inflation and its drivers\n \nDried, salted or smoked\n \nBeef\n \nMeat (left-hand scale)\nSources: SARB and Stats SA \n \nPork\n \nLamb\n \nPoultry\n-5\n0\n5\n10\n15\n20\n-5\n0\n5\n10\n15\n20\nMonetary Policy Review April 2017\n22\nConsumer food price inflation\nPercentage change over 12 months, previous weights and September 2016 forecast in italics\nActual\nForecast\nActual\nSARB forecast\nWeight\n2003-16\n2016\n2017\n2018\n2016Q3\n2016Q4\n2017Q1\n2017Q2\n2017Q3\n2017Q4\n2018Q1\n2018Q2\n2018Q3\n2018Q4\nFood and non-alcoholic \nbeverages................................. 17.24\n6.9\n10.6\n7.4\n5.2\n11.3\n11.7\n9.7\n7.0\n6.9\n6.0\n5.1\n5.2\n5.3\n5.3\n15.41\n10.8\n6.0\n11.8\n12.3\n8.2\n6.4\n5.5\n4.0\n Bread and cereals................\n3.21\n7.5\n14.6\n5.5\n4.8\n15.9\n16.9\n12.6\n5.8\n2.6\n1.1\n1.9\n4.7\n6.2\n6.3\n3.56\n14.6\n8.5\n15.9\n16.7\n12.7\n8.8\n7.3\n5.7\n Meat.....................................\n5.46\n6.7\n5.8\n10.1\n4.7\n5.6\n6.4\n9.2\n9.8\n11.4\n10.0\n5.0\n4.2\n4.6\n5.1\n4.56\n6.4\n8.5\n6.1\n8.1\n9.2\n9.1\n8.3\n7.6\n Beef.................................\n1.44\n7.6\n8.3\n9.4\n4.9\n8.4\n7.1\n7.6\n7.7\n11.1\n11.3\n6.4\n4.6\n4.1\n4.6\n Poultry..............................\n2.12\n5.9\n3.1\n12.7\n4.5\n1.9\n5.0\n12.1\n12.7\n14.5\n11.4\n4.0\n4.0\n4.7\n5.4\n Vegetables............................\n1.30\n7.1\n16.5\n2.3\n6.9\n15.0\n11.9\n1.1\n-1.1\n4.1\n5.2\n6.8\n7.0\n7.9\n6.0\n1.61\n16.3\n2.7\n15.1\n11.1\n1.5\n-0.4\n5.9\n3.9\nSources: SARB and Stats SA\nHerd rebuilding has been singled out as a key driver of rising \nmeat prices, and beef inflation is indeed likely to sustain \nmeat price inflation over the forecast period. In the near term, \nhowever, poultry sector dynamics have also become important. \nPoultry inflation was unusually low for most of 2016, chiefly \ndue to competition from imports. Yet it began to accelerate \nlate in the year, reaching 12.4% in February 2017, from 1.7% in \nSeptember 2016. There are two factors underlying this shift. The \nfirst is an outbreak of avian influenza in Europe, which has cut \noff supply from seven of the 10 countries which export poultry \nproducts to South Africa. The second and more significant is \nchanges to brining regulations imposed by the Department of \nAgriculture, Forestry and Fisheries in October 2016. The new \nrules reduce the amount of salt water that may be injected into \nfrozen chicken. Although this could be interpreted as a quality \nimprovement rather than a price increase, it is nonetheless \nmeasured as inflation in the CPI.10\nWorld food prices, denominated in US dollars, have begun to \nrise again following an extended period of deflation. The change \nin trend is broad-based, with positive price changes in all five \nof the broad food categories. In part, this reversal is explained \nby higher oil prices which have raised producer input costs. \nSector-specific conditions are also contributing; for instance, the \nworld’s largest exporter of sugar, Brazil, has experienced poor \ncrops. Although world food price projections have been marked \nup in the latest forecast, price pressures are expected to remain \nquite weak given substantial inventories of staple commodities, \nincluding many grains, as well as relatively low input costs.\n10\t Under the new regulations, a given portion of chicken will contain less \nsaltwater but may also cost more per gram. The change in the price of the \nportion is treated as inflation, although strictly speaking the consumer is \ngetting more chicken.\nUS$ per barrel\n2015\n2016\n2017\n2018\n2019\nEvolution of Brent crude oil price forecasts\n \nActual\n \nMarch 2016\n \nMarch 2017\nSources: Bloomberg and SARB\n \nMay 2015\n \nSeptember 2016\n30\n35\n40\n45\n50\n55\n60\n65\n70\n75\n23\nMonetary Policy Review April 2017\nBox 2\t Reweighting and rebasing the consumer price \nindex – implications for the forecast\n1\t\nThe intuition here is that when an item with an index value of 200 \nincreases by 5%, that lifts the index 10 points to 210. The same \n5% increase for an item with an index value of 100 adds just 5 points. \nAssuming both items have an equal weight in the CPI, the first item \nwill have twice the impact on headline, compared to the second, in \ncalculating the final inflation outcome. Yet both inflated by the same \n5%. Periodic rebasing keeps such distortions small.\nStatistics South Africa (Stats SA) has recently completed a routine \nreweighting and rebasing of the consumer price index (CPI). This box \ndescribes how these adjustments are likely to affect headline inflation. \nTo quantify the direction and magnitude of the changes, the revised \nweights and bases were applied to an earlier forecast. The results \nsuggest that there is a small net downward shift in overall CPI of \nroughly 0.1 percentage points for both 2017 and 2018. The 2017 \nchanges are mostly explained by reweighting (particularly the lower \nweights of electricity and petrol). By contrast, the 2018 effects are \nalmost entirely due to rebasing.\nReweighting means aligning the CPI basket with the latest consumer \nexpenditure patterns (in this case, based on data from the 2014/15 \nLiving Conditions Survey). This entails adjusting the shares of existing \nitems as well as updating product coverage. For instance, in this latest \nupdate, stamps and DVDs were removed from the index, while instant \nnoodles were added.\nRebasing means adjusting all the indices in the CPI basket to a new \nbase period, in this case making December 2016 equal to 100. This \nis required because different sub-indices increase at a faster (or \nslower) pace than the overall index. As a result, some sub-indices \nmight end up contributing more to headline inflation than would be \njustified by their respective weights.1 These distortions can be \ncontrolled by periodic rebasing to a single starting point.\nAdministered price inflation is lower given changes to electricity and \nfuel. Electricity inflation continues to be relatively high, but whereas \nbetween 2008 and 2012 this increased the share of electricity in \nhousehold expenditure, consumers have now cut back. As a result, \nelectricity’s share has fallen to 3.75%, versus 4.13% in 2012 and \n1.68% in 2008. The forecast is also slightly lowered by a smaller \nweight for fuel, which has fallen from 5.68% in 2012 to 4.58% in 2016.\nFood inflation is raising the forecast, given a larger weight for food as a \nwhole (from 15.4% of the basket to 17.2%) as well as changing weights \nwithin the food category. Meat, which was already experiencing \nrelatively high inflation, now has a larger weight (up by 0.9 percentage \npoints, from 4.6% of the total 2012 basket to 5.5% of the 2016 basket). \nBy contrast, bread and cereals, which have been disinflating, now have \na smaller weight (falling from 3.6% to 3.2% of the total).\nThe weight of services in the basket is 1.2 percentage points higher. \nBoth housing services and recreation and culture have been revised \nup, by 0.66 and 1.07 percentage points respectively. By contrast, \nweights have been reduced for major services categories like medical \nhealth insurance (-0.38%), education (-0.42%), and restaurants and \nhotels (-0.41%). The reweighting effects on the inflation trajectory are \nslightly positive, but these are overwhelmed by rebasing effects. \nThe net result is that underlying inflation is lower by 0.13 and \n0.15 percentage points in 2017 and 2018 respectively.\nPercentage points\nPercentage change over 12 months\n2015\n2016\n2017\n2018\nFood inflation\n \nNew base\n \nFood (December 2012 = 100) (left-hand scale)\n \nFood (new weights, December 2016 = 100) (left-hand scale)\nSources: SARB and Stats SA \n \nNew weights\n-0.1\n0.0\n0.1\n0.2\n0.3\n0.4\n0.5\n0.6\n0.7\n0.8\n0.9\n0\n2\n4\n6\n8\n10\n12\nPercentage points\nPercentage change over 12 months\n2015\n2016\n2017\n2018\nHeadline consumer inflation\n \nNew base\n \nHeadline (December 2012 = 100) (left-hand scale)\n \nHeadline (new weights, December 2016 = 100) (left-hand scale)\nSources: SARB and Stats SA\n \nNew weights\n-0.2\n-0.1\n0.0\n0.1\n0.2\n3.0\n3.5\n4.0\n4.5\n5.0\n5.5\n6.0\n6.5\n7.0\nPercentage points\nPercentage change over 12 months\n2015\n2016\n2017\n2018\nCore inflation inflation\n \nNew base\n \nUnderlying (December 2012 = 100) (left-hand scale)\n \nUnderlying (new weights, December 2016 = 100) (left-hand scale)\nSources: SARB and Stats SA\n \nNew weights\n-0.3\n-0.2\n-0.1\n0.0\n0.1\n0.2\n0.3\n0.4\n4.0\n4.5\n5.0\n5.5\n6.0\nMonetary Policy Review April 2017\n24\nFuel prices\nBrent crude oil climbed to US$57 per barrel in January, \nescaping the US$30 to US$50 range in which it had \ntraded since August 2015. This shift was triggered by the \nannouncement of production cuts by the Organization of the \nPetroleum Exporting Countries (OPEC) as well as some non-\nOPEC countries, including Russia. The decision to reduce \noutput marked a change of strategy by traditional producers, \nwhich had previously sought to defend market share by \nmaintaining supply and using low prices to squeeze out \nmarginal producers. Yet new rivals, chiefly shale producers \nin North America, proved unexpectedly resilient, prompting \nOPEC countries to re-assess.\nAlthough production cuts were effective in pushing prices \nclose to US$60 per barrel, they have since subsided to nearer \nUS$50. There is a plausible case they will stay quite low. OPEC \nproduction cuts have typically not been implemented in full \nover time, as there are strong incentives to free-ride on others’ \nefforts and enforcement mechanisms are relatively weak. \nFurthermore, North American producers have increased \nproduction in response to higher prices, limiting the overall \nreduction in supply. The oil price assumption used in the \nforecast is US$60 for 2017 and US$62 for 2018, but the lower \nlevel of prevailing prices suggests a risk this may be too high.\nThe change in local petrol prices has been greater than the gains \nin world oil prices, owing to increases in the various domestic \ncost factors that make up slightly more than half of the final \npetrol price, as well as international refinery margins and other \ncosts such as freight and insurance. The total fuel price change \nin the forecast is 127 cents per litre between September 2016 \nand April 2017. Of this, just 27 cents reflects the international \noil price portion of the local price. The balance is split roughly \n60:40 between domestic taxes and margins (mainly for higher \nfuel and road accident fund levies) and international refinery \nmargins and other costs. Over the forecast period, fuel price \ninflation is projected at 7.8%, 6.9% and 6.0% in 2017, 2018 and \n2019 respectively.\nElectricity prices\nAlthough the multi-year pricing agreements are intended to \nmake electricity prices more predictable, they remain complex \nand difficult to forecast. The National Energy Regulator of \nSouth Africa has approved Eskom tariff increases of 2.2% \nfor the financial year 2017/18. This number is unusually low \ngiven the Regulatory Clearing Account (RCA) adjustment, \nwhich compensates for excess payments to Eskom in \n2016/17; without this RCA adjustment, tariff increases would \nbe 8%. The regulator has given Eskom permission to apply \nfor a higher increase should the approved 2.2% threaten its \nfinancial sustainability, and it is possible that a higher figure will \nbe granted, especially given that the Year 2 and Year 3 RCA \napplications by Eskom have not yet been processed. Given \nthe uncertainties around Eskom’s tariff increase, the SARB still \nMillion barrels per day\n2012\n2013\n2015\n2014\n2016\n2017\n2018\nUS and world oil production changes from 2012 to 2018* \n \nWorld \n* Includes crude oil, shale oil, oil sands and natural gas liquids, but \nexcludes biofuels and ethanol\nSources: BP, Energy Information Administration and SARB\n \nUnited States\n-0.5\n0.0\n0.5\n1.0\n1.5\n2.0\n2.5\n3.0\nForecast\nRand per litre\n1998 2000 2002 2004 2006 2008 2010 2012 2014 2016\nFuel price inflation \n \nPetrol price\nSources: Department of Energy\n \nDiesel price\n0\n2\n4\n6\n8\n10\n12\n14\n16\nCent per kilowatt-hour\nGigawatt hours\n2009\n2010\n2011\n2012\n2013\n2014\n2015\n2016\nElectricity consumption and prices\n \nElectricity consumption (left-hand scale)\n \nElectricity price\nSources: Eskom and Stats SA\n98\n100\n102\n104\n106\n108\n110\n112\n0\n50\n100\n150\n200\n250\n300\n25\nMonetary Policy Review April 2017\nassumes CPI electricity inflation of 7.7% for 2017 and 8% for \nboth 2018 and 2019. Even if the 2.2% increase goes ahead, \nhowever, final prices faced by consumers are likely to rise by \na larger magnitude – perhaps closer to 5% – due to municipal \npricing decisions.\nCore inflation\nCore inflation is anticipated to trend downwards from its \nDecember 2016 high of 5.9%, averaging 5.4% in 2017, 5.2% \nin 2018 and 5.3% in 2019. This slight moderation in core is \ndue to lower inflation in the core goods component, which is \nprojected to benefit from rand appreciation. Vehicle inflation, \nfor instance, is expected to fall from 7.6% in 2016 to just 3.8% in \n2018, with its overall contribution to headline inflation forecast \nto drop from 0.5 percentage points in 2016 to 0.2 percentage \npoints in 2018. Core nonetheless remains relatively elevated \ndue to sticky services inflation, which is unlikely to depart from \nthe upper end of the inflation target range.\nThe outlook for core inflation is broadly unchanged from \nthe October 2016 MPR, recording an improvement of just \n0.1 percentage points for each of the first two forecast years. \nThe stability of the core forecast, despite continued exchange \nrate appreciation, is explained by offsetting increases in other \nfactors, particularly medical insurance and rentals and owners’ \nequivalent rent.\nTargeted inflation (March 2017 forecast)\nPercentage change over 12 months, previous weights and September 2016 forecasts in italics \nActual\n Forecast\nActual\nSARB forecast\nWeight\n2003-16\n2016\n2017\n2018\n2016Q3\n2016Q4\n2017Q1\n2017Q2\n2017Q3\n2017Q4\n2018Q1\n2018Q2\n2018Q3\n2018Q4\nTargeted inflation....................... 100.00\n5.9\n6.3\n5.9\n5.4\n6.1\n6.6\n6.4\n5.8\n5.8\n5.6\n5.2\n5.4\n5.5\n5.5\nCore inflation*............................ 74.43\n5.0\n5.6\n5.4\n5.2\n5.7\n5.7\n5.4\n5.5\n5.4\n5.3\n5.1\n5.1\n5.2\n5.3\n74.78\n5.7\n5.6\n5.7\n5.9\n5.8\n5.7\n5.5\n5.4\n Insurance................................. 10.06\n7.0\n7.6\n8.4\n8.4\n7.4\n7.7\n8.1\n8.4\n8.5\n8.5\n8.7\n8.3\n8.3\n8.3\n9.92\n7.5\n8.5\n7.3\n7.5\n8.1\n8.6\n8.7\n8.7\nEducation..................................\n2.53\n8.4\n5.3\n7.2\n8.0\n4.6\n4.6\n5.7\n7.7\n7.7\n7.7\n7.8\n8.0\n8.0\n8.0\n2.95\n5.4\n7.2\n4.6\n4.7\n5.7\n7.7\n7.7\n7.7\nVehicles.....................................\n6.12\n1.7\n7.6\n5.2\n3.8\n9.1\n8.8\n7.7\n5.8\n3.8\n3.4\n3.5\n3.7\n3.9\n4.1\n5.98\n7.6\n5.3\n9.0\n8.8\n7.5\n5.6\n4.2\n3.9\nFuel...........................................\n4.58\n8.6\n1.6\n7.8\n6.9\n-4.7\n3.1\n10.4\n4.6\n8.3\n8.0\n4.6\n8.0\n7.6\n7.6\nPreviously petrol........................\n5.68\n1.0\n7.0\n-4.6\n0.8\n6.2\n4.0\n7.9\n10.2\nElectricity..................................\n3.75\n11.8\n9.2\n7.7\n8.0\n7.4\n7.4\n7.4\n7.4\n8.0\n8.0\n8.0\n8.0\n8.0\n8.0\n4.13\n9.2\n7.7\n7.4\n7.4\n7.4\n7.4\n7.9\n8.0\n* CPI excluding food, non-alcoholic beverages, fuel and electricity\nSources: SARB and Stats SA\nForecast\nPercentage change over 12 months\n2009\n2011\n2013\n2015\n2017\nCore inflation and its components\n \nServices\nSources: SARB and Stats SA \n \nTotal core\n \nCore goods\n0\n1\n2\n3\n4\n5\n6\n7\n8\n9\nMonetary Policy Review April 2017\n26\nAlthough service price inflation has been stable close to 6%, in \nline with inflation expectations and the upper end of the target \nrange, key service sub-categories have experienced inflation \nwell above this level for an extended period of time. In particular, \ninflation in the insurance and education categories has \naveraged 7% and 8.4% respectively between 2003 and 2016, \ncompared to average headline inflation of 5.9%. Education \ninflation was briefly lower in 2016 following the decision to \ntemporarily freeze tertiary tuition fees, but renewed increases \nwill shift it back towards 8% by March 2017 and it is likely to \nstay close to these levels over the rest of the forecast period. \nInsurance inflation is expected to remain similarly elevated.\nEmployment, remuneration \nand unit labour costs\nWages and salaries are a continued source of inflationary \npressure in South Africa. Increases in remuneration tend to \nbe generous, at least for the upper deciles of income earners \nwhose compensation accounts for the major portion of the total \nSouth African wage bill. This is due to the structure of labour \nmarket institutions as well as skills shortages, both of which \nbolster the negotiating power of this segment of the workforce. \nTo some extent, the resulting price pressure is contained by \noff-setting factors: productivity growth, labour shedding and \nprofit compression. Yet some portion also feeds into inflation.\nIn the context of weakening growth and rising unemployment, \nreal wage growth might have been expected to stagnate. \nNonetheless, the available data show continued real gains \nfrom 2011 onwards. The Andrew Levy wage settlement rate \nand the mean growth rate of wages and salaries in South \nAfrica, derived from the Quarterly Employment Survey, have \nboth remained elevated, averaging close to 8% over this \nperiod. After deducting average labour productivity growth of \n1.2%, unit labour cost (ULC) growth has been 6.8%, above the \nupper bound of the inflation target.\nULC growth likely reached its post-crisis peak in 2016 at 7.5%, \nmainly due to the productivity loss implicit in very weak output \ngrowth. Over the forecast period, ULC growth is projected to \nmoderate to 5.7% by 2018, its lowest level in over a decade, \nwith average salaries growing at 8.1% and productivity growth \nat 2.1%. The deceleration in ULCs is premised on improved \nGDP outcomes and – much less desirably – job losses. \nWithout these developments, ULC growth could surprise on \nthe upside, lifting core inflation.11\nExchange rates\nIn a small open economy like South Africa, import prices are \nanother key driver of inflation. One aspect of these prices is \ninternational wholesale prices; the other crucial determinant is \nthe exchange rate. Over the past year, the rand has benefitted \nthe inflation forecast. It has recovered from a weak position in \nin January 2016, and by March 2017 was back at mid-2013 \n11\t This discussion refers to the ULC measure used in the forecast, which \ndiffers from that published in the Quarterly Bulletin. The forecast uses \neconomy-wide remuneration, whereas the Quarterly Bulletin measure \ncovers only the formal, non-agricultural sector.\nPercentage change over 12 months\n2009\n2011\n2013\n2015\n2017\nVehicle prices at producer and consumer level\n \nVehicle PPI inflation\nSources: SARB and Stats SA\n-5\n0\n5\n10\n15\n20\n \nVehicle CPI inflation\nForecast\nAnnual percentage change\nPercentage points\nUnit labour cost and its components\n \nProductivity (left-hand scale)\n \nAverage salaries (left-hand scale)\n \nAndrew Levy average salaries\nSources: Andrew Levy Employment Publications and SARB\n \nUnit labour cost\n \nReal wages\nForecast\n-5\n0\n5\n10\n15\n-5\n0\n5\n10\n15\n2019\n2017\n2015\n2013\n2011\n2009\n2007\n27\nMonetary Policy Review April 2017\nlevels against the euro and sterling, and at mid-2015 levels \nagainst the US dollar. This rand recovery reflected several \ncomplementary factors, including improved macroeconomic \nfundamentals in South Africa, diminished political uncertainty \nand reduced global risk aversion. The appreciation trend \nhas at times been interrupted by shocks, including the Brexit \nreferendum and the US elections. In each of these episodes, \nhowever, the rand has subsequently rebounded, returning to \nits appreciation trend.\nThe outlook for the exchange rate remains uncertain. The rand \ncould appreciate further, supported perhaps by commodity \nprices and better domestic growth and confidence. Yet it \nmight well weaken again, given several domestic or foreign \nfactors. On balance, the risk to the exchange rate is that it will \ndepreciate in the near term in response to increased political \nuncertainty, potentially accelerating inflation.\nThe exchange rate assumption used in the forecast is \npredicated on a simple convention: the real exchange rate is \nheld constant at around the starting point shortly preceding \nthe MPC meeting – allowing sufficient time for the modelling \nteam to prepare the forecast – with the nominal exchange rate \nthen adjusting across the forecast horizon in line with inflation \ndifferentials. This practice has in recent meetings tended to \nmake the exchange rate used in the forecast somewhat weaker \nthan the one prevailing at the time of the policy decision. It \nhas also left the exchange rate in each subsequent meeting \nsomewhat more favourable than the one used before. The \nfact that this has not produced larger variations between the \ndifferent forecasts points to offsetting factors, but also the \nfact that pass-through to inflation remains quite low. Applying \nan exchange rate shock to the latest version of the core \neconometric model yields a response of only about 0.15 in the \npeak quarter. Furthermore, historically, pass-through has been \nweaker in appreciation phases than during depreciations.12\nInflation expectations\nIn a flexible inflation targeting framework, inflation is permitted \nto depart temporarily from target in the event of shocks. \nInflation expectations help policymakers judge whether such \nshocks will in fact prove temporary. If inflation expectations are \nwell anchored in the right place, shocks should pass out of \nthe year-on-year comparisons after 12 months and inflation \nwill revert to target. However, if medium term expectations \nchange in line with current inflation, or if they are anchored \nat an inappropriate level, then wages and prices are likley to \nrespond and inflation will not return to its desired rate without \nsome form of monetary policy response.\nThere are several available measures of inflation expectations \nin South Africa. One of the most frequently consulted is the \nBureau for Economic Research’s (BER) survey, which collects \nthe views of union leaders, business people and financial \n12\t Karoro, T D, Aziakpono, M J and Cattaneo, N. 2009. ‘Exchange rate \npass-through to import prices in South Africa: Is there asymmetry?’ South \nAfrican Journal of Economics, 77(3): 380-398.\nForecast\nPercentage points\nPercentage change over four quarters\n2011 2012 2013 2014\n2016\n2015\n2017 2018 2019\nContribution to headline inflation\n \nImport price contribution\n \nOutput gap contribution\n \nUnit labour cost contribution\n \nHeadline CPI (left-hand scale)\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\n7\n-2\n-1\n0\n1\n2\n3\n4\n5\n6\n7\nSources: SARB and Stats SA\nIndices: 2010 = 100\n2015\n2016\n2017\n2018\n2019\nEvolution of the real effective exchange rate assumptions\n \nJuly 2016\n \nNovember 2016\n \nMarch 2017\nSource: SARB\n \nSeptember 2016\n \nJanuary 2017\n \nActual\nStronger rand = higher\n70\n75\n80\n85\n90\nPer cent\n2011\n2012\n2013\n2014\n2015\n2016 2017\nSurvey-based inflation expectations*\n \nCurrent year\n \nTwo years ahead\n \nInflation target range\n* Total, combining expectations of labour, business and analysts\nSource: BER\n \nOne year ahead\n \nFive years ahead\n3.0\n3.5\n4.0\n4.5\n5.0\n5.5\n6.0\n6.5\nMonetary Policy Review April 2017\n28\nanalysts. According to this survey, aggregate expectations for \none, two and five years ahead are clustered around the top of \nthe target range, varying between 5.7% and 6.2%. The analyst \ncomponent of the survey shows expectations somewhat lower \nin the medium term, at 5.4% and 5.5% in 2018 and 2019, which \nis in line with the SARB forecast. (These expectations are also \nechoed in the Reuter’s survey of analysts, for which many of \nthe contributors are the same.) Arguably, the expectations of \nbusiness people in the BER survey are the best available guide \nto price-setting behaviour. These expectations are higher and \nhave also been more stable than those of analysts; they are \ncurrently at 6.4% and 6.3% for 2018 and 2019.\nBreak-even inflation rates, a market based measure of inflation \nexpectations, have improved from levels approaching 8% in \nearly January 2016, trending back towards 6%. Break-even \nrates cannot be strictly compared to inflation surveys as \nthey also price in risks of inflation surprises (an inflation risk \npremium). Furthermore, they are also sensitive to market \nidiosyncrasies affecting the underlying instruments from which \nbreak-even rates are calculated. Nonetheless, they reflect \ninflation expectations for long time periods, five to ten years, \nover which shocks should be expected to even out. The fact \nthat break-evens remain close to or above the target therefore \nsuggests the same interpretation attached to the BER survey: \nthat expectations are sticky close to, or above, the top end of \nthe 3–6% target range.\nConclusion\nHeadline inflation is falling back below 6% following an \nextended breach of the inflation target. The forecast indicates \nit will remain within the upper portion of the target range across \nthe medium term. The decline in inflation reflects stabilising \nfood and petrol prices as well as currency appreciation. \nYet the persistence of inflation above global and emerging \nmarket averages speaks to wage and price rigidities, which \nare fed by elevated inflation expectations. While the stability \nof expectations has been reassuring in the context of above-\ntarget inflation, it would be preferable for expectations to be \nanchored more centrally within the inflation target range.\nPer cent\n2011\n2012\n2013\n2014\n2015\n2016 2017\nSurvey-based inflation expectations of business\n \nCurrent year\n \nTwo years ahead\n \nInflation target range\nSource: BER\n \nOne year ahead\n \nFive years ahead\n3.0\n3.5\n4.0\n4.5\n5.0\n5.5\n6.0\n6.5\n7.0\nPer cent\n2014\n2015\n2016\n2017\nBreak-even inflation rates\n \nFive year\nSource: Bloomberg\n \nTen year\n4.5\n5.0\n5.5\n6.0\n6.5\n7.0\n7.5\n8.0\n29\nMonetary Policy Review April 2017\nBox 3\t Comparing the accuracy of CPI forecasts\n1\t\nCurrently between 12 and 14 institutions and economists participate on a regular basis in supplying Reuters with quarterly economic \nforecasts of consumer price inflation. Reuters forecast contributors change over time in terms of who participates and how often they do \nso. It is important therefore to discard those forecasters that do not have a significant track record (taken as less than 30 forecasts over the \nperiods chosen) or contribute sporadically.\n2\t\nThe average forecast error (AFE) and the root mean square error (RMSE) are used to evaluate the forecasts. The AFE measures projection \nbias in terms of systematic over- or underestimation. The RMSE is a measure of the standard deviation or magnitude of the errors.\n3\t\nThe average value of the RMSEs has decreased by a significant factor – from 3.2% points during the first period to 0.7% points during \nthe second period.\nEconomic forecasts are critical inputs into the monetary policymaking process. To test the quality of forecasts and to build credibility, the \nbest practice among central banks is to conduct routine accuracy assessments and publish the results. Accordingly, previous Monetary \nPolicy Reviews have contained boxes on the growth and headline inflation forecasts (e.g. in April 2016) the core forecast (October 2016) \nas well as the fan charts (June 2015).\nThe usual standard for evaluating the forecasts is to compare them with observed outcomes. An alternative would be to contrast performance \nwith that of other institutions. This is helpful as a yardstick for success: even forecasts which proved close to outcomes and were not biased \nin a particular direction would need improving if rival forecasts performed better. Furthermore, a large forecasting error is less embarrassing if \nit is shared by other forecasters. For instance, it was wrong but not unreasonable for 2013 forecasts to miss the collapse in the world oil price \nand therefore overstate headline inflation.\nIn this box, the South African Reserve Bank (SARB) forecasts are compared with those provided by other organisations to Reuters.1 These \nforecasts are divided into two periods, one up to and including the crisis (2003Q3 to 2009Q4) and the other post-crisis (2010Q1 to \n2016Q4). The accuracy tests consider both the size and bias of projection errors.2 \nThe error statistics reveal that the SARB is most accurate over all forecast horizons for the pre-crisis period, but all forecasters are less \naccurate in this period compared to the next because of the large shock to inflation during 2007 and 2008. In period 2, although all the \nforecasts improve, the SARB’s ranking worsens somewhat.3 In particular, the SARB’s forecast six quarters ahead slips to 10th place out \nof 14, whereas in all other cases the SARB forecast ranks either first or second. The size of the error remains quite small, however.\nRMSE 1 quarter ahead\nSize of forecast errors\n* Size of worst RMSE 6 quarters ahead in Period 1 = 5.7\nSources: Reuters and SARB\n0\n1\n2\n3\n4\nSARB core model\n1\n2\n3\n4\n5\nReuters mean\n6\n7\n8\n9\n10\n11\n12\n13\n14\nRMSE 4 quarters ahead\nPeriod 1\nSARB core model\n4\n1\n6\nReuters mean\n2\n9\n13\n8\n10\n7\n3\n5\n11\n14\n12\n0\n1\n2\n3\n4\nRMSE 6 quarters ahead\nSARB core model\n10\n4\nReuters mean\n7\n2\n6\n9\n1\n13\n3\n14\n8\n5\n12\n11*\n0\n1\n2\n3\n4\nRMSE 1 quarter ahead\n0\n1\n2\n3\n4\nSARB core model\n2\n7\n15\n4\nReuters mean\n9\n6\n16\n1\n17\n10\n11\n13\nRMSE 4 quarters ahead\nPeriod 2\n0\n1\n2\n3\n4\n13\nSARB core model\n17\nReuters mean\n9\n2\n7\n15\n4\n6\n16\n10\n1\n11\nRMSE 6 quarters ahead\n0\n1\n2\n3\n4\n7\n17\n9\n4\n13\nReuters mean\n10\n6\n1\nSARB core model\n11\n15\n2\n16\n*\nMonetary Policy Review April 2017\n30\nAFE 1 quarter ahead\nForecast error bias\n* Size of worst AFEs 6 quarters ahead in Period 1 = -2.1 and -4.0\nSources: Reuters and SARB\n-2\n-1\n0\n1\n2\n14\n13\n10\n12\n5\n4\n2\n11\n1\n3\n6\nSARB core model\n8\n9\nReuters mean\n7\nAFE 4 quarters ahead\nPeriod 1\n-2\n-1\n0\n1\n2\n12\n5\n14\n10\n13\n11\n8\n1\n2\n3\n9\n4\n6\nSARB core model\nReuters mean\n7\nAFE 6 quarters ahead\n-2\n-1\n0\n1\n2\n11*\n12*\n8\n5\n14\n1\n13\n3\n2\n4\n9\n10\n6\nSARB core model\nReuters mean\n7\nAFE 1 quarter ahead\n-2\n-1\n0\n1\n2\nSARB core model\n2\n16\n15\n1\n7\n6\n4\n11\n10\nReuters mean\n9\n17\n13\nAFE 4 quarters ahead\nPeriod 2\n-2\n-1\n0\n1\n2\n2\n16\n4\n15\n13\nReuters mean\n17\nSARB core model\n7\n9\n10\n6\n1\n11\nAFE 6 quarters ahead\n-2\n-1\n0\n1\n2\n2\n16\n4\nSARB core model\nReuters mean\n15\n11\n9\n17\n13\n10\n7\n6\n1\n*\n*\nAverage forecast errors then show that both the SARB core model and the Reuters’ average are relatively unbiased across the two time periods \nand also for forecasts of different durations. A number of private sector forecasters recorded fairly large negative errors both four and six quarters \nahead in period 1, but this mainly indicates significant underestimation of the inflation spike during 2007 and 2008.\nOne interpretation of these findings is that economists have improved their forecasting ability. Another is that inflation has become more \nstable and therefore simpler to predict. More inflation stability, in turn, may be a better indicator of luck and the achievements of monetary \npolicy than of forecasting quality. \n31\nMonetary Policy Review April 2017\nSummary\nThe assessment of South Africa’s economic outlook depends, \nto some extent, on the perspective adopted. From an earlier \nstarting position, perhaps 2011, the combination of growth \nunder 2% for the foreseeable future and inflation either at or \nabove the top of the target range looks very disappointing. \nFrom a more recent vantage point, accelerating growth, with \ninflation falling back into the target range, marks a welcome \nimprovement. This comparison highlights the extent of \nthe economic deterioration experienced in recent years, \nculminating in 2016’s stagflation.\nReaching this low point required a variety of adverse \ndevelopments. Global growth slowed steadily from 2011 \nonwards, reaching a new post-crisis low in 2016. Furthermore, \nSouth Africa suffered from greater exposure to the parts of \nthe global economy that slowed most markedly (the euro \narea, China) than those that recovered more rapidly (the US). \nCommodity prices weakened, prompting a steady decline in \nSouth Africa’s terms of trade between 2011 and 2016. World \ncapital flows also became somewhat more discriminating as \nthe US Fed moved away from quantitative easing towards policy \nnormalisation, increasing pressure on borrower countries.\nThese problems were compounded by a series of domestic \nshocks. Labour disputes disrupted production in several key \nsectors. Electricity shortages became acute in 2014 and \n2015, and although load shedding has since been avoided, \nelectricity production remains below early 2015 levels. The \ndrought in 2016 was one of the worst in South African history. \nPolicy uncertainty also intensified, with various proxies for this \nvariable peaking late in 2015 and early 2016. In this context, \nconsumer and business confidence weakened to levels last \nseen during the global financial crisis.\nThis combination of shocks posed difficult policy challenges. \nOne was developing a realistic assessment of the economy’s \npotential. In the immediate post-crisis years, expectations were \nthat GDP growth would soon revert to levels of 3% or higher. \nThis outlook motivated large budget deficits and provided \nassurance that higher debt levels would be manageable \nwhen growth rebounded. Instead, growth failed to recover \nand estimates of potential slipped to around 1.5%, putting \ngovernment debt dynamics on a less sound trajectory.\nFor monetary policy, lower estimates of potential growth largely \nclosed output gaps, implying reduced scope for demand \nstimulus. Meanwhile, inflation dynamics were deteriorating, \ngiven repeated supply shocks on top of stubbornly high \nservices inflation. Furthermore, persistent exchange rate \ndepreciation fuelled a steady rise in underlying inflation, helping \ndrive core from the bottom to the top of the 3–6% target range. \nAs a question of policy, rand depreciation has improved the \neconomy’s competitiveness and helped to absorb shocks, \nespecially the decline in commodity prices. Yet the depreciation \ntrend was also a symptom of deeper problems, including an \nPercentage of GDP\nForecast\nMain budget balance\nSource: National Treasury\n-5\n-4\n-3\n-2\n-1\n0\n2017/18\n2016/17\n2015/16\n2014/15\n2013/14\nPercentage of GDP\nForecast\nCurrent account balance\nSource: SARB\n-5.9\n-6\n-5\n-4\n-3\n-2\n-1\n0\n2017\n2016\n2015\n2014\n2013\nMonetary Policy Review April 2017\n32\nunsustainably large current account deficit. In this context, the \ninflation forecasts began pointing to sustained target breaches. \nFurthermore, with inflation expectations already precariously \npositioned close to or above 6%, the risks to the medium term \ninflation forecast were becoming excessive.\nMacroeconomic policy reached a turning point in early 2014. \nMonetary policy embarked on a tightening cycle, and at \naround the same time fiscal policymakers began setting out a \nconsolidation agenda to stabilise debt relative to GDP. These \npolicy adjustments reduced the degree of stimulus provided \nto the economy, contributing to macroeconomic rebalancing. \nSince then, global conditions have improved and some \ndomestic shocks, like drought, have abated. These factors \nunderpin some economic recovery over the forecast period. \nGrowth is expected to rise towards 2% by 2019, closing the \noutput gap. Inflation should be back within the target range \nby the second quarter of 2017 and is projected to remain \nthere until the end of the forecast period. As such, the policy \nrate trajectory may now have stabilised. However, forecast \ninflation is still relatively elevated, remaining above 5% for 2018 \nand 2019, and inflation expectations are uncomfortably close \nto 6%. This limits the scope for rate cuts. Furthermore, the \nrisks are that inflation will be higher, and growth will be worse, \nthan currently projected, owing in part to a recent spike in \nuncertainty. The much-needed improvement envisioned by \nthe forecast may therefore not materialise.\nForecast\nIndices: 2015 Q1 = 100\n2005\n2007\n2009\n2011\n2013\n2015\n2017\n2019\nReal and potential GDP\n \nReal GDP\n \nReal potential GDP (old 2013 method)\nSource: SARB\n \nReal potential GDP\n \n95\n100\n105\n110\n115\n120\n125\n130\n135\n140\n145\n33\nMonetary Policy Review April 2017\nStatement of the Monetary Policy Committee\n24 November 2016\nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank, \nat a meeting of the Monetary Policy Committee in Pretoria\nHeadline consumer price inflation declined to within the \ntarget range of 3–6% in August, in line with the expectations \nof the South African Reserve Bank (SARB). Nevertheless, \nhigher inflation outcomes are forecast in the near term \nbefore a sustained return to within the target range during \n2017. While domestic economic growth prospects appear \nmore favourable following the positive surprise in the second \nquarter of this year, the outlook remains constrained against \na backdrop of weak domestic fixed investment and low \nlevels of business and consumer confidence.\nSince the previous meeting of the Monetary Policy \nCommittee (MPC), the global economic and political \nlandscape \nhas \nchanged \nsignificantly \nfollowing \nthe \npresidential election in the United States (US). The high \ndegree of uncertainty surrounding the economic policies of \nthe new administration is expected to persist for some time, \ncreating a more challenging and volatile environment for \nemerging markets in particular. Higher US long bond yields, \nalong with expectations of a tighter stance of monetary \npolicy by the US Federal Reserve (Fed) than previously \nexpected, have contributed to the reversal of the recent \npositive sentiment towards emerging markets. The prospect \nof rising protectionism and its implications for world trade \nare also a concern.\nThese developments have also affected capital flows to \nSouth Africa, with implications for the rand and bond yields. \nDomestic growth and inflation dynamics have remained \nmore or less in line with expectations, but risks to the \ninflation outlook have increased moderately.\nThe year-on-year inflation rate, as measured by the consumer \nprice index (CPI) for all urban areas, measured 6.1% and \n6.4% in September and October respectively, compared \nwith 5.9% in August. The October outcome was marginally \nabove the forecast of the SARB. Food price inflation \naccelerated further to a recent high of 12.0%, with the \ncategory of food and non-alcoholic beverages contributing \n1.8 percentage points to the overall inflation outcome. Goods \nprice inflation measured 7.1% in October, up from 6.6% in \nSeptember, with non-durable goods inflation increasing to \n7.6%. Services price inflation increased from 5.6% to 5.8%. \nThe SARB’s measure of core inflation – which excludes \nfood, fuel and electricity – measured 5.7%, up from 5.6%.\nProducer price inflation for final manufactured goods \nmeasured 6.6% in September and October, down \nfrom 7.2% in August. The main contributor to the \nOctober outcome was the category of food products, \nbeverages and tobacco products, which contributed \n4.0 percentage points and reflects the continued impact of \nthe drought on food prices.\nThe latest inflation forecast of the SARB is broadly \nunchanged over the forecast period, despite a moderate \nupward adjustment to the food price forecast in the later \nquarters. The annual averages are unchanged at 6.4% for \n2016 and 5.8% and 5.5% respectively in the coming two \nyears. Inflation is expected to peak at 6.6% in the fourth \nquarter of this year, marginally lower than in the previous \nforecast, with a sustained return to within the target range \nstill expected to occur during the second quarter of 2017. \nThe higher food price assumption is offset by a slightly more \nappreciated exchange rate assumption.\nCore inflation is expected to average 0.1 percentage points \nless in each year of the forecast period compared with the \nprevious forecast, at 5.6% this year and 5.5% and 5.2% in \n2017 and 2018 respectively. Core inflation is expected to \nremain within the target range over the forecast period, with \na peak of 5.8% in the final quarter of this year.\nThe annual inflation expectations of economic analysts, as \nreflected in the Reuters Econometer survey conducted in \nNovember, are broadly unchanged since September and \nare similar to those of the SARB. The median forecast for \nthe current and next two years are 6.3%, 5.8% and 5.6% \nrespectively. Bond market expectations implicit in the \nbreak-even inflation rates, i.e. the yield differential between \nconventional government bonds and inflation-linked bonds, \nincreased in the wake of the recent depreciation of the \nrand. They remain above the upper end of the inflation \ntarget range.\nThe global outlook became increasingly uncertain during \nthe year following the decision of the United Kingdom \n(UK) to leave the European Union and the outcome of the \nUS presidential election. While the new policy direction \nin the US is still unclear, the markets have interpreted the \noutcome as being positive for US growth in the short run, \nwith commitments to tax cuts and higher fiscal spending on \ninfrastructure. These policies are expected to result in higher \ngrowth and inflation, particularly against the backdrop of an \nincreasingly tight labour market. Nevertheless, the timing \nand extent of the expenditure boost is highly uncertain at \nthis stage.\nWhile an increase in infrastructure expenditure could be \npositive for commodity prices, other aspects of the possible \nnew policy direction are likely to have an adverse effect \non emerging markets. These include a possibly more \nMonetary Policy Review April 2017\n34\naggressive tightening of US monetary policy in response \nto higher inflation and growth, which could also reduce the \nmultiplier effect of the fiscal expansion. Together with the \nrecent sharp increase in US long bond yields, the possibility \nof such actions has led to a reversal of capital flows to \nemerging markets, reminiscent of the market reaction to \nthe so-called US taper tantrum in 2013. The impact on \nemerging market currencies and bond markets, including \nin South Africa, is already evident. Given the high degree \nof uncertainty, the financial markets may have overreacted.\nA further concern for emerging markets is the potential \nchange of trade policies that may impact on existing trade \ntreaties, as well as unilateral increases in tariff protection \nin the US. The outlook for emerging markets has therefore \nbecome more uncertain. The lingering concerns about the \nsustainability of the recovery in the Chinese economy have \nbeen revived by the possibility of tariff increases on Chinese \nexports. Countries with strong direct trade links with the US, \nin particular Mexico, are most vulnerable to increased trade \nbarriers. A more protectionist US stance could reinforce the \nalready slow growth of global trade.\nThe short-term fallout of the Brexit vote on the UK economy \nhas been limited to date, in part due to the accommodative \nmonetary policy response. The longer-term impact remains \nunclear as the terms of withdrawal are still to be negotiated \nand there are concerns that a delay in clarity could undermine \ninvestment. The eurozone is expected to continue with \nits slow but steady recovery, and the Japanese economy \ncontinues to battle with deflation.\nGlobal inflation remains generally benign. Since the previous \nmeeting of the MPC, a number of countries have loosened \nmonetary policy. Expansionary policies are expected to \npersist in the eurozone, Japan and the UK, despite emerging \ninflation pressures in the latter. By contrast, a persistence of \nsignificant outflows from emerging markets in response to \nthe possibility of a tighter US monetary policy stance could \npose challenges for monetary policies in a number of these \neconomies.\nThese new global developments have impacted on the \ndomestic bond and foreign exchange markets. The rand \nappreciated steadily from the middle of October in response \nto some positive domestic developments as well as inflows \nfrom a large mergers and acquisitions transaction. The \ncurrency was trading at around R13.20 against the US dollar \njust before the elections. It then reached its weakest point \nof R14.60 against the US dollar in the wake of the surprise \noutcome, before recovering somewhat. Domestic long \nbond yields (R186) initially spiked by about 60 basis points, \nbut the increase has since moderated to about 25 basis \npoints. Since the previous meeting of the MPC, the rand \nhas depreciated by about 5.7% against the US dollar and \nby about 1.1% on a trade-weighted basis.\nThe rand is expected to remain sensitive to changes in the \nstance of US monetary policy. A US rate increase is generally \nexpected in December and probably largely priced in, but \nof greater significance for the rand will be the signals from \nthe Federal Open Market Committee (FOMC) regarding \nthe trajectory of future increases. The rand will also remain \nsensitive to the sovereign ratings announcements due later \nthis month and early in December.\nOn the positive side, the rand has been given support by \nthe generally improved trade account in recent months. \nHowever, the deficit on the current account of the balance of \npayments is expected to have widened in the third quarter \nof this year.\nThe financing of the deficit may become more challenging \nshould the recent significant non-resident sales of bonds \nand equities persist. During October and on a month-to-\ndate basis, non-residents have been net sellers of domestic \nbonds and equities to the value of R42.7 billion and \nR19.7 billion respectively.\nThe domestic economic growth outlook remains subdued, \nalthough the low point of the cycle appears to be behind \nus. The SARB’s forecast remains unchanged at 0.4% for \n2016 and 1.2% and 1.6% respectively for the next two \nyears. While the estimate for potential real gross domestic \nproduct (GDP) growth was revised down marginally to \n1.3%, rising to 1.5% by 2018, the output gap is expected \nto remain negative over the forecast period. The SARB’s \ncomposite leading business cycle indicator improved in \nAugust and September, continuing a recent generally \npositive albeit gradual upward trend.\nAvailable monthly data suggest that growth in the third \nquarter is likely to be positive but well below the rate \nrecorded in the second quarter. The mining sector \ncontributed positively to GDP growth in the quarter. The \nphysical volume of manufacturing output declined despite \na positive month-to-month outcome in September. The \nBarclays Purchasing Managers’ Index (PMI), which declined \nfurther in October, has remained below the neutral 50 index \npoint level for three consecutive months. The weak trends in \nmanufacturing are consistent with the continued low levels \nof business confidence despite a moderate improvement \nin the third quarter. More positively, the services sector is \nexpected to sustain its positive growth rate, with the tourism \nsector being particularly buoyant.\nConsumption expenditure by households remains subdued, \nwith declining retail trade sales and static wholesale trade \nsales in the third quarter of this year. Although new motor \nvehicle sales increased sharply on a month-to-month basis \nin October, a sizeable proportion of this is attributed to car \nrental companies; challenging conditions in the new vehicle \nsector persist.\n35\nMonetary Policy Review April 2017\nConsumers continue to face a number of constraints. \nEmployment growth is particularly weak. Household debt \nlevels, while moderating, are still elevated. And wealth \neffects are muted amid stagnant equity and residential \nproperty markets. Furthermore, growth in credit extension \nto households remains subdued.\nThe slow growth in household disposable incomes is also \nreflected in a gradual decline in wage growth, with growth \nin nominal remuneration per worker declining to 5.8% in \nthe second quarter. When an adjustment is made for the \nincrease in labour productivity, growth over four quarters \nin nominal unit labour costs measured 5.1% in the second \nquarter. The Andrew Levy Employment Publications survey \nreports an average wage settlement rate in collective \nbargaining agreements of 7.5% in the first three quarters of \nthe year and 7.1% in the third quarter. This may be indicative \nof wage settlements becoming more sensitive to the \npersistently high unemployment rates.\nAccording to the Medium Term Budget Policy Statement \n(MTBPS) released in October, fiscal consolidation is set \nto continue at a measured pace. A moderate degree of \nslippage is expected in the near term, as tax receipts are \nnegatively affected by the economic slowdown. In order \nto prevent an excessive widening of the fiscal deficit, the \nMTBPS proposes a reduction in the expenditure ceiling \nand tax increases, to be announced in February. A revised \ndeficit of 3.4% of GDP is expected in the current fiscal year, \nsteadily narrowing to 2.5% of GDP in the 2019/20 fiscal year.\nFood price inflation remains a significant driver of inflation. \nIt remains sensitive to the continuing drought. While food \nprice inflation is still expected to moderate from early 2017, \nthe pace of decline is expected to be slower than previously \nforecast. This has led to an upward revision to the food \nprice assumption in the forecast during the outer quarters in \nparticular. The change is mainly due to the delayed impact \nof meat prices, which are now expected to peak only in \nearly 2018 as farmers rebuild their herds during 2017.\nBrent crude oil prices reached a year-high of US$52 per barrel \nin early October following the decision of the Organization \nof the Oil Exporting Countries (OPEC) to curtail production. \nSince then, prices have declined following doubts about the \nprospects for an agreement on the distribution of production \ncuts across the cartel. Some price volatility is expected in the \nshort run as negotiations on production cuts continue. The \nSARB’s forecast maintains the assumption of a moderate \nupward trajectory of international oil prices over the forecast \nperiod. The domestic price of 93 octane petrol increased by \na cumulative 88 cents per litre in October and November, \nwith almost all of the increase due to higher international \nproduct prices. The current over-recovery indicates that, \nshould current trends persist, about half of that increase \ncould be reversed in December.\nThe MPC is of the view that a high degree of uncertainty \nsurrounds the nature and timing of possible policy changes \nemanating from significant developments in the global \neconomic environment. This elevated uncertainty creates \na more challenging environment especially for emerging \nmarkets, as evidenced in the recent changed pattern of \ncapital flows. Financial markets are thus likely to remain \nvolatile for some time.\nSince the previous meeting of the MPC, the inflation forecast \nhas remained largely unchanged. Whereas the risks to the \ninflation forecast were previously assessed to be more or less \nbalanced, the MPC now assesses the risks to be moderately \nto the upside. This is mainly due to the possible impact of \nadverse global developments on the exchange rate. The risk \nof domestically generated shocks to the exchange rate also \nremains. Nevertheless, despite its high degree of volatility, the \nrand has displayed relative resilience in the face of numerous \nshocks over the past year.\nThe domestic growth outlook is unchanged and remains \nconstrained against the backdrop of weak business and \nconsumer confidence. The risks to the growth forecast \nare assessed to be broadly balanced. Domestic demand \npressures remain weak, and consumers are expected to \nremain under pressure for some time.\nThe MPC has accordingly decided to keep the repurchase \nrate unchanged at 7.0% per annum. The decision was \nunanimous.\nThe MPC remains concerned that the inflation trajectory \nis uncomfortably close to the upper end of the target \nrange. Furthermore, the uncertain environment and \nmoderately higher risks to the inflation outlook require \ncontinued vigilance. While the MPC retains the view that we \nmay be close to the end of the hiking cycle, this position \nmay be reassessed should the upside risks transpire.\nMonetary Policy Review April 2017\n36\nSummary of assumptions: Monetary Policy Committee \nmeeting on 24 November 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% \n3.0% \n2.8% \n2.9% \n3.1% \n(2.8%)\n(2.7%) \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% \n3.\t Brent crude (US$/barrel)........................................................................\n108.8 \n99.2 \n52.5 \n44.0 \n53.5 \n57.5 \n(44.3) \n \n4.\t World food prices (US$).........................................................................\n-1.6% \n-3.8% \n-18.7% \n-1.6% \n5.5% \n2.5% \n(-4.9%) \n(3.0%) \n(3.0%)\n5.\t International wholesale prices................................................................\n0.3% \n-0.1% \n-3.5% \n-1.2% \n1.1% \n1.2% \n(-1.1%) \n \n6.\t Real effective exchange rate of the rand (index 2010 = 100)................\n81.91 \n79.17 \n80.08 \n76.67 \n81.00 \n81.00 \n(75.67) \n(78.00) \n(78.00) \n7.\t Real effective exchange rate of the rand...............................................\n-10.1% \n-3.3% \n1.1% \n-4.3% \n5.7% \n0.0% \n(-5.5%) \n(3.1%) \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% \n5.2%\n6.4%\n7.6%\n(5.1%) \n(6.7%)\n(7.3%) \n\t\n– Petrol price.....................................................................................\n11.8% \n7.2% \n-10.7% \n1.4% \n5.7% \n8.9% \n(1.0%) \n(7.0%)\n(7.9%) \n\t\n– Electricity price..............................................................................\n8.7% \n7.2% \n9.4% \n9.3% \n7.7% \n8.0% \n3.\t Potential growth..................................................................................\n2.0% \n1.7% \n1.5% \n1.3% \n1.4% \n1.5% \n(1.4%) \n(1.5%) \n(1.7%) \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 48 and 49.\n37\nMonetary Policy Review April 2017\nForecast 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% \n2. Current account as a ratio to nominal GDP..............................\n-5.9 \n-5.3 \n-4.3 \n-3.8 \n-4.3 \n-4.4 \n \n(-4.0) \n(-4.2) \n \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nForecast 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\n6.2 \n6.1 \n6.6\n6.4 \n6.1 \n5.7 \n5.8 \n5.5 \n5.8\n5.5 \n5.5 \n5.5 \n5.6 \n5.5 \n(6.2) \n(6.7) \n(6.4) \n(6.2) \n(5.8) \n(5.8) \n(5.5) \n(5.8) \n(5.4) \n(5.4) \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 \n5.8 \n5.6 \n5.6 \n5.6\n5.5 \n5.4 \n5.5 \n5.2 \n5.2 \n5.2 \n5.3 \n5.2 \n(5.7) \n(5.9) \n(5.7) \n(5.8)\n(5.7) \n(5.5 )\n(5.4) \n(5.6)\n(5.3) \n(5.3) \n(5.3) \n(5.4) \n(5.3) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nSelected forecast results: Monetary Policy Meeting on 24 November 2016\nMonetary Policy Review April 2017\n38\nStatement of the Monetary Policy Committee\n24 January 2017 \nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank, \nat a meeting of the Monetary Policy Committee in Pretoria\nSince the previous meeting of the Monetary Policy Committee \n(MPC), the near-term inflation outlook has deteriorated, but \nthe longer-term outlook is more or less unchanged. The \nexpected inflation profile has been negatively affected by \nhigher international oil prices and a persistence in elevated \nfood price inflation despite improved rainfall in many of the \ndrought-stricken regions. At the same time, the rand has \ndisplayed some resilience. While some of the key risks to \nthe rand appear to have subsided for now, they could re-\nemerge at any stage. \nGlobal growth prospects are mixed amid policy uncertainty, \nprimarily in the United States (US) and the United Kingdom \n(UK). The domestic growth outlook remains challenging, \nalthough a modest improvement is expected over the \nforecast period.\nThe year-on-year inflation rate as measured by the consumer \nprice index (CPI) for all urban areas measured 6.8% in \nDecember, up from 6.6% in November. The December \noutcome surprised on the upside relative to the South \nAfrican Reserve Bank’s (SARB) forecast and the market \nconsensus expectation of 6.5%. The main sources of this \nsurprise included food prices, housing rentals, recreation \nand culture, and restaurants and hotels. Food price inflation \nremained elevated at 12.0% in December, matching the \nrecent high recorded in October 2016. The contribution \nof the category of food and non-alcoholic beverages to \nthe overall inflation outcome has remained unchanged at \n1.8 percentage points for the past three months. Goods \nprice inflation measured 7.8% in December, up from \n7.7% in November, while services price inflation increased \nfrom 5.6% to 5.9%. The SARB’s measure of core inflation, \nwhich excludes food, fuel and electricity measured \n5.9%, up from 5.7%. \nProducer price inflation for final manufactured goods \nmeasured 6.9% in November, compared with 6.6% in \nOctober. The main contributor to the November outcome \nwas the category of food products, beverages and tobacco \nproducts which contributed 3.9 percentage points.\nThe inflation forecast of the SARB has deteriorated since \nthe previous meeting of the MPC. Headline inflation is \nnow expected to only return to within the target range \nduring the final quarter of 2017, and to average 6.2% for \nthe year, compared with 5.8% in the previous forecast. \nThe forecast for 2018 is more or less unchanged at an \naverage of 5.5%. The peak of the forecast remains at 6.6%, \nwhich was recorded in the final quarter of 2016, and this \nlevel is now expected to persist in the first quarter of 2017. \nThis deterioration is mainly due to changed assumptions \nregarding international oil prices, the domestic fuel prices \nand the outlook for food prices, which more than offset the \nmore favourable exchange rate assumption.\nBy contrast, the forecast for core inflation is unchanged, \naveraging 5.5% and 5.2% in 2017 and 2018 respectively. \nInflation expectations as reflected in the survey conducted \nby the Bureau for Economic Research (BER) during the \nfourth quarter of 2016 showed average inflation expectations \nfor 2017, declining from 6.0% in the third quarter to 5.8%. \nThe same outcome is expected for 2018 as well as for five-\nyear inflation expectations. Despite the slight moderation, \nexpectations remain more or less anchored at the upper \nend of the target range, but with a narrower divergence \nbetween the different groups of respondents than is usually \nthe case. The expectations of these groups ranged from \n5.6% to 6.0% for 2017, and from 5.4% to 6.0% for 2018. The \noutcome may have been distorted by the marked decline of \n0.6 percentage points for the trade union respondents.\nThe median annual inflation expectations of market analysts \nas reflected in the Reuters Econometer survey are relatively \nunchanged at 5.8% and 5.5% for 2017 and 2018. Bond \nmarket expectations implicit in the break-even inflation \nrates have declined across all maturities since the previous \nmeeting, though they remain above the target range.\nThe global economic outlook remains uncertain, despite \nincreased optimism regarding US growth following the \nUS presidential elections. There is still a great deal of \nuncertainty regarding the policies of the new administration, \nparticularly with respect to the size of the promised fiscal \nstimulus. While some of the initial optimism has since been \ntempered somewhat, US growth is expected to be relatively \nstrong, but with some downside risks posed by a stronger \ndollar. Uncertainty also persists regarding the prospects \nfor the UK economy, as the terms of the disengagement \nfrom the European Union (EU) are unlikely to be resolved \nfor some time. The steady but slow growth recovery in the \neurozone is expected to continue, but upcoming elections \nin a number of countries could pose risks to the outlook, \nalongside ongoing concerns about the prospects for the \nItalian economy.\nThe outlook for emerging markets is also unclear, given \nconflicting developments. Commodity prices, especially \nindustrial commodities, have risen in recent months, but \nprotectionist threats from the US, if carried through, could \nundermine world trade and have an adverse effect on \n39\nMonetary Policy Review April 2017\nemerging markets in particular. These countries are also \nhighly dependent on Chinese growth, which is expected \nto remain above the 6% level. However, given the credit-\ndriven nature of recent Chinese growth, there are fears of an \nunsustainable credit bubble which could expose financial \nsector vulnerabilities and undermine the growth outlook. \nThere are tentative signs of global inflation edging up as fears \nof deflation recede amid higher energy and food prices. \nAs expected, the US Federal Reserve tightened monetary \npolicy in December and signalled further increases to \ncome. However, the pace of increase is still expected to be \nrelatively moderate amid a highly uncertain economic policy \nenvironment. Both the European Central Bank (ECB) and the \nBank of Japan have maintained their highly accommodative \npolicy stances. This divergence between the advanced \neconomies is likely to persist for some time. \nThe rand has displayed a degree of resilience since the \nprevious meeting of the MPC, having traded in a relatively \nnarrow range of between R14.22 and R13.46 against \nthe US dollar. Since the previous meeting, the rand has \nappreciated by 5.6% against the US dollar and by 4.2% on \na trade-weighted basis. The rand was positively impacted \nby the decisions of the ratings agencies not to downgrade \nthe sovereign foreign credit rating to sub-investment grade, \nalthough this remains a risk in the coming months. The \nlimited response of the rand exchange rate to the increase in \nthe US policy rate in mid-December suggests that the move \nhad been largely priced in. A gradual pace of tightening is \nexpected in the US, with the rand vulnerable to any upside \nsurprises in this respect.\nThe rand has been positively affected by the improvement \nin the terms of trade, following the recent modest increase \nin commodity prices. Although the overall current account \ndeficit is expected to narrow over the forecast period, it \nremains relatively wide. In line with the recent improved \ncapital flows to emerging economy bond markets, non-\nresidents have been net buyers of South African bonds \nsince the beginning of the year, while equity net sales have \ncontinued. This follows persistent net sales of both bonds \nand equities during the last three months of 2016.\nThe domestic growth outlook remains weak and more or \nless unchanged since the previous meeting of the MPC. \nThe SARB expects growth to have averaged 0.4% in \n2016, although recent monthly data for the fourth quarter \nsuggest that there may be a downside risk to this forecast. \nThe forecast for 2017 has been revised down marginally to \n1.1% (from 1.2%), and remains unchanged at 1.6% for 2018. \nThis improved outlook relative to 2016 is consistent with the \nrecent upward trend in the composite leading indicator of \nthe SARB. By contrast, the Rand Merchant Bank (RMB)/\nBER Business Confidence Index declined again in the fourth \nquarter, following a recovery in the previous quarter. Much \nof this decline was driven by the new vehicle sector.\nThe recent monthly data paint a bleak picture for the fourth \nquarter of 2016. Mining production, which had improved in \nthe second and third quarters, contracted in both October \nand November. However, improved commodity prices are \nexpected to help the sector in the coming months. The \nmanufacturing sector recorded low but positive growth in \nNovember, following a month-to-month decline in October. \nThe Barclays Purchasing Managers’ Index (PMI) declined \nfurther in December and recorded its fifth consecutive \nmonth below the neutral 50 level. \nThe low level of business confidence is reflected in the \ncontinued, but slower, contraction in real gross fixed capital \nformation. Gross fixed investment has contracted for four \nconsecutive quarters, particularly in the private sector. This \nhas contributed to the persistent labour market weakness, \nwith \nformal \nnon-agricultural \nemployment \n(excluding \ntemporary \nelection-related \nemployment) \nremaining \nunchanged in the year to the third quarter of 2016. The \nofficial unemployment rate increased to 27.1%, its highest \nlevel since the inception of the Quarterly Labour Force \nSurvey in 2008.\nWage growth appears to be responding to the weak labour \nmarket environment. Year-on-year nominal wage growth per \nworker moderated for a fifth consecutive quarter in the third \nquarter of 2016, down to 5.8%. Following a small decline \nin labour productivity growth, nominal unit labour costs in \nthe formal non-agricultural sector increased to 5.7%. The \nslower nominal wage growth per worker is consistent with \nthe lower wage settlement rates reported by Andrew Levy \nEmployment Publications.\nHousehold consumption expenditure data paint a mixed \npicture. Growth in household consumption expenditure \naccelerated to 2.6% in the third quarter despite a further \ncontraction in durable goods consumption. Real retail \ntrade sales declined in October, but increased markedly \nin November on a month-to-month basis. By contrast, \nwholesale trade sales contracted in both months. Domestic \nnew vehicle sales remained subdued following further \ndeclines in the final quarter of last year. \nNotwithstanding some improvement, consumers remain \nunder pressure and consumer confidence remains low, \nas indicated in the sharp contraction in the First National \nBank (FNB)/BER Consumer Confidence Index in the fourth \nquarter. Households remain highly indebted despite a further \nmoderation in the debt ratio and the subdued housing and \nequity markets have contributed to an absence of strong \nwealth effects. Slower wage growth along with stagnant \nemployment growth and expected tax increases in the \nforthcoming budget are also likely to dampen consumption \nexpenditure.\nA further constraint to consumption expenditure growth \nhas been the weak credit extension to the private sector, \nwhich, at 4.5% in November, was the lowest year-on-year \nMonetary Policy Review April 2017\n40\ngrowth since late 2010. While growth in credit extension \nto the household sector was particularly subdued, that to \nthe corporate sector also moderated in the second half of \n2016. The strongest decline was seen in mortgage credit \nextension for commercial property. \nFood price inflation is expected to decline following good \nrainfall in parts of the country. Spot prices for both maize \nand wheat have declined significantly, and a markedly higher \nmaize crop is expected this year. However, the impact on \nprices at the consumer level are yet to be felt, with meat prices \nlikely to lag other food price categories as farmers restock \ntheir herds. Although the SARB’s inflation forecast assumes \nthat food price inflation has more or less peaked, the pace \nof moderation is expected to be slower than in the previous \nforecast. Food price inflation is now expected to average \n7.0% during 2017, compared with 6.5% previously. Food \nprice disinflation is expected to be constrained or delayed by \nhigher fuel costs and a rising trend in global food prices.\nBrent crude oil prices increased by over 20% to almost \nUS$60 per barrel, in response to the Organization of the \nPetroleum Exporting Countries (OPEC)-brokered agreement \nto restrict production. Prices have since moderated to current \nlevels of around US$55 per barrel. The sustainability of this \nagreement and its longer-term impact on prices is uncertain, \ngiven the possibility of offsetting developments. A number \nof oil producers were exempt from the agreement; there are \nincentives and scope for cartel members to exceed their \nquotas; and US shale producers have already increased \nproduction in response to higher prices. These factors are \nlikely to constrain oil price increases. While the SARB’s oil \nprice assumption has been revised up, the trajectory is \nrelatively flat. Despite the stronger rand exchange rate, the \ndomestic price of 93 octane petrol increased by 50 cents \nper litre in January and a further increase can be expected \nin February. \nThe MPC has noted the marked deterioration in the inflation \nforecast since the previous meeting, as well as the extension \nof the expected breach of the upper level of the target \nrange by a further two quarters. Inflation is now expected \nto return to within the target range in the final quarter of \n2017. While this is a cause for concern, the main drivers \nof this deterioration are supply side shocks, in particular oil \nand food prices. The increase in the international oil price is \nnot expected to be a start of a new oil price spiral. Various \nsupply side factors are expected to constrain oil prices \ngoing forward in the absence of any major global political \nrisks that would threaten production. While the food price \nforecast has been adversely affected by higher input costs, \na steady decline in food price inflation is still expected. \nThe more favourable rand exchange rate has been an \nimportant factor in offsetting some of the negative impacts \nof these developments. Despite a turbulent second half of \n2016, both domestically and globally, the rand has been \nrelatively resilient. Furthermore, the current level of the rand is \nstronger than that implicit in the forecast, and pass-through \nto inflation continues to be relatively muted. Nevertheless it \nremains vulnerable to both domestic and external shocks. \nAs always, the approach of the MPC is to look through \nthe first-round effects of exogenous shocks, but remain \nfocused on the possible emergence of second-round \neffects, which could require a policy response. At this stage, \nthe longer-term trajectory over the relevant policy horizon is \nunchanged, as is the forecast for core inflation. In particular, \nthe MPC will take note of possible changes in the longer-\nterm inflation expectations, which had shown tentative \nsigns of moderation in the fourth quarter of 2016. The MPC \nassesses the risks to the inflation outlook to be moderately \non the upside. \nThe domestic growth outlook has remained largely \nunchanged despite a possible weaker outcome in the fourth \nquarter of 2016. While some improvement is anticipated over \nthe forecast period, growth is expected to remain below \npotential. The risks to the growth forecast are assessed to \nbe broadly balanced. Growth prospects remain dependent \non uncertain but tentatively improving global conditions \nand their impact on commodity prices. Domestically, some \nimprovement in agricultural production can be expected. \nHowever, a significant improvement in growth prospects \nrequires the implementation of structural reforms which \ncould contribute to increased business and consumer \nconfidence. \nIn light of these developments and the assessment of the \nbalance of risks, the MPC has unanimously decided to keep \nthe repurchase rate unchanged at 7.0% per annum. \nThe MPC remains focused on the medium- to longer-term \ninflation outlook, but the deterioration of the shorter-term \noutlook requires increased vigilance. Furthermore, the MPC \nremains concerned that the longer-term inflation trajectory \ncontinues to be uncomfortably close to the upper end of the \ntarget range. The MPC retains the view that we may be near \nthe end of the hiking cycle. However, should second-round \neffects emerge that undermine the longer-term inflation \noutlook, there may be a reassessment of this view. \n \n41\nMonetary Policy Review April 2017\nSummary of assumptions: Monetary Policy Committee \nmeeting on 24 January 2017*\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% \n3.2% \n3.0% \n2.8% \n2.9% \n3.1% \n(3.1%)\n \n2.\t International commodity prices in US$ (excluding oil)..........................\n-6.2% \n-10.5% \n-18.7% \n-3.6% \n9.9% \n-4.2% \n(-6.4%)\n(-9.8%)\n(-19.3%)\n(-4.5%) \n(5.5%) \n(1.0%) \n3.\t Brent crude (US$/barrel)........................................................................\n108.8 \n99.2 \n52.5 \n43.6 \n56.0 \n60.0 \n(44.0 )\n(53.5) \n(57.5) \n4.\t World food prices (US$).........................................................................\n-1.6% \n-3.8% \n-18.7% \n-1.6% \n6.0% \n2.5% \n(5.5%)\n \n5.\t International wholesale prices................................................................\n0.3% \n-0.1% \n-3.5% \n-1.2% \n1.5% \n1.2% \n(1.1%) \n \n6.\t Real effective exchange rate of the rand (index 2010 = 100)................\n81.91 \n79.17 \n80.08 \n77.28 \n84.00 \n84.00 \n(76.67) \n(81.00) \n(81.00) \n7.\t Real effective exchange rate of the rand...............................................\n-10.1% \n-3.3% \n1.1% \n-3.5% \n8.7% \n0.0% \n(-4.3%) \n(5.7%) \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% \n1.6% \n1.0% \n1.0% \n(1.5%)\n2. \t Administered prices...........................................................................\n8.7% \n6.7% \n1.7% \n5.3%\n8.3%\n7.6%\n(5.2%)\n(6.4%\n\t\n– Petrol price.....................................................................................\n11.8% \n7.2% \n-10.7% \n1.6% \n12.8% \n8.9% \n(1.4%) \n(5.7%)\n\t\n– Electricity price..............................................................................\n8.7% \n7.2% \n9.4% \n9.3% \n7.7% \n8.0% \n3.\t Potential growth..................................................................................\n2.0% \n1.7% \n1.5% \n1.3% \n1.4% \n1.5% \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 48 and 49.\nMonetary Policy Review April 2017\n42\nForecast 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% \n1.1% \n1.6% \n(1.2%)\n2. Current account as a ratio to nominal GDP..............................\n-5.9 \n-5.3 \n-4.3 \n-4.1 \n-3.5 \n-4.1 \n \n(-3.8) \n(-4.3) \n(-4.4) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nForecast 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.............................\n4.1\n4.6\n4.7\n4.9\n4.6\n6.5\n6.2 \n6.0 \n6.6\n6.4 \n6.6 \n6.2 \n6.2 \n5.9 \n6.2\n5.4\n5.4\n5.5 \n5.6 \n5.5 \n(6.6) \n(6.4) \n(6.1) \n(5.7) \n(5.8) \n(5.5) \n(5.8) \n(5.5) \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 \n5.7 \n5.6 \n5.7 \n5.7\n5.5 \n5.3 \n5.5 \n5.1 \n5.2 \n5.2 \n5.3 \n5.2 \n(5.8) \n(5.6) \n(5.6)\n(5.6) \n(5.5 )\n(5.4) \n(5.5)\n(5.2) \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.\nSelected forecast results: Monetary Policy Meeting on 24 January 2017\n43\nMonetary Policy Review April 2017\nStatement of the Monetary Policy Committee\n30 March 2017 \nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank, \nat a meeting of the Monetary Policy Committee in Pretoria\nSince the previous meeting of the Monetary Policy Committee \n(MPC) the inflation outlook has improved. This was mainly \ndue to the further appreciation of the rand exchange rate \nfollowing the benign market reaction to the United States \nFederal Reserve (US Fed) monetary policy tightening as well \nas the significant narrowing of the domestic current account \ndeficit. A more positive growth outlook in the advanced \neconomies has also contributed to a more favourable \nenvironment for emerging markets generally. However, \nthe recent heightened domestic political uncertainty has \nreversed some of these exchange rate gains, and the risk of \nfurther rand weakening overshadows the inflation outlook.\nDomestic growth prospects remain constrained, although \nthe low point of the cycle is probably behind us. Demand \npressures are expected to remain weak amid low business \nand consumer confidence\nThe year-on-year inflation rate as measured by the \nconsumer price index (CPI) for all urban areas moderated \nto 6.3% in February, from 6.6% in January, in line with the \nmarket consensus expectation. Food price inflation, which \nmeasured 10.0%, moderated for the second consecutive \nmonth following its recent peak of 12.0% in December. \nThe contribution of the category of food and non-alcoholic \nbeverages to the overall inflation outcome declined from \n1.9 percentage points in January to 1.7 percentage points \nin February. The South African Reserve Bank’s (SARB) \nmeasure of core inflation, which excludes food, fuel and \nelectricity, measured 5.2%, down from 5.5%. This follows a \nrecent peak of 5.9% in December 2016.\nProducer price inflation for final manufactured goods \nmeasured 5.6% in February, compared with 5.9% in January. \nThe category of food products, beverages and tobacco \nproducts decelerated for the sixth consecutive month to \n8.4%, following its recent peak of 13.4% in August last year. \nThe inflation forecast of the SARB has improved, reversing \nmost of the deterioration seen at the previous meeting of \nthe MPC. Headline inflation is now expected to return to \nwithin the target range during the second quarter of 2017, \ncompared with the fourth quarter previously, and to remain \nwithin the range for the rest of the forecast period. CPI \ninflation is expected to average 5.9% for the year, compared \nwith 6.2% in the previous forecast, while the forecast for \n2018 has moderated from an average of 5.5% to 5.4%. \nThe forecast period has been extended to 2019, with an \nexpected average of 5.5% for the year.\nThis improvement is mainly due to a more appreciated \nexchange rate assumption. Despite the recent depreciation, \nthe current level of the rand is still consistent with the exchange \nrate assumption in the forecast. Although the international \noil price assumption remains unchanged, the exchange \nrate is expected to lead to lower petrol price inflation and \nis reflected in a downward revision to the assumption for \nadministered prices. This favourable trend is partially offset \nby a slower pace of disinflation in food and non-alcoholic \nbeverages, driven by an expected acceleration in poultry \nprices in particular. Food price inflation is now expected to \naverage 7.4% and 5.2% in 2017 and 2018, compared with \n7.0% and 5.0% previously.\nThe forecast for core inflation is marginally lower than before, \nat an average of 5.4% in 2017, and unchanged at 5.2% in \n2018. An average core inflation of 5.3% is expected in 2019.\nInflation expectations as measured by the Bureau for \nEconomic Research (BER) show a deterioration over the \nnear-term in particular. The average expectation for 2017 \nhas increased from 5.8% to 6.2%, with the largest upward \nrevisions coming from businesses and labour respondents. \nThe average expectation for 2018 increased marginally from \n5.8% to 5.9%, while the expected inflation for 2019 is 6.0%. \nBy contrast, average inflation expectations over five years \ndeclined by 0.1 percentage point to 5.7%.\nMedian inflation expectations of economic analysts, as \nreflected in the Reuters Econometer survey conducted in \nMarch, are more or less unchanged since January. Inflation \nis expected to average 5.8% in 2017 and 5.5% and 5.4% \nin the coming two years, roughly in line with the SARB’s \nforecast. Inflation expectations implicit in the break-even \ninflation rates (the yield differential between conventional \nbonds and inflation linked bonds) had declined since the \nprevious meeting, but have since spiked following the recent \ndepreciation of the rand, and remain above the 6.0% level \nfor longer-dated maturities.\nThe global economy shows continued signs of a broad-\nbased improvement. The growth outlook in the US remains \nfavourable with business confidence indices at high levels. \nHowever, there is growing uncertainty about the timing and \nsize of the expected fiscal stimulus. Tax reform may take \nlonger than anticipated following the recent failure to repeal \nthe Affordable Care Act.\nMonetary Policy Review April 2017\n44\nGrowth prospects in Japan and Europe are also more \npromising, with the Purchasing Manager’s Index (PMI) \nreaching a six-year high in the euro area, led by the services \nsectors in France and Germany. The extent to which the \nsustainability of this improvement is dependent on the highly \naccommodative monetary policy stance is still unclear.\nThe outlook for emerging markets is also more positive, in \npart driven by the recovery in the advanced economies and \nstronger demand in China. Firmer commodity prices have \nalso helped, but an oversupply of some commodities could \nlimit these gains.\nGlobal inflation provides a mixed picture with the recent \ndecline in international oil prices threatening to reverse the \nbroad-based increases in headline inflation in the advanced \neconomies. Some inflation normalisation is evident in the US \nand the euro area, but Japan is showing less momentum \nin price and wage growth. Inflation in the United Kingdom \nis expected to overshoot the target for some time, as the \neconomy adjusts to a weaker currency. Similarly, inflation \nexperiences in a number of emerging economies have \nreflected divergent currency movements. \nThe US Fed raised its policy rate in March in response to the \nstronger inflation trend and improved growth outlook. While \nthis action was widely expected, the gradual nature of the \nexpected interest rate cycle implicit in the forward guidance \nsurprised the markets. Policy rates are expected to remain at \nlow levels for some time in most of the advanced economies \nuntil more favourable inflation and growth dynamics are \nmore firmly entrenched.\nFor the past few months the rand exchange rate has been \nrelatively resilient, along with a number of other emerging \nmarket currencies. While most measures of emerging \nmarket risk have narrowed over recent months, those for \nSouth Africa have widened again over the past few days. The \nrand has depreciated significantly in response to increased \ndomestic political uncertainty and the exchange rate has \nre-emerged as an upside risk to the inflation outlook. Since \nthe previous meeting of the MPC, the rand has appreciated \nby 3.9% against the US dollar, by 4.0% against the euro and \nby 3.4% on a trade-weighted basis. \nThe prospect of US monetary policy tightening has been \nseen as a risk to the exchange rate. However, the rand and \nother peer currencies strengthened in response to the Fed \nactions in March, indicative of revised market expectations \nof a more moderate tightening cycle than that priced in. \nThe rand has also been underpinned by favourable terms of \ntrade trends. Furthermore, the improving trend of the deficit \non the current account of the balance of payments has \nreduced the perceived vulnerability of the rand to possible \ncapital flow reversals. However, while significant adjustment \nof the current account has occurred, the deficit is not \nexpected to remain at the level seen in the fourth quarter \nof last year. \nThe domestic growth outlook remains weak following the \nnegative growth recorded in the fourth quarter of 2016. The \n2016 annual gross domestic product (GDP) growth of 0.3% \nis likely to have been the low point of the growth cycle, and \na mild recovery is expected over the forecast period. The \nSARB’s forecast for GDP growth has been revised up by \n0.1 percentage points in both 2017 and 2018, to 1.2% and \n1.7%, with growth of 2.0% forecast for 2019. While growth is \nstill expected to be below estimated potential output growth \nof around 1.4% in the near term, the output gap is expected \nto narrow to some extent in the later part of the forecast \nperiod. The more favourable growth outlook is consistent \nwith the SARB’s leading indicator of economic activity, \nwhich has increased for six consecutive months.\nThe main drivers of growth are expected to be net exports \nand positive, albeit weak, household consumption \nexpenditure growth. Some impetus is expected to come \nfrom fixed capital formation in the outer period of the \nforecast. At a sectoral level, the agricultural sector is \nexpected to return to positive growth following good rains \nin a number of regions and improved maize crop estimates. \nA modest recovery in the manufacturing sector is expected \nfollowing two consecutive months of the Absa PMI being \nabove the neutral 50 point level, while the mining sector is \nforecast to respond to more favourable commodity prices. \nLow growth in gross fixed capital formation remains a \ndownside risk to growth in the short term. In 2016 gross \nfixed capital formation contracted for the first time since \n2010, with the ratio of fixed capital formation to GDP \ndeclining from 20.4% in 2015 to 19.6% in 2016. Private \nsector investment remains particularly weak, having \ncontracted for five successive quarters. This is reflected in \nthe Rand Merchant Bank (RMB)/BER Business Confidence \nIndex which increased marginally in the first quarter of 2017, \nbut at 40 index points remains well below the neutral level of \n50. The BER Manufacturing survey shows a sharp decline in \nexpected capital investment over the next 12 months, with \nthe political climate cited as the main reason.\nThe constrained growth outlook does not bode well for \nemployment creation in the economy. According to the \nQuarterly Labour Force Survey, employment increased by \n0.3% while the number of unemployed grew by 11.3% in the \nfourth quarter of 2016, compared to the fourth quarter of \n2015. This resulted in an increase in the unemployment rate \nby 2.0 percentage points to 26.5%. \nConsumption expenditure by households, which grew \nby 0.8% in 2016, remains subdued amid low consumer \nconfidence. While growth of 2.2% was recorded in both of \nthe final two quarters of 2016, negative retail and wholesale \ntrade sales growth in December and January underscore \nthe likely persistence of this weakness. New vehicle sales \ncontinued to decline in February, although exports increased \nsignificantly. \n45\nMonetary Policy Review April 2017\nThese trends are expected to persist as the impact of a \nhigher tax burden, low employment growth and weak \nwealth effects take their toll on consumption expenditure. \nIn addition, credit extension by banks to the private sector \ncontinues to grow at low rates, particularly to households, \namid a further decline in the household debt to disposable \nincome ratio. Expenditure will be supported to some extent \nby positive but moderate real income growth.\nFiscal policy as outlined in the recent budget remains \ncommitted to a steady pace of deficit reduction over the next \nthree years. Lower tax revenues relative to budget – partly a \nconsequence of slower economic growth – have resulted in \na shortfall to be filled by a combination of lower expenditure \ngrowth, increased fuel levies and other excise duties, and a \nnumber of tax changes. These include limited compensation \nfor fiscal drag and a higher marginal tax bracket for high-\nincome earners. The tax increases are expected to act as \na drag on household consumption expenditure, particularly \nfor middle and upper income earners.\nInternational oil prices have declined following increased oil \ninventories and weak compliance with the Organization of \nthe Petroleum Exporting Countries (OPEC)-brokered deal \nto restrict output, and an increase in shale gas production \nin the US. Although Brent crude oil prices increased by \nabout 10% in the wake of this agreement, these gains have \nbeen largely reversed, with oil prices back in the region of \nUS$50 per barrel for the past three weeks. The impact on \nthe domestic petrol price will be evident in April, when a \nreduction is expected, despite the 39 cent increase in the \nRoad Accident Fund and fuel levies provided for in the \nFebruary budget. \nSince the previous MPC meeting the inflation outlook has \nimproved. However, the risk to the inflation forecast has \nbeen affected by the reaction of the exchange rate to the \ncurrent elevated levels of political uncertainty. At current \nlevels of around R13.00 against the US dollar, the exchange \nrate is still moderately stronger than the level implied in the \nexchange rate assumption in the forecast. However, the \nrand is likely to react further to unfolding developments until \na greater degree of certainty and confidence is restored. \nThe possibility of significant overshooting of the exchange \nrate in the short run also cannot be ruled out. As always, the \nMPC will attempt to ‘look through’ short term fluctuations \nand focus on longer term trends in its policy settings.\nThe MPC remains concerned about the elevated level of \ninflation expectations. While the near-term reversal was \nnot unexpected, given the deterioration of the short-term \ninflation outlook in January, the longer term expectations \nremain anchored uncomfortably at the upper end of the \ntarget range.\nNot all the inflation risk factors are on the upside. The \ndeterioration in the forecast at the previous meeting was \npartly due to a higher international oil price assumption. \nThis assumption has not been adjusted to reflect the recent \nmarket developments. There is a downside risk to this \nassumption, given the possibility of these more moderate \ntrends persisting. \nA further downside risk comes from electricity price \nincreases, which could turn out to be lower than the \n8.0% currently in the forecast from mid-2017. The final \nprice determination by the energy regulator is yet to be \nannounced. \nOverall, the MPC assesses the risk to the inflation outlook to \nbe moderately on the upside, mainly due to the high degree \nof exchange rate uncertainty.\nThe MPC sees no evidence of significant demand \npressures impacting on inflation. The growth outlook \nremains disappointing, and the MPC is concerned that \nincreased political uncertainty could impact negatively on \nprivate sector investment and household consumption \nexpenditure, and further undermine employment growth. \nThe risks to the growth outlook are therefore assessed to \nbe on the downside.\nIn light of these developments, the MPC has decided to \nkeep the repurchase rate unchanged at 7.0% per annum. \nFive members preferred an unchanged stance and one \nmember preferred a 25 basis point reduction.\nThe MPC is of the view that we may have reached the end \nof the tightening cycle. However, the Committee would like \nto see a more sustained improvement in the inflation outlook \nbefore reducing rates. This assessment may, however, \nchange if the inflation outlook and the risks to the outlook \ndeteriorate. \nMonetary Policy Review April 2017\n46\nSummary of assumptions: Monetary Policy Committee \nmeeting on 30 March 2017*\n1.\t Foreign-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2014\n2015\n2016\n2017\n2018\n2019\n1.\t Real GDP growth in South Africa’s major trading-partner countries...\n3.3% \n3.2% \n2.9% \n3.1% \n3.3% \n3.3% \n(3.2%)\n(3.0%)\n(2.8%)\n(2.9%) \n(3.1%)\n2.\t International commodity prices in US$ (excluding oil)..........................\n-10.5% \n-18.7% \n-3.6% \n15.5% \n-4.0% \n2.5% \n(9.9%) \n(-4.2%) \n3.\t Brent crude (US$/barrel)........................................................................\n99.2\n52.5 \n43.6\n56.0\n60.0 \n62.0 \n4.\t World food prices (US$).........................................................................\n-3.8% \n-18.7% \n-1.5% \n7.0% \n2.7% \n3.4% \n(-1.6%)\n(6.0%)\n(2.5%)\n \n5.\t International wholesale prices................................................................\n-0.1% \n-3.5% \n-0.8% \n3.0% \n2.0% \n2.0% \n(-1.2%)\n(1.5%)\n(1.2%) \n \n6.\t Real effective exchange rate of the rand (index 2010 = 100)................\n79.17 \n80.08 \n77.08 \n87.25 \n87.00 \n87.00 \n(77.28)\n(84.00) \n(84.00) \n7.\t Real effective exchange rate of the rand...............................................\n-3.3%\n1.1%\n-3.7%\n13.2% \n-0.3% \n0.0% \n(-3.5%)\n(8.7%) \n(0.0%) \n \n2.\t Domestic-sector assumptions\nPercentage changes (unless otherwise indicated)\nActual\nForecast\n2014\n2015\n2016\n2017\n2018\n2019\n1.\t Real government consumption expenditure.....................................\n1.1% \n0.5% \n2.0% \n1.0% \n1.0% \n1.0% \n(1.8%)\n(0.2%)\n(1.6%)\n2. \t Administered prices...........................................................................\n6.7% \n1.7% \n5.3% \n6.7%\n6.7%\n6.4%\n(8.3%)\n(7.6%)\n\t\n– Petrol price.....................................................................................\n7.2% \n-10.7% \n1.6% \n7.8% \n6.9% \n6.0% \n(12.8%) \n(8.9%)\n\t\n– Electricity price..............................................................................\n7.2% \n9.4% \n9.3% \n7.7% \n8.0% \n8.0% \n3.\t Potential growth..................................................................................\n1.7%\n1.5%\n1.3%\n1.4%\n1.5%\n1.6%\n4.\t Repurchase rate (per cent)................................................................\n5.57 \n5.89 \n6.91 \n7.00 \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 48 and 49.\n47\nMonetary Policy Review April 2017\nForecast results (annual)\nPer cent\nActual\nForecast\n2014\n2015\n2016\n2017\n2018\n2019\n1. Real gross domestic product (GDP) growth.............................\n1.7% \n1.3% \n0.3% \n1.2% \n1.7% \n2.0% \n(1.6)\n(0.4%)\n(1.1%)\n(1.6%)\n2. Current account as a ratio to nominal GDP..............................\n-5.3 \n-4.4\n-3.3 \n-3.2 \n-3.9 \n-4.0 \n \n(-4.3)\n(-4.1) \n(-3.5) \n(-4.1) \nThe figures in brackets represent the previous forecasts of the Monetary Policy Committee.\nForecast results (quarterly)\nYear-on-year percentage change\nActual\nForecast\n1\n2\n3\n4\n2016\n1\n2\n3\n4\n2017\n1\n2\n3\n4\n2018\n1\n2\n3\n4\n2019\n1. Headline inflation.............................\n6.5\n6.2\n6.0\n6.6\n6.3\n6.4\n5.8 \n5.8\n5.6\n5.9 \n5.2 \n5.4 \n5.5 \n5.5 \n5.4\n5.5\n5.5\n5.5 \n5.5\n5.5 \n(6.6)\n(6.2)\n(6.2)\n(5.9) \n(6.2) \n(5.4) \n(5.4) \n(5.5) \n(5.6) \n(5.5) \n2. Core inflation...................................\n5.5\n5.5\n5.7\n5.7\n5.6 \n5.4 \n5.5 \n5.4 \n5.3 \n5.4 \n5.1 \n5.1\n5.2 \n5.3 \n5.2 \n5.3 \n5.3\n5.3\n5.3 \n5.3 \n(5.7)\n(5.7)\n(5.5)\n(5.3) \n(5.5) \n(5.1)\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.\nSelected forecast results: Monetary Policy Meeting on 30 March 2017\nMonetary Policy Review April 2017\n48\nForeign-sector assumptions\n1.\t  Trading partner gross domestic product (GDP) growth \nis determined broadly via the International Monetary \nFund’s (IMF) Global Projection Model (GPM), which is \nthen adjusted to aggregate the GDP growth rates of \nSouth Africa’s major trading partners on a trade-weighted \nbasis. Individual projections are done for the four largest \ntrading partners (euro area, China, the United States \n(US) and Japan), while the remaining trading partners \nare grouped into three regions: Emerging Asia (excluding \nChina), Latin America and the Rest of Countries bloc. \nThe assumption takes account of country specific \n‘consensus’ forecasts as well as IMF regional growth \nprospects.\n2.\t The commodity price index is a weighted aggregate \nprice index of the major South African export commodities \nbased on 2010 prices. The composite index represents \nthe total of the individual commodity prices multiplied \nby their smoothed export weights. Commodity price \nprospects generally remain commensurate with global \nliquidity as well as commodity demand/supply pressures \nas reflected by the pace of growth in the trading partner \ncountries.\n3.\t The Brent crude oil price is expressed in US dollars \nper barrel. The assumption incorporates the analysis \nof factors of supply, demand (using global growth \nexpectations) and inventories of oil (of all grades) as \nwell as the expectations of the US Energy Information \nAdministration (EIA), the Organization of the Petroleum \nExporting Countries (OPEC) and Reuters.\n4.\t World food prices are the composite food price index \nof the United Nations Food and Agriculture Organization \n(FAO) in US dollars. It is weighted via average export \nshares and represents the monthly change in the \ninternational prices of a basket of five food commodity \nprice indices (cereals, vegetable oil, dairy, meat and \nsugar). World food price prospects incorporate selected \nglobal institution forecasts for food prices as well as \nimbalances from the anticipated trend in international \nfood supplies relative to expected food demand \npressures.\n5.\t International wholesale prices refers to a weighted \naggregate of the producer price indices of South \nAfrica’s major trading partners, as per the South African \nReserve Bank’s (SARB) official real effective exchange \nrate calculation. Although individual country consumer \nprice index (CPI) forecasts provide a good indication for \ninternational wholesale price pressures, the key drivers \nfor the assumed trend in global wholesale inflation are oil \nand food prices as well as expected demand pressures \nemanating from the trends in the output gaps of the major \ntrading partner countries. Other institutional forecasts \nfor international wholesale prices are also considered.\n6.\t Real effective exchange rate is the nominal effective \nexchange rate of the rand deflated by the producer price \ndifferential between South Africa and an aggregate of \nits trading partner counties (as reflected in the SARB \nQuarterly Bulletin). Although the nominal rate is a \nweighted average of South Africa’s 20 largest trading \npartners, particular focus is placed on the rand outlook \nagainst the US dollar, euro, Chinese yuan, UK pound \nand the Japanese yen. The assumed trend in the real \neffective exchange rate remains constant from the latest \navailable quarterly average over the projection period. \nHowever, due to the time delay for the calculation of \nthe real effective exchange rate, the most recent trend \nin the nominal effective exchange rate is adjusted with \nthe assumed trend for the domestic and foreign price \ndifferential for the current quarter. This may result in a \ntechnical annual adjustment over the current and next \nforecast year that differs from zero.\n49\nMonetary Policy Review April 2017\nDomestic-sector assumptions\n1.\t Government consumption expenditure (real) is broadly \nbased on the most recent National Treasury budget \nprojections. However, since these projections take place \ntwice yearly, the most recent actual data points also play \na significant role in the assumptions process.\n2.\t Administered prices represent the total of the regulated \nand non-regulated administered prices as reflected by \nStatistics South Africa (Stats SA). Their weight in the \nCPI basket is 18.48% (16.17% from January 2017) and \nthe assumed trend over the forecast period is largely \ndetermined by the expected pace of growth in petrol \nprices, electricity tariffs, school fees, water and other \nmunicipal assessment rates.\n\t\nPetrol price is an administered price and comprises \n5.68% (4.58% from January 2017) of the CPI basket. The \nbasic fuel price (which currently accounts for roughly \nhalf the petrol price), is determined by the exchange rate \nand the price of petrol quoted in US dollars at refined \npetroleum centres in the Mediterranean area, the Arab \nGulf and Singapore. The remainder of the petrol price \nis made up of wholesale and retail margins as well as \nthe fuel levy and contributions to the road accident fund \n(RAF). Since most taxes and retail margins are changed \nonce a year, the assumed trajectory of the petrol price \nlargely reflects the anticipated trend in oil prices and the \nexchange rate.\n\t\nElectricity price is an administered price measured at \nthe municipal level with a weight of 4.13% (3.75% from \nJanuary 2017) in the headline CPI basket. Electricity \nprice adjustments generally take place in the months of \nJuly and August of each year, and the assumed pace of \nincrease over the forecast period reflects the multi-year \nprice determination (MYPD) agreement between Eskom \nand the National Energy Regulator of South Africa \n(NERSA) with a slight adjustment for measurement at \nmunicipal level.\n3.\t The pace of potential growth is derived from the \nSARB’s semi-structural potential output model. The \nmeasurement accounts for the impact of the financial \ncycle on real economic activity and introduces economic \nstructure via the relationship between potential output \nand capacity utilisation in the manufacturing sector \n(SARB, Working Paper Series, WP/14/08).\n4.\t The repurchase rate (repo rate) is the official monetary \npolicy instrument and represents the interest rate at \nwhich banks borrow money from the SARB. Although \nthe rate is held constant over the forecast period, this \nassumption is relaxed in alternative scenarios where for \ninstance the policy rate responds to deviations of output \nfrom its potential and the gap between future inflation \nand the inflation target, that is, via a stylised ‘Taylor rule’; \none that is based on market expectations of the future \npath of the policy rate; and other paths as requested.\nMonetary Policy Review April 2017\n50\nGlossary\nAdvanced economies: Advanced economies are countries \nwith high levels of gross domestic product per capita. These \ncountries are sometimes described as industrialised. With \nfurther growth, however, they have tended to diversify, with \nparticular emphasis on services sectors.\nBalance of payments: This is a record of transactions \nbetween the home country and the rest of the world over a \nspecific period of time. It includes the current and financial \naccounts. See also ‘current account’ below.\nBudget deficit: A budget deficit indicates the extent to which \ngovernment expenditure exceeds government revenue (a \nbudget surplus occurs when revenue exceeds expenditure).\nBusiness and consumer confidence: These are economic \nindicators that measure the state of optimism about the \neconomy and its prospects among business managers and \nconsumers.\nCommodity prices: Commodities can refer to energy, \nagriculture, metals and minerals. Major South African-\nproduced commodities include platinum and gold.\nConsumer price index (CPI): The CPI provides an indication \nof aggregate price changes in the domestic economy. The \nindex is calculated using a number of categories forming \na representative set of goods and services bought by \nconsumers.\nCore inflation: Core generally refers to underlying inflation, \nexcluding volatile elements (e.g. food and energy prices). \nThe SARB’s forecasts and discussions refer to headline CPI \nexcluding food, non-alcoholic beverages, fuel and electricity \nprices.\nCrude oil price: This is the US dollar price per barrel of \nunrefined oil (Brent crude refers to unrefined North Sea oil).\nCurrent account: The current account of the balance of \npayments consists of net exports (exports less imports) \nin the trade account, as well as the services, income and \ncurrent transfer account.\nEmerging markets: Emerging markets are countries with \nlow to middle income per capita. They are advancing rapidly \nand are integrating with global (product and capital) markets.\nExchange rate depreciation (appreciation): Exchange rate \ndepreciation (appreciation) refers to a decrease (increase) in \nthe value of a currency relative to another currency.\nExchange rate pass-through: This is the effect of exchange \nrate changes on domestic inflation (i.e. the percentage \nchange in domestic CPI due to a change in the exchange \nrate). Changes in the exchange rate affect import prices, \nwhich in turn affect domestic consumer prices and inflation.\nFlexible inflation targeting: This refers to inflation-targeting \nregimes that consider changes in inflation and other variables \naffecting the real economy in the short term. Under strict \ninflation targeting only inflation matters, but flexible inflation-\ntargeting takes into account other variables, such as output.\nForecast horizon: This is the future period over which the \nSARB generates its forecasts, typically between two and \nthree years.\nGross domestic product (GDP): GDP is the total market \nvalue of all goods and services produced in a country. It \nincludes total consumption expenditure, capital formation, \ngovernment consumption expenditure and the value of \nexports less the value of imports.\nGross fixed capital formation (investment): The value of \nacquisitions of capital goods (e.g. machinery, equipment \nand buildings) by firms, adjusted for disposals, constitutes \ngross fixed capital formation.\nHeadline consumer price index (CPI): Headline CPI refers \nto CPI for all urban areas that is released monthly by \nStatistics South Africa. Headline CPI is a measure of price \nlevels in all urban areas. The 12-month percentage change \nin headline CPI is referred to as ‘headline CPI inflation’ and \nreflects changes in the cost of living. This is the official \ninflation measure for South Africa.\nHousehold consumption: This is the amount of money \nspent by households on consumer goods and services.\nInflation (growth) outlook: This outlook refers to the evolution \nof future inflation (growth) over the forecast horizon.\nInflation targeting: This is a monetary policy framework \nused by central banks to steer actual inflation towards an \ninflation target level or range.\nMedian: This is a statistical term used to describe the \nobserved number that separates ordered observations in half.\nMonetary policy normalisation: This refers to the unwinding \nof unusually accommodative monetary policies. It could \nalso mean adjusting the economy’s policy rate towards its \nreal neutral policy rate.\nNominal effective exchange rate (NEER): A NEER is an \nindex that expresses the value of a country’s currency \nrelative to a basket of other (trading partner) currencies. An \nincrease (decrease) in the effective exchange rate indicates \na strengthening (weakening) of the domestic currency with \nrespect to the selected basket of currencies. The weighted \naverage exchange rate of the rand is calculated against \n20 currencies. The weights of the five major currencies \nare as follows: euro (29.26%), Chinese yuan (20.54%), \nUS dollar (13.72%), Japanese yen (6.03%) and the British \npound (5.82%). Index: 2010 = 100. See ‘Real effective \nexchange rate’.\n51\nMonetary Policy Review April 2017\nOutput gap/potential growth: Potential growth is the \nrate of GDP growth that could theoretically be achieved \nif all productive assets in the economy were employed \nin a stable inflation environment. The output gap is the \ndifference between actual growth and potential growth, \nwhich accumulates over time. If this is negative, then the \neconomy is viewed to be underperforming and demand \npressures on inflation are low. If the output gap is positive, \nthe economy is viewed to be overheating and demand \npressures are inflationary.\nProducer price index (PPI): This index measures changes \nin the prices of goods at the factory gate. Stats SA currently \nproduces five different indices that measure price changes \nat different stages of production. Headline PPI is the index \nfor final manufactured goods. PPI measures indicate \npotential pressure on consumer prices.\nProductivity: Productivity indicates the amount of goods \nand services produced in relation to the resources utilised \nin the form of labour and capital.\nPurchasing power parity (PPP): PPP is based on the law \nof one price, assuming that in the long run, exchange rates \nwill adjust so that purchasing power across countries is \napproximately the same. It is often used to make cross-\ncountry comparisons without the distortionary impact of \nvolatile spot exchange rates.\nReal effective exchange rate (REER): The REER is the \nNEER adjusted for inflation differentials between South \nAfrica and its main trading partners. See ‘Nominal effective \nexchange rate’.\nRepurchase (repo) rate: This is the policy rate that is set \nby the Monetary Policy Committee (MPC). It is the rate that \ncommercial banks pay to borrow money from the SARB.\nReal repo rate: This is the nominal repo rate, as set by the \nMPC, adjusted for expected inflation.\nTaper tantrum: The term ‘taper tantrum’ is widely used \nto describe the strong reaction of global financial markets \nto comments by the US Federal Reserve (Fed) chairman \nin May 2013 that the Fed would likely start to reduce (or \n‘taper’) the pace of its asset purchases later that year.\nTerms of trade: This refers to the ratio of export prices to \nimport prices.\nUnit labour costs: A unit labour cost is the labour cost to \nproduce one ‘unit’ of output. This is calculated as the total \nwages and salaries in the non-agricultural sector divided by \nthe real value added at basic prices in the non-agricultural \nsector of the economy.\nMonetary Policy Review April 2017\n52\nAbbreviations\nAFE\t\naverage forecast error\nAlsi\t\nAll-Share Index\nBER\t\nBureau for Economic Research\nBIS\t\nBank for International Settlements\nBRICS\t\nBrazil, Russia, India, China and South Africa\nCAD\t\ncurrent account deficit\nCDS\t\ncredit default swap\nCPI\t\nconsumer price index\nCPIX\t\nconsumer price index for metropolitan \nand other urban areas, excluding the \ninterest cost on mortgage bonds\nECB\t\nEuropean Central Bank\nEIA\t\nEnergy Information Administration\nELMI\t\nEmerging Local Markets Index\nEMBI+\t\nJPMorgan Emerging Market Bond Index Plus\nEU\t\nEuropean Union\nFAO\t\nFood and Agriculture Organization\nFNB\t\nFirst National Bank\nFed\t\nUnited States Federal Reserve\nFOMC\t\nFederal Open Market Committee\nG3\t\nGroup of Three\nGDP\t\ngross domestic product\nIMF\t\nInternational Monetary Fund\nMPC\t\nMonetary Policy Committee\nMPR\t\nMonetary Policy Review\nMTBPS\t\nMedium Term Budget Policy Statement\nMYPD\t\nmulti-year price determination\nNAB\t\nnon-alcoholic beverages\nNERSA\t\nNational Energy Regulator of South Africa\nOPEC\t\nOrganization of the Petroleum \nExporting Countries\nPCE\t\nPersonal Consumption Expenditure\nPMI\t\nPurchasing Managers’ Index\nPPI\t\nproducer price index\nRCA\t\nRegulatory Clearing Account\nREER\t\nreal effective exchange rate \nrepo (rate)\t repurchase (rate)\nRMB\t\nRand Merchant Bank\nRMSE\t\nroot mean square error\nS&P\t\nStandard and Poor’s\nSACU\t\nSouthern African Customs Union\nSARB\t\nSouth African Reserve Bank\nSOCs\t\nstate-owned companies\nStats SA\t\nStatistics South Africa\nTPP\t\nTrans-Pacific Partnership\nUK\t\nUnited Kingdom\nULC\t\nunit labour cost\nUS\t\nUnited States\nWGBI\t\nWorld Government Bond Index", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/Monetary_Policy_Reports/MPRAPR2017.pdf"}
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