{"doc_id": "0256137b6fffdd4b45df3fb3f150300b", "text": "MPC Statement 20 July 2023 \nPage 1 \n \n \n \n \nPRESS STATEMENT \n20 July 2023 \n \n \nSTATEMENT OF THE MONETARY POLICY COMMITTEE \n \nIssued by Lesetja Kganyago, Governor of the South African Reserve Bank \nAs we enter the second half of 2023, near term prospects for the global economy are \nbroadly unchanged, with inflation easing and growth forecasts stable. The longer-term \neconomic outlook however remains clouded by risks to the inflation trajectory, ongoing \ngeopolitical tensions and the effects of climate change. China’s growth performance \nis expected to remain modest, with little benefit to commodity prices.1 In the \ndeveloping world, many economies face high debt levels, weaker economic growth \nand prolonged adverse financing conditions. As a result, Sub-Saharan Africa’s growth \nprospects remain muted. \nWhile goods price inflation has eased in much of the world, core inflation remains \nelevated, keeping consumer price inflation from falling more sharply. Globally, \n \n1 Commodity export prices in USD terms fell by 0.9% in 2022. South Africa’s commodity export index is forecast \nto decline by 27.6% this year, a further 11.5% in 2024, and an additional 5.4% in 2025. \nMPC Statement 20 July 2023 \nPage 2 \n \nmonetary policy is likely to remain focused on ensuring inflation continues to retreat, \nimplying policy rates will stay higher. We expect markets in major financial centers to \nremain volatile. \nTaking these and other factors into account, the SARB’s forecast for global growth in \n2023 is revised marginally higher to 2.5% (from 2.4%), and remains unchanged at \n2.7% in 2024.2 \nWhile South Africa’s economic conditions appear to have improved, the longer-term \noutlook mirrors the uncertainty of the global environment. Prices for commodity \nexports continue to weaken. In addition, energy supply remains unreliable and \nstronger El Nino conditions threaten the agricultural outlook. \nFor 2023, the Bank’s forecast for South Africa’s GDP growth is slightly higher than in \nMay, at 0.4% (from 0.3%). Energy and logistical constraints remain binding on the \ngrowth outlook, limiting economic activity and increasing costs.3 \nFrom a demand perspective, spending by firms, households, public corporations and \ngeneral government remains positive in real terms. Disposable income of households \ncontinues to grow, albeit slowly. Investment by the private and public sectors is \nrevised up and the terms of trade has remained more beneficial than previously \nforecast. Debt service costs of households have increased to 8.4% of disposable \n \n2 Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners. \n3 The number of days of expected load-shedding is 280 days in 2023, decreasing to 150 days and 100 days, \nrespectively in 2024, and 2025. Estimates of the average stages of load-shedding is multiplied by the number \nof days and then multiplied by the cost to GDP per stage-day. The cost per stage has been revised lower for \nstages 1 and 2. In nominal terms, these costs vary between R0-R1.2 million for stages 1 and 2 and up to R204-\nR899 million for stages 3 to 6, when continued on a 24 hour basis on weekdays. \nMPC Statement 20 July 2023 \nPage 3 \n \nincome, and now sit at around the average for the past decade.4 Although credit \ngrowth to households and corporates has slowed in recent months, it has increased \nin real terms compared to last year. \nOur GDP growth forecast for 2024 and 2025 is unchanged from the previous meeting, \nat 1.0% and 1.1%, respectively.5 \nWhile households and firms exhibit resilience, economic growth has been volatile for \nsome time and highly sensitive to new shocks. An improvement in logistics and a \nsustained reduction in load-shedding, or greater energy supply from alternative \nsources, would significantly increase growth. \nAt present, we assess the risks to the medium-term domestic growth outlook to be \nbalanced. \nTurning to inflation prospects, our current growth forecast leaves the output gap \naround zero over the next three years, implying little positive or negative pressure on \ninflation from GDP growth.6 \nSouth Africa’s external financing needs are expected to rise due to expansion in the \ncurrent account deficit. Despite somewhat lower oil prices, falling export commodity \nprices are forecast to result in a current account deficit of 1.9% of GDP this year (down \nfrom 2.5%), 2.9% and 3.3% of GDP in 2024 and 2025, respectively.7 \n \n4 Debt service costs are the product of prevailing interest rates and debt volumes. The average from 1994 to \n2019 was 8.8%. From the beginning of the pandemic until March 2023, the average was 7.4%. In the last \nquarter of 2022, the average was 7.9%. \n5 The growth forecast includes expected changes in the policy rate as given by the QPM. \n6 Potential growth is revised marginally, to -0.1% in 2023 (up from -0.2%), and is unchanged at 0.8% for 2024 \nand 1.0% for 2025. \n7 In May, a current account balance of -2.5% of GDP was expected for the forecast period. Exports are forecast \nto grow in real terms by 6.2% this year (from 1.8%) and 3.4% in 2024. Our oil price forecast is also slightly \nMPC Statement 20 July 2023 \nPage 4 \n \nSharply lower tax revenue, higher employee compensation and ongoing financing \nneeds of state-owned enterprises are likely to keep the long-term cost of borrowing \nelevated. Despite the expected moderation of inflation over the forecast period, long-\nterm bond yields currently trade at about 11.6%. \nThe rand has generally weakened over the past year, depreciating by about 5% year \nto date against the US dollar, and showing high volatility in response to risk-on and \nrisk-off episodes. The implied starting point for the rand forecast is R18.52 (23q3) to \nthe US dollar, compared with R18.73 at the time of the previous meeting. \nThe trajectory of South Africa’s headline inflation rate has been shaped primarily by \nfuel, electricity and food price inflation. Compared to the previous meeting, fuel price \ninflation is lower at -3.1% in 2023 (from -2.0%). The electricity price forecast is \nunchanged at 11.6% this year, 13.4% in 2024, and 10.9% in 2025. Our food price \ninflation forecast for 2023 remains high but is revised lower in this meeting to 10.3% \n(from 10.8%), and up slightly to 5.2% in 2024 (from 5.0%). \nBetter monthly outcomes have led to a downward revision in our forecast for core \ninflation to 5.2% in 2023 (previously 5.3%), 4.9% (from 5.0%) and 4.5% (from 4.6%) \nin 2024 and 2025, respectively. Services price inflation in 2023 is expected to come in \nat 4.8% (down from 4.9%). Core goods inflation, while still elevated, is also revised \n \nlower than in May, averaging US$81 per barrel in 2023, and unchanged at US$82 for 2024 and US$80 for \n2025. \nMPC Statement 20 July 2023 \nPage 5 \n \nslightly lower for this year at 6.2% (from 6.3%).8 Growth in average salaries and unit \nlabour costs is lower in 2023 and 2024 and slightly higher in 2025.9 \nWith core goods and food inflation lower in the near term, headline inflation for 2023 \nis revised down to 6.0% (from 6.2%). The headline inflation forecast for 2024 also \ndecreases to 5.0%, before stabilising at 4.5% in 2025. \nRisks to the inflation outlook are assessed to the upside. Headline inflation at a global \nlevel continues to moderate, but food price inflation remains high and oil markets \nremain tight. Despite recent easing in some food price components, domestic food \nprice inflation is still elevated at 11% in June and the risk of drier weather conditions \nin coming months has increased. In the absence of sustained and consistent \nincreases in energy supply, electricity prices continue to present clear inflation risks. \nLoad-shedding and logistics constraints may also have broader effects on the cost of \ndoing business and the cost of living. Given uncertain fuel and food price inflation, \nconsiderable risk still attaches to the forecast for average salaries. \nSticky inflation in major economies suggests that average interest rates in these \neconomies will remain high.10 As a result, tighter global financial conditions are likely \nto persist, raising the risk profile of economies needing foreign capital. \nHigher inflation outcomes have generally resulted in elevated inflation expectations \nacross businesses and households, while market-based expectations have eased \n \n8 Core goods refers to total CPI goods excluding food and NAB, fuel and electricity, whereas services include all \nsurveyed services within the CPI basket. Core goods inflation is expected to be 5.1% in 2024 and 4.3% in 2025. \n9 Average salaries are expected to rise by 6.6% in 2023, 6.1% in 2024, and by 5.2% in 2025, compared to 6.8%, \n6.5%, and 4.9%, at the time of the May meeting, respectively. Unit labour costs are forecast to rise by 6.0%, \n5.3% and 4.6%, respectively, in 2023, 2024, and 2025. \n10 G3 interest rates average 4.0% in 2023, 3.9% in 2024, and 2.6% in 2025. \nMPC Statement 20 July 2023 \nPage 6 \n \nrecently.11 The Bureau for Economic Research survey released in July shows average \ninflation expectations of 6.5% for 2023 (from 6.3% in the first quarter). Expectations \nfor inflation in 2023 based on market surveys are currently 5.9%, and near-term break-\neven rates have decreased to around 4.5%.12 Longer-term expectations remain \nelevated. \nHeadline inflation returned to the upper end of the inflation target range in June, and \nis forecast to sustainably revert to the mid-point of the target range by the third quarter \nof 2025. The forecast takes into account the policy rate trajectory indicated by the \nBank’s Quarterly Projection Model (QPM). \nAgainst this backdrop, the MPC decided to keep the repurchase rate at its current level \nof 8.25% per year. Three members of the Committee preferred to keep rates on hold \nand two preferred an increase of 25 basis points. \nAt the current repurchase rate level, policy is restrictive, consistent with elevated \ninflation expectations and the inflation outlook. Serious upside risks to the inflation \noutlook remain. In light of these risks, the Committee remains vigilant and decisions \nwill continue to be data dependent and sensitive to the balance of risks to the outlook. \nThe policy stance aims to anchor inflation expectations more firmly around the mid-\npoint of the target band and to increase confidence of attaining the inflation target \nsustainably over time.13 The MPC will seek to look through temporary price shocks \n \n11 The BER Q2 2023 survey of inflation expectations indicated inflation at 6.5% in 2023 (up from 6.3% in Q1) \nand 5.9% for 2024 (up from 5.8% in Q1) and 5.6% in 2025. \n12 At the median, market analysts (Reuters Econometer) in July expect inflation to remain at 5.9% in 2023, \n4.9% in 2024 and 4.4% in 2025 (from 4.6%). Market-based rates are calculated from the break-even inflation \nrate, which is the yield differential between conventional and inflation-linked bonds. The 10-year breakeven \nnow sits at about 6.1%. The 15-year break-even inflation rate sits at 7.3%. \n13 The forecasted trajectory for the repurchase rate implies a rise in the inflation-adjusted repo rate from -1.4% \nin 2022, to 2.7% in 2023, and 3.0% in 2024. The real repo level for 2025 is expected to be 2.7%. The real \nMPC Statement 20 July 2023 \nPage 7 \n \nand focus on potential second round effects and the risks of de-anchoring inflation \nexpectations. \nGuiding inflation back towards the mid-point of the target band reduces the economic \ncosts of high inflation and will achieve lower interest rates in the future. Since early \n2020, the Committee has recommended additional and indirect means of lowering \ninflation that are within the reach of the public sector, including achieving a prudent \npublic debt level, increasing the supply of energy, moderating administered price \ninflation and keeping wage growth in line with productivity gains. Such steps would \nstrengthen monetary policy effectiveness and its transmission to the broader \neconomy. \nThe repo rate projection from the updated QPM remains a broad policy guide, \nchanging from meeting to meeting in response to new data and risks. \n \nLesetja Kganyago \nGOVERNOR \nThe next statement of the Monetary Policy Committee will be released on 21 \nSeptember 2023. \n \nContact person: \nThoraya Pandy \n0824168416 \nmedia@resbank.co.za \n \nrepurchase rates calculated here are based on the 3-quarter ahead inflation forecast and are annual average \nrates.", "source": "SARB", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///SARB/MPC_Statements/Statement of the Monetary Policy Committee July 2023.pdf"}