MPC Press conference reveals significant inflation deterioration
Due to the exchange rate and food price developments, the inflation outlook had declined significantly since the last Monetary Policy Committee (MPC) Press Conference.
In response to this, Lesetja Kganyago, Governor of the South African Reserve Bank, revealed at the MPC Conference today that the Rand has depreciated with regards to domestic and external developments. This was then upended by the worsening drought on food prices.
“The outlook is complicated by the fact that the domestic growth has weakened further. Having averaged 4.6% in 2015, inflation is now expected to average 6.8% in 2016 and 7.0% in 2017,” said Kganyago at the MPC Press Conference.
“Inflation still expects to breach upper end of target in first quarter of 2016 is now expected to remain outside target for the entire forecast period,” he added.
The latest inflation forecast of the Bank show a swelled deterioration. Since the previous meeting, the Rand depreciated 13.5% against the US Dollar, 15.2% against the Euro and 12.9% on trade-weighted basis.
“The domestic economic growth outlook remains weak, with further downward revisions to the Bank’s forecast,” said Kganyago.
Domestic economic growth in 2015 was estimated to be about 1.3%, while expecting to moderate into 0.9% in 2016 following acceleration to 1.6% in 2017.
“SARB’s estimated output growth revised down from 1.9% to 1.5% for 2016 and from 2.1% to 1.6% for 2017,” added Kganyago.
Food prices remain a significant risk to the inflation outlook, as the surge in agricultural commodity prices in early 2015 are beginning to impact on consumer food price inflation. In the light of the persistent drought in farm-stricken areas, along with the weaker exchange rate, the pressures are likely to increase.
International oil prices have also declined to multi-year lows.
“Petrol prices have declined only marginally since November and current under-recovery suggests a possible increase of around 7 cents per litre in February,” said Kganyago.
The MPC still views the stance of monetary policy to be accommodative.
“Given the deterioration in the inflation outlook, the MPC decided to increase the repurchase rate by 50 basis points to 6.75% per annum.”
“The MPC will remain focused on its core mandate of containing inflation within a flexible inflation targeting framework,” concluded Kganyago.
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