June Monetary Policy Review
Cape Town3 June 2015
2
Headlines
Evolving global conditions
Headline CPI likely to be sticky around 6% as petrol impact dissipates
Underlying inflation and expectations persistent
Output gap still negative, but potential growth lower
Risks to inflation high… Food, electricity, remuneration, currency
Monetary policy remains in a gradual tightening cycle
3
Overview of the presentation
I. The world economy
II. Growth and the GDP forecast
III. Inflation and the inflation outlook
I. The world economy
4
5
Modest global recovery shaped by mixed AE fortunes & EM weakness – longer term acceleration will be EM driven
Source: IMF World Economic Outlook
6
The advanced economy recovery is chiefly a US-UK story…
8
China’s economy is slowing and rebalancing…
9
…with important consequences for commodity prices
10
Chinese monetary policy easing as inflation falls & GDP slows
11
Global monetary conditions continue to support financing in EMs
12
…but at risk of reversal as monetary conditions tighten
13
II. Growth and the GDP forecast
14
SA growth forecasts closer to 2%, with pick up late in the period
Nov13
Jan14
Mar1
4
May
14Ju
l14Se
p14
Nov14
Jan15
Mar1
5
May
151.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
Growth forecasts over time
2015 real GDP
2016 real GDP
2017 real GDP
Date of forecast
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8Growth fan chart
15
Lower potential but output gap still negative
16
Improved measures of potential have narrowed the output gap estimate
17
Weak global demand results in low and volatile exports
18
… and inflation diluting competitiveness gains…
19
… while commodity prices decline … CSC over?
Commodity price assumptions down 37% in two years
21
Shortages in energy intensive economy hit hard
22
…curtailing investment (outside electricity sector)
23
Household consumption still underpins growth forecast
24
…while debt to GDP burdens weigh against further leverage
25
And net job creation tailing off
26
III. Inflation and the inflation outlook
27
World inflation unusually low due to weak demand… falling food & oil prices
28
South African inflation running ahead
29
The inflation respite from cheap oil was brief
30
Higher inflation propelled by a series of supply shocks…
31
…as well as high unit labour cost growth
32
Not unhinging expectations, but fostering convergence
33
Convergence around the top of the target range
Hassan, Shakill, Siobhan Redford, and Franz Ruch. 2015. Dispersion of Inflation Expectations. SA Reserve Bank, Working Paper (forthcoming).
34
Forecast at top of the target and risks to the upside
35
World food prices low, but currency and drought keeping SA prices buoyant
Depreciation to the USD sustained but EMs still exposed
36
37
South Africa’s current account deficit narrowing slowly
38
Unit labour costs expected to moderate somewhat, with risks
20042005
20062007
20082009
20102011
20122013
20142015
20162017
0
3
6
9
12
15
Core inflation Unit labour cost
39
Electricity prices have the potential to shock
Conclusion: Monetary policy shaped by an array of factors…
• Global financial conditions as rates change… speed & timing
• Inflationary pressures at elevated levels
• Risks… food, electricity, remuneration, currency
• Sustained breach as core & expectations high?
• MPC indicated a preference for a Gradual normalisation path in keeping with or flexible IT framework
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