Excerpts from the statement issued by Lesetja Kganyago:
South Africa’s inflation and growth dynamics continue to highlight the policy dilemma facing monetary policy. Although headline CPI inflation has moderated since February, the respite is expected to be temporary, as food and petrol price pressures continue to intensify. The recovery in the rand exchange rate in April also proved to be short-lived, as both domestic and external factors weighed on the currency. At the same time, domestic economic growth continues to disappoint. While there are signs that the economy may be reaching the low point in the growth cycle, the recovery is expected to be slow with downside risks. Global economic growth and financial market conditions have stabilized somewhat since the previous MPC meeting, but a high degree of risk and uncertainty persists.
The MPC faced the continuing dilemma of upside risks to the inflation forecast and a worsening growth outlook. The risks to the growth outlook are assessed to be on the downside, particularly in the short term, despite the downward revision to the forecast. Both the mining and agricultural sectors are expected to weigh heavily on the first quarter growth outcome, and the outlook is therefore dependent in part on whether these sectors rebound in the coming quarters.
The Committee remains concerned that inflation expectations remain at uncomfortably high levels. Although core inflation has remained relatively contained in recent months, with a lower peak now expected, it is forecast to accelerate and exceed the upper end of the inflation target range for four quarters in response to exchange rate and wage pressures.
The increase in the repo rate at the previous MPC meeting contributed to the improvement in the longer-term inflation forecast, and that move should be seen in conjunction with previous actions in the cycle and the lagged effects of monetary policy. The MPC felt that there is some room to pause in this tightening cycle and accordingly decided to keep the repurchase rate unchanged for now at 7 percent per annum. Five members preferred no change, while one member preferred a 25 basis point increase.
The MPC remains focused on its inflation mandate, but sensitive to the extent possible to the state of the economy. The MPC will not hesitate to act appropriately should the inflation dynamics require a response, within a flexible inflation targeting framework. Future moves, as before, will continue to be highly data dependent.