Excerpts from the statement by Lesetja Kganyago, Governor:
Trends in bank credit extension to the private sector have remained relatively unchanged, with highly divergent patterns in loans granted to the corporate and household sectors. While growth over twelve months in total loans and advances to the private sector measured 8,3 per cent in January, credit extended to corporates increased by 14,3 per cent while that to households increased by 3,5 per cent.
The recent higher trend in wage settlements has the potential to put further upside pressure on inflation. Nominal remuneration per worker over four quarters increased by 7,7 per cent in the fourth quarter of 2014, and, after accounting for changes in labour productivity, resulted in a unit labour cost increase of 6,2 per cent, up from 5,7 per cent in the previous quarter.
The recent downward trend in consumer food price inflation is forecast to be reversed in the coming months, following the severe drought in some of the maize producing areas of the country. With drastically reduced maize crop estimates, South Africa is expected to become a net importer of maize during the year, and spot prices have moved closer to import parity.
The respite to the headline inflation outlook from lower international oil prices appears to have been short-lived. However, the expected breach of the target range in 2016 is likely to be temporary and the main drivers of the deterioration of the inflation forecast are exogenous. While the MPC will look through these developments, the Committee remains concerned about the possible impact on inflation expectations which remain at the upper end of the target range over the longer term.
The rand exchange rate continues to be the main upside risk to the inflation outlook, and remains highly vulnerable to the timing and pace of US monetary policy normalisation. The extent to which US rate increases are priced into the exchange rate remains uncertain. While the weaker euro has provided some offset, and therefore a more moderate depreciation of the trade-weighted exchange rate, this effect is partial. Furthermore, the rand will also remain sensitive to domestic developments, including the slow pace of contraction in the deficit on the current account of the balance of payments.
The Committee assesses the risk to the inflation outlook to be on the upside, with the possibility of further electricity tariff increases accentuating this risk. At the same time, the growth outlook remains constrained by electricity supply concerns and low business confidence, and the risks to the growth forecast are assessed to be moderately on the downside. Demand pressures on inflation remain muted, reinforced by a moderately tighter fiscal policy stance. In its previous statement the Committee noted that the more favourable inflation path allowed for some room to pause in the process of domestic monetary policy normalisation. The deterioration in the outlook suggests that this scope has narrowed. However, given the uncertainties related to US policy normalisation and the weak state of the domestic economy, the MPC has unanimously decided to keep the repurchase rate unchanged for now.
The timing of future interest rate increases will be dependent, as before, on a range of domestic and external factors. The MPC will remain vigilant and will not hesitate to act in order to maintain the integrity of the inflation targeting framework.