PRETORIA, Nov 22 (Reuters) - Below are comments from South African Reserve Bank (SARB) Governor Lesetja Kganyago on Thursday as he announced the central bank’s latest decision on its benchmark repo rate.
“Since the previous meeting of the Monetary Policy Committee (MPC), the near-term inflation outlook has improved, however, the longer term risks to inflation outlook remain elevated.
“The weaker exchange rate and the impact of higher oil prices have contributed to inflation since March 2018.
“The Bank’s measure of core inflation, which excludes food, fuel and electricity was 4.2 percent in October. Producer price inflation for final manufactured goods slowed to 6.2 percent in September from 6.3 percent in August.
“While remaining within the inflation target range throughout the forecast period, the SARB’s model projects an increase in headline inflation, albeit slightly lower than the September projection.
“Headline inflation is now expected to average 4.7 percent in 2018 (down from 4.8 percent) before increasing to 5.5 percent in 2019 (down from 5.7 percent)and moderating to an unchanged 5.4 percent in 2020. Headline CPI inflation is now expected to peak at around 5.6 percent in the third quarter of 2019.
“Forecast for core inflation is 4.3. percent in 2018 (down from 4.4. percent), 5.3 percent in 2019 (down from 5.6 percent) and 5.5 percent in 2020.
“Expectations implicit in the break-even inflation rates remain sensitive to exchange rate movements. While 5-year break even rates remains within the inflation target range, the longer break-even rates remain above 6 percent.”
“Since the September MPC, the rand has appreciated by 3.8 percent against the US dollar.
“The implied starting point for the rand is 14.50 against the US dollar, compared with 14.20 at the time of the previous meeting.
“At these levels, the QPM assesses the rand to be still undervalued.”
“The global outlook is expected to remain broadly favourable over the short term. However, medium term risks are to the downside due to less synchronised global growth.
“This is amplified by elevated policy uncertainty emanating from escalating trade tensions, tightening global financial conditions and rising geo-political risks.
“The MPC assesses the risks to the growth forecast to be moderately on the downside. As previously highlighted the Committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by the monetary policy alone.”
“Given the relative stability in the underlying core inflation measure, delaying the adjustment could give the MPC room to re-assess these unfolding developments in subsequent meetings.
“However, delaying the adjustment could cause inflation expectations to become entrenched at higher levels and thus contribute to second round effects, which would require an even stronger monetary policy response in the future.
“The Committee continues to assess the stance of monetary policy to be accommodative.
“Three members preferred an increase and three members preferred a hold stance. We then closed the room, debated vigorously until a decision was made. In the end the decision was that we go with the 25 basis points hike.” (Reporting by Olivia Kumwenda-Mtambo, Alex Winning and Nomvelo Chalumbira Editing by James Macharia)