Rosy prospects of SA economy surprised us, Reserve Bank admits

Cape Town – South African Reserve Bank Deputy Governor Francois Groepe has told those attending the bank’s monetary policy forum in Cape Town that South Africa’s economy had brighter prospects than the bank had expected a year ago.

Groepe on Wednesday evening warned that while political changes brought stability which would benefit the economy, the global economic and political environment presented risks that could undermine recent gains.

Groepe said the bank was committed to keeping inflation as low as possible to create the most conducive environment for household spending and consumption.

“SA has been lagging behind in recovery from the global economic crisis. Despite this, growth in 2017 has produced surprises. Growth in the last quarter of 2017 surprised us with 1.3% for 2017. We were not the only ones surprised by the outcome compared with the forecast,” said Groepe.

He said the recent the tit-for-tat tariff decisions between China and the United States do not take place in an environment of pure isolation and could very well have an impact on South Africa if a trade war ensued between the two largest economies in the world.

READ: Trump's trade war could hit rand through oil price

“People have come to expect that the interest rate path we have published in the past is a strict commitment and that is what will always happen to the interest rate. We sign off on assumptions from the MPC meetings and that is what we release,” he said.

Theresa Alton of the Reserve Bank research department said the Reserve Bank received news of this better-than-expected forecast with caution. Household consumption growth increased by 2% which can be attributed to higher real wages. Household debt is decreasing and has reached levels last seen in 2006, she said.

“We don’t expect current growth to continue in the forcast period. It’s still a mediocre outcome. What we factored in is that confidence is expected to return from highly depressed levels. We expect confidence to boost investment levels,” said Alton.

Alton said the Reserve Bank was adjusting its inflation expectations to lower inflation as they had long been stuck at the top end of the target range.

With regards to the VAT, she said they had calculated that in the 12 months following the VAT increase there may be 6 percentage points added to the inflation rate.

"Despite the increase in the VAT rate we still expect inflation to be lower than expected,” she said.

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