The document summarizes the June monetary policy review from the South African Reserve Bank. It notes that global economic conditions remain modest with advanced economies like the US and UK seeing better recovery while emerging markets weaken. In South Africa, growth forecasts are around 2% with a pickup expected later in the period. Inflation remains high around 6% due to factors like food and electricity prices, wage growth, and currency depreciation. Monetary policy remains on a gradual tightening path given elevated inflationary pressures and risks to inflation from various supply side factors.

1. June Monetary Policy Review
Cape Town
3 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
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3. Overview of the presentation
I. The world economy
II. Growth and the GDP forecast
III. Inflation and the inflation outlook
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4. I. The world economy
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5. Modest global recovery shaped by mixed AE fortunes & EM
weakness – longer term acceleration will be EM driven
5Source: IMF World Economic Outlook

6. The advanced economy recovery is chiefly a US-UK story…
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7. China’s economy is slowing and rebalancing…
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8. …with important consequences for commodity prices
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9. Chinese monetary policy easing as inflation falls & GDP slows
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10. Global monetary conditions continue to support financing in
EMs
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11. …but at risk of reversal as monetary conditions tighten
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12. II. Growth and the GDP forecast
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13. SA growth forecasts closer to 2%, with pick up late in the period
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1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
Date of forecast
Growth forecasts over time
2015 real GDP
2016 real GDP
2017 real GDP
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Growth fan chart

14. Lower potential but output gap still negative
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15. Improved measures of potential have narrowed the output gap
estimate
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16. Weak global demand results in low and volatile exports
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17. … and inflation diluting competitiveness gains…
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18. … while commodity prices decline … CSC over?
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19. Commodity price assumptions down 37% in two years

20. Shortages in energy intensive economy hit hard
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21. …curtailing investment (outside electricity sector)
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22. Household consumption still underpins growth forecast
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23. …while debt to GDP burdens weigh against further leverage
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24. And net job creation tailing off
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25. III. Inflation and the inflation outlook
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26. World inflation unusually low due to weak demand… falling
food & oil prices
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27. South African inflation running ahead
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28. The inflation respite from cheap oil was brief
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29. Higher inflation propelled by a series of supply shocks…
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30. …as well as high unit labour cost growth
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31. Not unhinging expectations, but fostering convergence
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32. Convergence around the top of the target range
33
Hassan, Shakill, Siobhan Redford, and Franz Ruch. 2015. Dispersion of Inflation Expectations. SA Reserve Bank, Working Paper
(forthcoming).

33. Forecast at top of the target and risks to the upside
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34. World food prices low, but currency and drought keeping SA prices
buoyant
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35. Depreciation to the USD sustained but EMs still exposed
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36. South Africa’s current account deficit narrowing slowly
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37. Unit labour costs expected to moderate somewhat, with risks
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0
3
6
9
12
15
Core inflation Unit labour cost

38. Electricity prices have the potential to shock
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39. 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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