Global Courant
The South African Reserve Bank (SARB) said improvements to its quarterly projection model (QPM) provided more accurate forecasts of its benchmark interest rate and several measures of inflation.
The SARB is improving the so-called QPM – which has been the basis for policy decisions since mid-2017 – to improve its forecasting ability after policymakers, in response to the worst global inflation shock in a generation, deviated from the interest rate path suggested by the current model.
In a working paper released on Tuesday (June 20), the central bank said the updated model largely outperformed the original QPM.
“This is especially true for headline inflation, core commodity inflation, food inflation and repo rates,” the study said. The accuracy of gross domestic product growth forecasts was relatively unchanged, according to the paper.
While the monetary policy committee will likely use the QPM from next month’s meeting, it has used it to do shadow projections.
The newspaper also found that the drop in inflation a year after 100 basis points of rate hikes was smaller and significantly less persistent in the new model than in the old one.
That’s because higher borrowing costs led to a rise in the exchange rate and a slowdown in real economic activity, it said.
The updated model also showed that a one percentage point depreciation in the exchange rate, fueled by a rise in the country risk premium, increases inflation by almost 0.1 percentage point — less than in the original QPM, the study said.
Changes to the refreshed model that have helped improve forecasting include:
Giving greater weight to the midpoint of 4.5% of the central bank’s inflation target, where policymakers prefer to anchor expectations; Having an inflation forecast horizon aimed at three quarters ahead and including a growth gap – or how GDP growth deviates from potential output increases – indicating the direction the output gap will move over the projection; Distinguish between private and government wage developments, along with a revised way in which price pressures in the labor market affect inflation; Explicit mechanisms to amplify indirect spillover effects of fuel and electricity price changes on core and food inflation; A risk premium channel that takes into account changes in global investor sentiment; and A mechanism to systematically take into account the effects of fiscal policy and the sustainability of public debt.
Read: How South Africa’s banknotes have changed: 1994 to 2023
