MPC decision

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‘WHILE THE MPC’S LATEST DECISION TO LEAVE INTEREST RATES UNCHANGED IS DISAPPOINTING, SA’s BASIC POLICY PRIORITIES NOW NONETHELESS LIE WITH URGENTLY IMPLEMENTING OVERDUE ECONOMIC REFORMS AND ENSURING SECURITY OF ELECTRICITY SUPPLY TO BOOST INVESTOR CONFIDENCE’, SAYS NWU BUSINESS SCHOOL ECONOMIST PROF RAYMOND PARSONS

‘The decision by the MPC to leave the repo rate unchanged in present economic circumstances is disappointing. Although the MPC has reduced interest rates substantially so far this year, as a result of the prolonged Covid-19 lockdown the economic outlook is now even bleaker than previous forecasts made by the Treasury, the SARB and many private sector economists about economic prospects in 2020.

Not to cut interest rates further now at a time when, to quote President Cyril Ramaphosa this week, ‘the economy and society have suffered a great devastation’ is therefore not a helpful or responsive judgement call. Both global factors and the shock 2Q 2020 collapse in GDP growth in SA had created both the need and space for more support from monetary policy, albeit modest. The MPC itself has now reduced its inflation forecasts as well as its growth outlook for 2020 and beyond.

Even though the Covid-19 lockdown is now positively at Alert Level 1 and the economy will indeed slowly recover in 2H 2020, GDP growth for the year as a whole could still be as low as -10%, even worse than the MPC’s latest forecast. Economic recovery, not inflation, is clearly the immediate problem. This seems not well captured by the Quarterly Projection Model, upon which the majority of the MPC have apparently relied for their decision.

Business and consumer sentiment would thus have both benefitted from yet lower borrowing costs, with the psychological impact being as important as the real one in present depressed economic conditions. In addition, businesses (especially SMMEs) who hold part of their stockin-trade with borrowed money are sensitive to changes in interest rates. Cheaper financing of stocks would thus have provided an extra basis for a revival of trade in the months ahead.

It remains true, as the SARB Governor again emphasized, that monetary policy alone cannot turn the economy around. It is not a major growth catalyst. And with the reality of continued Eskom load-shedding it is inevitable that the efficacy of interest rate cuts will be muted. The urgent implementation of pro-growth structural reforms and a guarantee of energy security are now where SA’s policy priorities must mainly lie to build confidence and place SA on a path of investment and job-rich growth.’