The decision by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) on 31 July to again reduce interest rates by a further 25 basis points (bps) is the right decision for the economy in the present circumstances.

This is the view of Prof Raymond Parsons, economist from the North-West University (NWU) Business School. In commenting on the decision, Prof Parsons says the inflation outlook is now still well within the SARB’s target range and the economy is battling with sluggish gross domestic product (GDP) growth of probably less than 1% this year.

“A further easing in borrowing costs for business and consumers is therefore supportive of future economic activity. The lower borrowing costs are positive for confidence levels at a time when the incipient economic recovery is struggling to gain momentum, bearing in mind the growth target of the Government of National Unity (GNU) of 3% in the medium term. The MPC has also further trimmed its growth forecast for 2025.”

Prof Parsons says it is highly uncertain whether there can be further interest rate cuts this year. There is global uncertainty because of US tariffs. “South Africa now has to unpack the complex economic impact of the higher US tariffs on the domestic economy and take shock-absorbent steps to ameliorate the situation.”

According to Prof Parsons, a worst case scenario estimates the range of a loss in South Africa’s economic growth to be between 0,4% to 0,7%, depending upon what remedial measures can eventually be implemented.

“There also needs to be finality on the key likelihood of a lower inflation target of 3%, in which case the SARB has indicated it will need to keep borrowing costs higher for longer. The dialogue with the National Treasury still appears to be ongoing. It is also not yet clear whether the necessary political support and buy-in have been secured for the inflation target change,” he concludes.