The cut in interest rates is good, but more would have been better

Belinda Bantham -- Fri, 07/24/2020 - 12:02

The cut in interest rates is good, but more would have been better

The further 25 basis-point cut in interest rates is positive, but 50 basis points would have been better. This is the view of Prof Raymond Parsons, well-known economist and academic from the NWU Business School.

“The decision by the Monetary Policy Committee (MPC) to cut interest rates by another 25 basis points is broadly in line with market expectations and comes as no surprise.”

Prof Parsons says this is a welcome continuation of rate reductions since the beginning of the year and brings the repo rate to the lowest point since it was introduced in 1998.

The South African Reserve Bank (SARB) has also cut its 2020 GDP growth forecasts from ‑7,0% to  ‑7,3%, which confirms the dire economic circumstances in which South Africa now finds itself.

“Also confirming these negative growth and employment trends from the MPC was a recent Nedbank investment survey, which forecast that gross capital formation would decline by ‑27% in 2020 and by ‑4% in 2021, and recover modestly in 2022.”

Prof Parsons explains that this all reflects a sombre economic outlook. “Monetary policy is no magic wand, but the devastating impact of the Covid-19 lockdown on the South African economy means the MPC should err on the side of flexibility and rather do too much than too little.”

He says with inflation now well within the SARB’s target range, a case could have been made for a 50 basis-point cut at this juncture to further reduce borrowing costs for distressed businesses and households. Minimal borrowing costs are important for a survival strategy by firms and consumers under the current stressful conditions.

“The danger is that over-reliance on the Quarterly Projection Model (QPM) may imply a too mechanistic approach to monetary policy decision-making, instead of the broader judgement calls appropriate to the unprecedented economic situation in which South Africa finds itself.”

“It is therefore concerning that two of the five MPC members wanted interest rates to remain unchanged. The MPC must remain open-minded and flexible about monetary policy responsiveness as economic developments unfold over the next few months.”