Further cut in interest rates is another valuable mitigating step

Belinda Bantham -- Fri, 05/22/2020 - 12:52

Further cut in interest rates is another valuable mitigating step

The Monetary Policy Committee (MPC) cut the repo rate by another 50 basis points on 21 May. Prof Raymond Parsons, well-known economist and academic from the NWU Business School, says this underscores the South African Reserve Bank’s (SARB) resolve to provide the necessary monetary support in light of the economic impact of the prolonged Covid-19 lockdown.

“Monetary policy is not a ‘silver bullet’ to reverse the economic damage caused by the prolonged pandemic lockdown. With risks to the inflation outlook well on the downside, the SARB has now been able to aggressively reduce borrowing costs by about one-third since the beginning of 2020.”

According to Prof Parsons a further cut in borrowing costs for distressed businesses and consumers of 50 basis points is therefore a valuable mitigating factor in present economic circumstances, notwithstanding the further phasing out of lockdown at the end of May.

He says the SARB’s continued support of overall liquidity in the economy and in the banking system is also welcome in view of the serious cash flow problems being experienced by businesses and households.

“The MPC has again revised its growth forecast for 2020, it is now down to -7% from -6.1%, which is well in recession territory.”

Prof Parsons says this forecast may still be too optimistic, and GDP growth may be as low as -10% to -12%, with widespread business failures and rapidly rising unemployment. “The efficacy of monetary policy itself is also influenced not only by the pace at which the lockdown exit strategy occurs, but also on how effectively other economic support measures are implemented.”

According to him, the MPC’s economic assessment also suggests that it would make for better decision-making about the lockdown exit strategy if, in addition to the key daily public health updates, there could now also be consolidated regular economic reports.

“These reports could be weekly updates by the National Treasury or Stats SA giving data on job losses, business failures and lost tax revenues to provide a balanced perspective around the successful management of Covid-19 in the months ahead.”