Reduced interest rates will help to underpin business and consumer confidence

Belinda Bantham -- Fri, 01/17/2020 - 11:21

Reduced interest rates will help to underpin business and consumer confidence

“The Monetary Policy Committee’s (MPC's) decision to reduce the repo rate by 25 basis points is a welcome recognition of the need to reduce borrowing costs for business and consumers in South Africa.”

This is according to Prof Raymond Parsons, a well-known economist and academic from the North-West University (NWU) Business School.

“Although it is a small step in the bigger scheme of things in the South African economy, it can help to underpin business and consumer confidence at the present juncture. In view of existing pressures on the economy the psychological impact of a modest interest rate cut will currently be greater than its real economic effect. But it is nonetheless positive.”

Prof Parsons says with inflation presently well within the target range of 3 - 6% and with the MPC again cutting its growth forecasts for both 2020 and 2021, there is clearly now both the space and the need for the MPC to act flexibly at this critical stage in South Africa's business cycle.

“Further cuts in interest rates may be needed later, especially as the MPC's growth forecasts may in any case be on the optimistic side. The World Bank and other economists are already expecting a growth rate of below 1% in 2020, compared with the MPC's latest growth forecast of 1,2%,” he adds.

He says the MPC's decision on interest rates nonetheless does not deny the fact that ultimately the main burden of turning the economy around and securing job-rich growth does not lie with monetary policy, but rather with the urgent expediting and implementing of the pro-growth reform policies to which South Africa is committed.

“The state of the nation address and the budget speech next month hold the policy keys to a pivotal year for the country’s economy.”