According to renowned economist Prof Raymond Parsons from the North-West University’s (NWU’s) Business School, stable interest rates are necessary for as long as possible to avoid choking off South Africa’s incipient economic recovery.

“As widely expected, the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) unanimously opted to leave interest rates unchanged, having decided by a narrow majority of 4:3 at its previous March meeting to cut the repo rate by 25 basis points. In its latest narrative the MPC, despite the rise in the balance of risks to the inflation outlook, has underpinned the case for a continued accommodative monetary policy and rightly decided to keep interest rates stable for now.”

He says that, against the background of better-than-expected inflation outcomes in recent months, the SARB's revised view of the inflation outlook is based on factors such as higher food and fuel costs, rising oil prices, escalating electricity tariffs and the Rand's continued vulnerability because of global trends.

“The general expectation among most economists is that inflation will indeed rise in the months ahead. But there would probably also be broad agreement with the MPC that inflation will nonetheless remain well within the SARB's upper 6% target in the period ahead.”

“The SARB's growth forecasts of 1,7% in both 2018 and 2019 are further evidence of why economic reforms are needed to unlock the true potential of the South African economy. Without such reforms the current economic upturn will only take the economy to a limited and highly inadequate growth level. The MPC itself confirms that the expected growth rates will be too low to make a serious dent on unemployment. There is also still evidence of slack in the economy and uncertainty about the real impact of recent tax increases on consumer spending.”

According to Prof Parsons, all this confirms that, with the present economic recovery still in its early stages, even a small but premature rise in interest rates could still have a negative 'megaphone' impact on the pillars of business and consumer confidence.

“The MPC sees these factors as being crucial to the current economic revival. A period of stable interest rates is therefore necessary for as long as possible to avoid choking off the incipient economic recovery.”