The arguments offered by the majority of the members of the Monetary Policy Committee (MPC) for raising the repo rate by 25 basis points at this stage are not persuasive.
This is the view of Prof Raymond Parsons, economist from the Business School of the North-West University (NWU). In commenting on the decision by the MPC of the South African Reserve Bank (SARB), Prof Parsons says the split vote of 3:2 on the MPC confirms that there are also cogent arguments in favour of rather delaying any increase in interest rates in South Africa for now.
“The available economic data could well be differently interpreted, with clear room for divided assessments. The South African economy is still recovering from the shocks of the July unrest, load shedding and the pandemic – with business and consumer confidence remaining weak. The MPC itself also says that the July civil unrest and load shedding will have a lasting impact on investment and job creation.”
Prof Parsons says on the inflation front the arguments in favour of rather keeping interest rates unchanged for now also include that, according to the SARB, the “core” inflation outlook remains modest and that price trends will indeed stay close to the mid-point of 4,5% within the inflation target range.
“However, despite the anticipated higher risks to the short-term inflation outlook – which have in any event been expected for some months – the MPC has decided on this occasion not to look through current headline price increases, as was promised previously. Administered prices have apparently been the main culprits, not any threat of demand inflation. Global inflation is not very relevant.”
He says whatever technical factors from the Quarterly Projection Model (QPM) may have driven the MPC’s majority decision, its latest judgement call on rates is therefore open to a different reading.
“For although the good news is that it is only a small increase in interest rates, it nonetheless heralds an upward turning point in borrowing costs, which comes at a crucial stage in South Africa’s business cycle. Rates can only be expected to rise from now on if the frequent reference to the QPM is any guide. While monetary policy cannot do the heavy lifting needed to put the economy on a higher growth trajectory, neither should it risk becoming an impediment to economic recovery at this juncture.”
In addition, the MPC’s economic growth forecasts remain at a modest 1,7% and 1,8% in 2022 and 2023 respectively – with downside risks, the MPC emphasises.
According to Prof Parsons, given the usual time lags in monetary policy, the full effect of the rising rate cycle will be felt during that period.
“It is therefore a real question to what extent the prospect of heavier borrowing costs will now have a negative impact on current levels of business and consumer confidence and on growth prospects. In view of the prevailing economic uncertainties it is therefore equally arguable that the MPC could easily have waited longer before initiating the heightened interest rate cycle.”