As was expected, in the light of the prevailing elevated global economic uncertainties, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) has again left interest rates unchanged for now.
Prof. Raymond Parsons, economist from the North-West University (NWU) Business School, says the decision on 26 March is an inevitable further pause in the recent interest rate-easing cycle of the SARB.
“The unanimous decision by the MPC is aligned with other central banks in responding to the global energy crisis with caution, mostly holding rates steady, while preparing for the potential inflation that is likely to flow from higher energy and other prices. Recent domestic headline and producer inflation data have been supportive of the new 3% inflation target, but the outlook has now deteriorated sharply as a result of global price pressures.”
He says the present MPC stance is therefore a prudent one in changed economic circumstances. However, South Africa faces triple price shocks on 1 April. There is the combined impact of the spike in fuel prices from the global oil price blow, the higher fuel and Road Accident Fund levies, the adjusted carbon tax, as well as increased Eskom tariffs. Business and consumers will inevitably experience concentrated cost challenges in the near future, not just a spike in fuel prices.
“The MPC already now sees inflation risks as being on the upside and interest rates are likely to remain higher for longer. Steps to mitigate the multiple cost escalations and soften their immediate impact on the economy – especially on the poor – do not in any event lie with monetary policy, but mainly with the government. As the MPC statement indicates, the overall impact of the Middle East crisis on various economies like that of South Africa now depends on its duration, not just on the intensity of the shock.”
According to Prof. Parsons, the MPC offered some useful alternative scenarios as to possible inflation and interest rate outcomes over the period ahead. In these highly uncertain economic circumstances, it is therefore important that the MPC must remain data-driven and flexible as it navigates a complex outlook in which several outcomes are possible.
“It is nonetheless likely that economic recovery in South Africa will now be interrupted this year. The MPC has left its gross domestic product growth forecasts unchanged for now, but with downside risks. There is no evidence of demand inflation in the economy and disposable income is now likely to be diminished by highly elevated costs. The oil price supply-shock could easily become a demand-shock for South Africa later. The MPC now has to calibrate the risks of higher inflation in the interests of balanced growth. It can hit its new inflation target of 3% for the wrong reasons, as well as miss it for the right ones,” Prof. Parsons concludes.
