Low borrowing costs are important for business and consumer confidence

The decision by the Monetary Policy Committee (MPC) to keep interest rates unchanged again was in line with market expectations and similar to its approach at its previous meeting in May 2021.

Prof Raymond Parsons, an economist from the Business School of the North-West University (NWU), says given the additional uncertainties recently injected into the economy by civil unrest, the Level 4 lockdown and the current trajectory of the pandemic, the need to now keep borrowing costs low and stable is reinforced. This remains important for business and consumer confidence at this point in South Africa’s business cycle.

Prof Parsons says the downside risks to growth listed by the MPC have now become paramount in the light of current developments. “With core inflation contained, for now, the priority is for monetary policy to remain supportive while South Africa seeks to absorb – and adjust to – the significant economic costs of the latest ‘shocks’ to the economy. It is therefore desirable that interest rate policy should stay responsive to an unusual set of circumstances.”

He says the MPC has not revised its previous May 2021 GDP growth forecast of 4,2% in 2021, which suggests that it does not see recent developments as having a lasting impact on South Africa’s growth outlook this year. Other preliminary estimates of GDP loss this year have indeed already ranged widely: from -0,4% to -0,8%, but we still await definite figures. Yet, whatever the ultimate outcome, it is right that there should be no talk for now of hiking or “normalising” interest rates in a vulnerable economy.

“It is encouraging that the MPC hopes to keep borrowing costs low for as long as circumstances permit. More broadly, the latest MPC statement confirms that investor confidence has indeed been shaken by recent events. However, it is already clear that the impact on long-term investor sentiment depends not on the fact that widespread civil unrest has occurred, but on the degree of confidence displayed in how the situation will be managed from now on.”

Prof Parsons explains that the better and more sensibly South Africa is seen, both politically and economically, to be handling the aftermath of the recent violence and looting, the sooner investor confidence will recover.

“What investors now need is reassurance that they will not be exposed to these risks again, because the right remedies and reforms that will keep South Africa investable will now be implemented. This challenge does not lie with the South African Reserve Bank or monetary policy, but elsewhere,” he concludes.

Submitted by BELINDA BANTHAM on Fri, 07/23/2021 - 14:25