Low level of borrowing costs continues to promote economic stability

The decision by the Monetary Policy Committee (MPC) to leave the repo rate unchanged for the fourth consecutive time last week was widely expected and in line with market expectations.

Prof Raymond Parsons, an economist from the Business School of the North-West University (NWU), says the MPC sees inflation as mainly being contained around the 4,5% mid-point of the 3%–6% inflation target range, and inflationary expectation as being largely anchored.

“The MPC has therefore rightly judged it necessary to continue to promote economic stability through a low level of borrowing costs for now. Mortgage loans, in particular, have surged in recent months on the back of interest rates at a near-50-year low, with the demand for home loans still rising.”

Prof Parsons says while low rates are generally supportive of the economy, weak credit demand by business nonetheless still seems to have persisted for some time. “It therefore suggests a reduced investor appetite and a lack of desire to commit to a much stronger investment drive that is needed to underpin growth in future years.”

He says rising fixed capital formation is the foundation of sustained job-rich growth. “In revising its GDP forecast for 2021 as a whole to a welcome high of 5,3%, the MPC nonetheless also said that the bulk of the bounce back in the economy is now behind us. It has also reduced its economic growth outlook for 2022 and 2023 to below 2%, which is barely above population growth. Unemployment will remain high. The MPC, fortunately, sees private fixed investment as beginning to recover, but emphasised that it was still constrained by various factors.”

According to Prof Parsons, the bounce back in the economy therefore needs to be translated into sustained growth.

He says the usual constraints on higher inclusive growth – such as the lack of energy security, policy uncertainty, weak confidence and slow progress with structural reforms – still require urgent attention to boost investor confidence.

“These are key issues to improve South Africa’s future economic performance, but they lie outside the mandate of the South African Reserve Bank.”

Submitted by BELINDA BANTHAM on Mon, 09/27/2021 - 11:52