The unanimous decision by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) to cut interest rates by another 25 basis points (bps) was the right one.

Prof. Raymond Parsons, economist at the North-West University (NWU) Business School, says the MPC decision of 20 November is the result of a number of recent favourable financial developments. It created the space to further ease borrowing costs for business and consumers, which he says is encouraging.

“Monetary policy now needs to be supportive of the incipient economic upturn, as even with the latest 25 bps cut, real interest rates in South Africa remain relatively high by global standards. Job-rich growth is now the high priority.”

Prof. Parsons says the steadier growth outlook outlined by the MPC statement is being driven mainly by higher consumer spending, with fixed capital formation still lagging.

“The cost of capital needs to be reduced. In the coming year, a sufficient number of firms must feel that economic and political factors justify their fresh plans for expansion. Downside risks to export performance and growth from external tariff shocks also loom, pending a new trade agreement with the United States.”

Prof. Parsons explains that even with a new 3% inflation target the MPC emphasised that monetary policymaking still required complex real-time judgements. There also remains the risk that South Africa’s excessively administered prices pose to the consolidation of a lower 3% inflation anchor.

“The MPC statement recognises that, in an uncertain environment, monetary policy can hit its future inflation target for the wrong reasons and miss it for the right ones. Global research confirms the need for gradualism in moving to any new lower inflation target.”

According to Prof. Parsons, the new inflation target band of 2% to 4% has therefore rightly been set in a flexible framework and is being phased in over two years.

“Judgement and common sense will consequently continue to remain essential for the MPC in interpreting incoming data, assessing the contours of the economic outlook, and identifying emerging risks to that outlook,” he concludes.