The widely expected pivot for the Monetary Policy Committee (MPC) to now commence its interest rate cutting cycle by a modest 25 basis points (bps) is good news for business and consumers.
In commenting on the decision by the South African Reserve Bank (SARB) on 19 September Prof Raymond Parsons, economist from the Business school of the North-West University (NWU), says that, although the decision remains marginal in terms of present high borrowing costs, it nonetheless represents a positive turning point in the interest rate outlook.
“Monetary policy is still in restrictive territory, but the SARB has now recognised that the time has come for interest rate policy to begin to adjust to a largely improved inflation outlook.”
Prof Parsons says the timing and pace of further interest rate reductions by the MPC will obviously remain data-driven, but are now likely to continue if the inflation outlook continues to improve.
“Although the MPC statement emphasised external uncertainties, both global and domestic economic trends on balance strongly indicate that, barring shocks, another 25 bps cut should be possible at the MPC’s next meeting in November.”
Prof Parsons says as it is still early days in the implementation of the two-pot system of access to pension funds and, given the firm rules of engagement, the MPC is right not to be too concerned about its possible inflationary effects.
“On present evidence, the macroeconomic implications of the two-pot system over time are likely to be quite balanced, in other words, a ‘Goldilocks’ impact – not too hot, and not too cold.”
According to Prof Parsons there were also key references in the MPC statement to administered prices in general and Eskom tariffs in particular that are continuing to pose upside risks to the inflation outlook.
“In the next three years, Eskom is seeking 36%, 12% and 9% price increases respectively over that period.”
Prof Parsons says that, fortunately, there is now a convergence of pressure from the Minister of Electricity, Parliament, the Presidential Climate Commission and other key stakeholders for electricity pricing reform before any final decisions are made.
“Finally, the MPC statement recognised that South Africa’s economic growth has been too low for too long. The MPC also acknowledged that a major weak link in South Africa’s growth prospects was total gross fixed capital formation (GFCF), which has declined for four successive quarters.”
He concludes that, apart from structural remedies and reforms, however, strengthening GFCF also needs progressive lowering of borrowing costs of capital to help improve the risk-reward ratio of private investment plans, especially for SMMEs.
