Prof Raymond Parsons, economist at the North-West University (NWU) Business School, says the latest decision by the Monetary Policy Committee (MPC) to again leave interest rates unchanged was widely expected, given the economic model on which the South African Reserve Bank (SARB) is operating.
“Once again the MPC voted by a narrow margin of three to two to keep the repo rate constant, although economic circumstances nonetheless still suggest the SARB had room to cut if it had wished to do so.”
He says the SARB itself sees inflation as well contained. A further cut in rates, even a small one, would have been useful in helping to turn the economy around, even though there is growing evidence of an economic recovery in the second half of 2020 as the lockdown exit strategy has been steadily implemented. Several economic sectors are projecting better economic news.
Prof Parsons says the SARB governor, Lesetja Kganyago, nevertheless agreed that the high-frequency data available so far suggests that the current recovery is premised more on base effects rather than on a strong economic momentum. Continued shaky consumer confidence and yet higher unemployment still make for persistent and generally weak domestic economic conditions in this period.
“The global economic outlook has in the meantime also deteriorated among some of South Africa’s major trading partners, with new waves of Covid-19 creating economic uncertainty through renewed lockdowns in several developed economies such as the United States and the European Union. These developments have raised new questions about world economic prospects.”
Prof Parsons explains that, domestically, the SARB expects 2020 to show a slightly better gross domestic product (GDP) growth outcome of -8% instead of its previous forecast of -8,2%. Improved growth forecasts are given for 2021 and 2022.
“The MPC nonetheless believes it will take a long time for output in South Africa to return to prepandemic levels. The economic evidence reflected in the latest SARB statement also confirms that the upside risks to inflation are much lower than the downside risks to growth. This is why a strong minority on the MPC supported another 25 basis-point cut in the repo rate at this meeting.”
He says that, looking ahead on the MPC’s decision-making processes, two matters should be raised:
* SARB Governor Kganyago’s assurance in reply to a question that efforts were being made to bring the MPC up to its full strength of seven members is welcome and necessary. This would make for more optimal decision-making by the MPC given the importance of the monetary policy matters being addressed by it.
* It must be emphasised that, as the MPC has also mentioned, the Quarterly Projection Model used by the committee is no substitute for human judgement. This is even more so in the current extraordinary economic circumstances in which most economies, including South Africa, find themselves. Although the SARB acted quickly in cutting rates initially this year, central banks have had to show continued flexibility in monetary policy in order not to find themselves “behind the curve” as events have unfolded.
Prof Parsons says the SARB is nonetheless right to again emphasise that the main solutions to South Africa’s economic predicament lie elsewhere and not in monetary policy. “The game changers now lie in the urgent implementation of promised economic reforms, and in the maintenance of fiscal sustainability. These priorities were embodied in the latest economic reconstruction plan and the recent Medium-Term Budget Policy Statement respectively.”
He says that, on the fiscal front in particular, the ability to control the excessive public sector wage bill still looms large in South Africa’s economic scenario and its containment remains essential if credibility with regard to fiscal planning is to be built.
“These factors, together with the outcome of the government’s third investment conference this week, and what the latest credit rating agency reports will say soon about the South African economy, will be more important in shaping the immediate economic environment than monetary policy.
“Therefore, in charting a course towards fiscal sustainability and renewed growth, the sooner a firm sense of economic direction is consolidated in South Africa and policy uncertainty is reduced, the better the prospects for boosting investor confidence and achieving job-rich growth.”
