The further 25 basis-point rise in interest rates by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) on 27 January was widely expected by the markets and economists.
Prof Raymond Parsons, economist from the Business School of the North-West University (NWU), explains that to uphold the credibility of the SARB it was inevitable that the MPC would have to raise the repo rate again, given the latest inflation data.
In commenting on the raise he says that in a 4 to 1 majority vote the MPC saw the upside risks to current inflation as the main reason why interest rates should be increased again.
“Borrowing costs for businesses and consumers are likely to rise further by the end of this year, with potential implications for levels of confidence.”
He says the rising trajectory in borrowing costs for businesses and consumers in South Africa this year comes at a weak point in the domestic business cycle.
“Forecasts of the gross domestic product (GDP) growth in South Africa in 2022 and 2023 are generally below 2%. The MPC itself has again lowered its own 2022 GDP growth forecast from 1,8% to 1,7%. The global economy has become less supportive.”
According to Prof Parsons, the downside risks to South Africa’s economic performance in 2022 remain reflected in unemployment being at its record highest (according to the broad definition) at 46%, and total fixed investment being at its lowest point in twenty years at 13% of GDP.
“The monetary policy dilemma is reinforced by the challenge of using higher borrowing costs to combat what are still primarily ‘cost-push’ or ‘supply-driven’ factors, such as Eskom tariffs, fuel costs and supply bottlenecks. The subdued economy limits the ability of producers to pass on cost increases to consumers.”
He says the danger here is that an aggressive rise in interest rates this year may then instead just harm output and employment.
“The MPC’s emphasis on ‘gradualism’ in pending higher interest rates is therefore important. ‘Stagflation’ must be avoided, which would give South Africa the worst of both worlds, in other words, low growth and high inflation.”
Prof Parsons believes to avert this the MPC must remain nimble, data-driven and flexible in its future decision-making to prevent a worst-case scenario from developing during the course of the year.
