The widely anticipated decision by the Monetary Policy Committee (MPC) to resume its interest rate-easing cycle by reducing rates by another 25 basis points (bps) is the right one.
Prof Raymond Parsons, economist of the North-West University (NWU) Business School, says the MPC decision of 29 May is welcome recognition of the changed economic circumstances that have made this possible.
“While the MPC acknowledged the continued heightened global uncertainties facing the South African economy, it saw them as somewhat more settled for now. The majority view of the MPC therefore recognised the other factors that made it both desirable and practical to further cut borrowing costs for business and consumers at this key juncture in South Africa’s business cycle.”
According to Prof Parsons, even a small reduction in interest rates at this stage can have a big positive impact on the national economic mood and on confidence levels.
He says although it is recognised that monetary policy cannot do the heavy lifting in South Africa’s growth performance, lower borrowing costs are nevertheless supportive of South Africa’s incipient but weak economic recovery.
“The MPC has indeed reduced its 2025 GDP growth forecast from 1,7% to 1,2%, which is lower than the 1,4% growth assumption in the recent Budget. The reduced growth projections remain indicative of the extent to which the implementation of much-needed structural reforms must be expedited to basically improve South Africa’s growth prospects.”
Prof Parsons says the debate around a possible future lower inflation target of 3% that was outlined by Lesetja Kganyago, governor of the South African Reserve Bank (SARB), remains a significant one for future monetary policy.
“The path and target will indeed need careful design, good communication and – above all – wide buy-in. The SARB can hit its target for the wrong reasons, as well as miss the target for the right ones. Global research has confirmed that public support of inflation objectives and means is essential. Finance Minister Enoch Godongwana has also recently again emphasised that political support for monetary policy reform, such as a lower inflation target, must be built before it can be implemented,” he concludes.
