“The decision by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) to again leave interest rates unchanged was widely anticipated and in line with market expectations.”
Prof Raymond Parsons from the North-West University (NWU) Business School says that whereas, in the past few months, the MPC voted 3 to 2 in favour of “no change” ― as opposed to another 25 basis points cut ― the outcome of the MPC’s latest meeting was a unanimous decision.
“It reflects the SARB’s updated assessment of the balance of risks facing the South African economy in which inflation in particular remains contained, but in which steeply rising administered prices still aggravate cost inflation.”
He says the MPC statement confirmed that both global and domestic factors are currently driving a firm “rebound” in the South African economy this year. “The fact that the MPC has raised its gross domestic product (GDP) growth forecast for 2021 from 3,6% to 3,8% is positive and resonates with revised improved growth expectations from other authoritative sources.”
According to Prof Parsons, the MPC was nonetheless right to emphasise that load-shedding and a highly uncertain electricity supply are very damaging to South Africa’s economic performance. He also warns that new waves of Covid-19 would weigh on the growth outlook.
“The MPC statement undertook ‘to look through temporary price shocks’.” Prof Parsons says it is still necessary for interest rates to stay as low as possible for as long as possible.
“Business conditions are tough and stability in borrowing costs must remain supportive for now. The downside risks to growth may be greater and upside risks to inflation less than the SARB analysis suggests, especially given weak demand conditions and still low levels of business and consumer confidence.”
According to Prof Parsons, the MPC statement reminds us that South Africa still has a long way to go to restore national output and employment to their pre-pandemic levels, bearing in mind that the economy was already in recession even before Covid-19 hit the country a year ago.
“The improved short-term economic outlook is therefore that South Africa must now move into more sustainable job-rich growth territory in the period ahead by steadily implementing appropriate structural reforms.”
