MPC decision in line with market ‘expectations’

by Raymond Parsons: Professor at the NWU School of Business & Governance and a former special policy adviser to Busa.
The MPC decision to again leave the repo rate unchanged for the fourth consecutive meeting was widely expected and in line with market ‘expectations’. The MPC sees inflation as mainly contained around the 4.5% mid-point of the 3%-6% inflation target range and inflationary expectation as largely anchored.

The MPC has therefore rightly judged it necessary to continue to promote economic stability through a low level of borrowing costs for now. Mortgage loans in particular have surged in recent months on the back of near 50-year low interest rates, with the demand for home loans still rising.

Nevertheless, while low rates are generally supportive of the economy, weak credit demand by business still seems to have persisted for some time. It thus suggests a reduced investors’ appetite and a lack of desire to commit to a much stronger investment drive needed to underpin growth in future years. Rising fixed capital formation is the foundation of sustained job-rich growth.

In revising its GDP forecast for 2021 as a whole to a welcome high of 5.3%, the MPC nonetheless also said that "the bulk of the ‘bounce back’ in the economy is now behind us". It has also reduced its economic growth outlook for 2022 and 2023 to below 2%, which is barely above population growth. Unemployment will remain high. The MPC fortunately sees private fixed investment as beginning to recover but emphasised that it was still constrained by various factors.

The ‘bounce back’ in the economy therefore needs to be translated into sustained growth. The usual constraints on higher inclusive growth - such as the lack of energy security, policy uncertainty, weak confidence and slow progress with structural reforms - still require urgent attention to boost investor confidence. These are key issues to improve SA’s future economic performance but they lie outside the mandate of the SARB.

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