MPC could easily have waited longer

by Raymond Parsons: Professor at the NWU School of Business & Governance and a former special policy adviser to Busa.
The arguments offered by the majority view on the MPC for raising the repo rate by 25 basis points at this stage are not persuasive. The split 3:2 vote on the MPC confirms that there are also cogent arguments in favour of having rather delayed any increase in interest rates in SA for now. The available economic data could well be differently interpreted, with clearly room for divided assessments. The SA economy is still recovering from the shocks of the July unrest, load shedding and the pandemic - with business and consumer confidence remaining weak. The MPC itself also says that the July civil unrest and load shedding will have ‘a lasting impact on investment and job creation’.

And on the inflation front the arguments in favour of rather keeping interest rates unchanged for now also include that, according to the SARB, the ‘core’ inflation outlook remains modest and that price trends will indeed stay close to the mid-point of 4.5% within the inflation target range. However, despite the anticipated higher risks to the short-term inflation outlook - which have in any event been expected for some months - the MPC has decided on this occasion not to ‘look through’ current headline price increases, as previously promised. Administered prices have apparently been the main culprits, not any threat of ‘demand inflation’. Global inflation is not very relevant.

Whatever technical factors from the Quarterly Projection Model (QPM) may have driven the MPC’s majority decision, its latest judgement call on rates is therefore open to a different reading. For although the good news is that it is only a small increase in interest rates it nonetheless heralds an upward turning point in borrowing costs which comes at a crucial stage in SA’s business cycle. Rates can only be expected to rise from now on, if the frequent reference to the QPM is any guide. While monetary policy cannot do the ‘heavy lifting’ needed to put the economy on to a higher growth trajectory, neither should it risk becoming an impediment to economic recovery at this juncture.

In addition, the MPC’s economic growth forecasts remain at a modest 1.7% and 1.8% in 2022 and 2023 respectively, with downside risks emphasises the MPC. Given the usual time lags in monetary policy the full effect of the rising rate cycle will be felt during that period. It is therefore a real question as to what extent the prospect of heavier borrowing costs will now negatively impact on current levels of business and consumer confidence and on growth prospects. In view of the prevailing economic uncertainties it is therefore equally arguable that the MPC could easily have waited longer before initiating the heightened interest rate cycle.

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