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‘Hawkish pause’ from MPC is the right move

by Raymond Parsons: Professor at the NWU School of Business & Governance and a former special policy adviser to Busa.
As widely expected, the MPC again decided by a 3-2 vote to continue to keep interest rates on hold, following on a similar decision at the MPC’s previous meeting on 20 July. This further ‘hawkish pause’ outcome today was the right decision by the MPC, taking into account the overall global and domestic factors presently shaping SA’s economic environment. The MPC analysis confirmed that monetary policy is now restrictive, with real interest rates now over 3%.

The period of stability in borrowing costs experienced since May this year is nevertheless a positive factor in business and consumer confidence at a time when both are in negative territory and when consumer spending, in particular, is under great pressure. The rate of inflation has also been declining in recent months, and there have been some signs of progress on the anti-inflation front.

Although the slight acceleration in inflation in August suggests that inflation remains ‘sticky’, it is still anticipated to stay well within the SARB’s inflation target range of 3%-6% in the months ahead. The rand is nonetheless likely to remain volatile as markets further unpack the global economic outlook, US monetary policy and domestic factors such as SA’s deteriorating public finances.

The SARB Governor also emphasised the extent to which a decline in fiscal sustainability drives the country risk premium faced by SA, thus keeping interest rates elevated. With the MPC seeing inflation risks as still being on the upside, it seems likely that interest rates will remain high for longer and not be reduced until well into 2024.

The SARB strengthened its GDP growth forecast for 2023 as a whole to 0.7%, compared to 0.4% at the previous MPC meeting, with about 1% expected in 2024. Capital formation, fortunately, seems to have turned a corner. However, various other negative factors in the economy, such as consumer spending being under heavy pressure, suggest that the balance of risks to the growth outlook is instead still on the downside. It again emphasises the urgent need to implement growth-friendly policies and projects.
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