‘The decision by the SARB to further increase rates by another 25 basis points is ‘overkill’ in present economic and political circumstances,” says NWU School of Business and Governance Economist Prof Raymond Parsons.“In any event, given that the SARB itself expects inflation to peak and level off in the near future, the MPC needed to show more flexibility in its approach to monetary policy at a time when the SA economy is fragile as a result of an unusual combination of circumstances.
“The persistently rising interest rate cycle will again come at a cost in growth and employment, as cumulatively higher interest rates have done little to stabilize the rand but will do more to harm business and consumer confidence. The rising interest rate cycle also heightens the chances of ‘stagflation’ (i.e. low growth and high inflation) being entrenched in the SA economy this year.”
Prof Parsons adds the outcome will be that the growth forecast of 0.9% on which the recent Budget is predicated is now also put at risk, at a time when the credit rating agencies have SA’s fiscal metrics under critical scrutiny and also want to see higher growth in the SA economy.
“It is no coincidence that the 23 months of declining economic growth outlined in the latest SARB Quarterly Bulletin also aligns with the two-year period of the current rising interest rate cycle of the SARB, during which borrowing costs have risen.
‘To attract foreign capital SA needs a much better growth outlook. While we cannot look to interest rate policy to promote growth prospects, neither should such policy needlessly weaken them,” he concludes.
