Commenting on the decision by the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) to raise interest rates by 25 basis points, Professor Raymond Parsons of the North-West University Potchefstroom Business School says:
“While the SARB decision to raise interest rates by 25 basis points is not entirely unexpected, the rates increase inevitably now comes at a cost to the economy. Given that the MPC itself has described the economic outlook as ‘fragile’, a rising interest rate cycle will exact a price in economic growth and employment. This must also be viewed against the SARB’s own downward revision of its growth forecasts for 2015 and next year. It is difficult to reconcile regular reductions in the Bank’s economic growth forecasts with rising interest rates.
“Even a small rise in borrowing costs at this stage will have a negative impact on already low levels consumer and business confidence, though more for its psychological than real effects at this stage. Furthermore, the global and domestic uncertainties referred to by the MPC argue against pushing SA further into a rising rate cycle at this juncture, rather than in favour of it. Several of these factors, such as the possible decision by the Federal Reserve to raise U.S. interest rates next month, could have been be reassessed at the MPC’s next meeting in January and not seemingly pre-empted at this stage.
“The effects of the unfolding drought on prices and output also cannot be dealt with through monetary policy. Growth and employment concerns in SA should instead at present be given the benefit of the doubt. Interest rates can always be raised later, whereas economic growth foregone is lost forever. A rising interest rate cycle thus makes it more difficult for SA to pull out of the ‘low growth trap’ in which it currently finds itself. If growth persistently remains below 2% the risks of further credit rating downgrades are increased, not reduced.
“That said, SA should now concentrate on the structural obstacles to a better economic performance and not seek solutions to its growth challenges in monetary policy. Interest rate and exchange rate policies must not be expected to carry an excessive burden. While global headwinds will inevitably continue to buffet SA, they also expose the structural weaknesses in the economy to which solutions are overdue.”