The South African Reserve Bank (Photo: AP)
Expect. Sensible.
This is how the decision to keep the interest rate unchanged for the time being is termed.
Prof. Raymond Parsons from the North-West University’s (NWU) business school says the Reserve Bank’s monetary policy committee’s unanimous decision is in line with that of other central banks to react cautiously to the global energy crisis.
Parsons says rates are now being kept constant around the world for the time being as central banks prepare for the possible inflation that is likely to result from higher energy and other prices.
He explains that recent domestic headline and producer inflation data supported the new 3% inflation target, but the outlook has now deteriorated sharply due to global price pressures.
Parsons says the monetary policy committee’s latest decision is therefore a sensible one in changed economic circumstances.
South Africa is currently facing triple price shocks on 1 April due to the combined impact of the rise in fuel prices, higher fuel and Road Accident Fund levies, the adjusted carbon tax as well as increased Eskom tariffs.
Parsons says it is therefore inevitable that business people and consumers will experience concentrated cost challenges in the near future, not just a rise in fuel prices.
“The monetary policy committee presented some useful alternative scenarios regarding possible inflation and interest rate outcomes over the coming period.
“The committee must now calibrate the risks of higher inflation in the interest of balanced growth. It could hit its new 3% inflation target for the wrong reasons, as well as miss it for the right reasons.”
Lesetja Kganyago, President of the Reserve Bank. (Archive photo)
In these highly uncertain economic circumstances, it is therefore important that the committee remains data-driven and flexible, as it navigates a complex outlook in which various outcomes are possible.
However, Parsons points out that steps to mitigate the multiple price rises and mitigate their immediate impact on the economy – especially on the poor – do not lie with monetary policy, but primarily with government.
“South Africa’s economic recovery is now likely to be interrupted this year. The committee has left its GDP growth forecasts unchanged for the time being, but with downside risks. There is no evidence of demand-side inflation in the economy and disposable income is now likely to be reduced by highly increased costs.”
Parsons believes that the oil price supply shock could easily later become a demand shock for South Africa.
“The overall impact of the Middle Eastern crisis on various economies, such as that of South Africa, now depends on the duration of the war, not just on the intensity of the shock.”
The Strait of Hormuz. (Photo: STR / AFP)