JOHANNESBURG, 17 SEPTEMBER 2020 – The decision by the South African Reserve Bank’s (SARB) Monetary Policy Committee to leave interest rates unchanged generally aligns with market expectations and comes as no surprise as the economy continues to splutter, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Michael Ade said today.
Commenting on the MPC’s decision to leave the repo rate unchanged at 3,50%, Dr Ade said the SARB had missed an opportunity to cut interest rates by a further 25 basis points, a move that is undoubtedly disappointing for embattled and over-indebted consumers and businesses. He said “further reduction of the repo rate would have further cushioned the economy from the impact of the COVID-19 pandemic”.
Dr Ade said the pandemic’s blow on the economy had been devastating, with extended negative implications for the Metals and Engineering (M&E) cluster of industries. He noted that household final consumption expenditure had decreased by -49,8% in the second quarter, with the largest decreases reported for expenditure on durable goods produced by sub-components of the industry, as the sale of these goods was largely restricted during the lockdown. These had significantly affected cashflow and liquidity, constricted margins and procurement expenditure and increased the chances of closure of indigenous companies.
The decision would have built on an encouraging trend of repo rate reductions since the start of 2020, bringing the interest rate to its lowest point since its inception 22 years ago. This would have led to a corresponding reduction in the prime lending rate, also impacting on the rates pegged to the various types of loans offered by commercial banks, as these rates would have been adjusted lower, Dr Ade said.
“A repo rate cut would have helped not only to reduce borrowing costs for embattled consumers and stagnating businesses, but also provide much-needed injection into the economy. The present scenario of low growth, volatile production levels, declining productivity and low consumer and business confidence does not provide comfort to both direct and anchor investors,” he said.
Dr Ade said although third-quarter real GDP growth is likely to be better than expected, there is not likely to be significant contribution from key industrial sectors such as the mining sector, the M&E and broader manufacturing sector and the utilities sector. He argued that the SARB has missed an opportunity to further pursue an expansionary monetary policy stance aimed at broadly stimulating growth and improving on the negative output gap, given the continuing existence of downside risks to the growth outlook.
“There is no doubt that the broader metals and construction industries would have benefited from such a decision. However, we understand and accept the outcome of the MPC’s deliberations, given the existence of upside risks to inflation outlook, which has been increasing – albeit at a slow pace – from May this year,” he said.
Dr Ade said the SARB’s decision to leave the repo rate unchanged was sensible, particularly given the need to be flexible and accommodative when using monetary policy as a tool to achieve and maintain price stability, while also being cognisant of changes in underlying market forces as they unfold over the coming months.
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