Decision makes lot of sense

THE expected decision by the MPC to again leave interest rates unchanged is the right one given policy and economic uncertainty in South Africa.

Although now a more benign inflation outlook and weaker growth prospects in 2017 might have justified a small rate cut at this stage, recent political developments make it inevitable that such a decision now needs to be postponed. It is striking the extent to which the MPC narrative was permeated by references to political uncertainty and its impact on South Africa’s economic outlook.

Therefore domestic factors such as the recent changes at the National Treasury and the investment downgrades which followed – and a volatile global environment – confirm that the risks of a rate cut now would outweigh any benefits. In the meantime the MPC remains cautious until more evidence has emerged about the balance of risks in economic outlook, and what unpredictable strains might yet still be imposed in the economy.

By the time the MPC meets again at the end of July, there should be more clarity about Moody’s decision on the rand downgrade, the ANC policy conference will have taken place, and there may be a less volatile element in global sentiment about emerging markets. The MPC will then be in a better position to make a judgment call on future interest rates and confirm that South Africa is at the end of the interest rate tightening cycle.

The MPC’s reference to the weakness in private fixed capital investment again emphasises why strengthening investor confidence remains essential to South Africa’s future economic performance. Professor Raymond Parsons NWU school of Business and Governance Economist