— RAZIA KHAN
greater premium on growth or inflation concerns in the current environment. Crucial for the Bank will be balancing its desire to respond to SA’s dwindling growth prospects against the importance of retaining its credibility as an inflation fighter.
Either way, the true nature of the MPC and the governor will be revealed in the coming meetings, says Montalto.
He remains hopeful that the Bank will cut rates again, possibly in the first quarter of next year, given his bearish views on SA’s growth prospects. Based on the pronouncements of various MPC members, Montalto thinks it likely that the Bank does want to cut again and will do so as long as any future shocks to SA’s growth are large enough to outweigh the inflation risks, thus preserving the Bank’s credibility.
But many economists are of the view that the Bank will find it difficult to cut rates when inflation is accelerating and so will keep rates on hold for an extended period.
They point out that monetary policy is already highly accommodative with nominal interest rates cut to multidecade lows and real short-term interest rates moving ever deeper into negative territory as inflation climbs.
The Bank also has to worry about the imbalances that are growing between the production and consumption sides of the economy — imbalances which could be worsened by any further rate cuts. Essentially, production and exports are faltering while spending and imports continue to increase.
These imbalances have given rise to SA’s mounting trade and current account deficits and helped the rand to weaken by nearly 6% on a trade-weighted basis over the past two months. If sustained, these trends imply higher inflation down the line.
The upshot is that SA cannot look to monetary policy to provide the stimulus the economy needs to escape its current growth slump. It is also not possible for one 50 basis point cut in interest rates to repair the damage done to economic activity and sentiment by violent labour unrest, heightened political uncertainty, successive sovereign rating downgrades, and the ever-rising cost of living.
“SA appears to be stuck in a lowgrowth equilibrium,” says Standard Chartered Bank’s regional head of research, Razia Khan. “It is going to take much bigger, more far-reaching policy decisions — decisions that can impact positively on long-term confidence — to turn this around.”