Economists lament ‘missed opportunity’ of another repo rate cut

17th September 2020 By: Simone Liedtke - Writer

While the decision to leave interest rates unchanged at 3.5% is “disappointing”, North West University Business School economist Professor Raymond Parsons says South Africa’s basic policy priorities should now focus on “urgently implementing overdue economic reforms and ensuring security of electricity supply”.

This should all be done with the aim of boosting and securing investor confidence, he says.

In a statement issued on September 17, Parsons laments that, although there has been a substantial reduction in interest rates this year, owing to the prolonged Covid-19 lockdown, “the economic outlook is now even bleaker than previous forecasts made by the National Treasury, the South African Reserve Bank (SARB) and many private sector economists”.

By not reducing interest rates further now, when the economy and society have “suffered a great devastation”, in the words of President Cyril Ramaphosa, is, according to Parsons, “not a helpful or responsive judgment call”.

Both global factors and the shocking second-quarter collapse in gross domestic product (GDP) growth in South Africa had created both the need and space for more support from monetary policy, albeit modest, he states.

Even though the Covid-19-induced lockdown is now at Alert Level 1, and the economy on track to slowly recover in the second half of the year, GDP growth for the year as a whole could still contract by as much as 10%, he adds.

Economic recovery, not inflation, “is clearly the immediate problem”, Parsons laments, adding that this “seems not well captured” by the Quarterly Projection Model.

Business and consumer sentiment would, therefore, have both benefited from lower borrowing costs, with the psychological impact being as important as the real one in the presently depressed economic conditions.

In addition, businesses that hold part of their stock-in-trade with borrowed money are sensitive to changes in interest rates.

Cheaper financing of stocks would thus have provided an extra basis for a revival of trade in the months ahead, says Parsons, adding that “it remains true that monetary policy alone cannot turn the economy around” and that it is “not a major growth catalyst”.

Further, with the reality of continued load-shedding by State-owned power utility Eskom being inevitable, “the efficacy of interest rate cuts will be muted”.

Parsons therefore says the urgent implementation of pro-growth structural reforms and a guarantee of energy security “are now where South Africa’s policy priorities must mainly lie to build confidence and place South Africa on a path of investment and job-rich growth”.

Additionally, in a separate statement on September 17, Steel and Engineering Industries Federation of Southern Africa (Seifsa) chief economic Dr Michael Ade cites the SARB’s decision as a “missed opportunity” to cut interest rates by a further 25 basis points, a move which he says is “undoubtedly disappointing for embattled and over-indebted consumers and businesses”.

Ade believes a further reduction of the repo rate “would have further cushioned the economy from the impact of the Covid-19 pandemic”.

The pandemic’s blow to the economy has been devastating, with extended negative implications for the metals and engineering (M&E) cluster of industries. 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 subsectors 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.

Ade says the decision would have built on an encouraging trend of repo rate reductions since the start of this year, 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.”

He explains that another repo rate cut would have helped not only to reduce borrowing costs for embattled consumers and stagnating businesses, but also provided a 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 laments.

Although third-quarter real GDP growth is likely to be better than expected, Ade notes that 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 argues, however, 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.