Tweaking the monetary policy could offer momentary relief to SA businesses

19 July 2019 2 min. read
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The debate around interest rates has been sparked again in South Africa, this time due to a decision by the Monetary Policy Committee (MPC) to reduce the interest rates in the country by 25 basis points. PwC Strategy& economists recommend that a 50 basis point reduction would have a more appropriate impact.

South Africa’s economy has been navigating a period of stagnation recently, with slow economic growth putting strain on public coffers. As experts look to find a way out, much has been said of the role that the South African Reserve Bank (SARB) and its monetary policy have to play in this process of recovery.

Interest rates have been a go to solution for increased strain on the government treasury, to the point where national interest rates currently stand in excess of 100 basis points. Such a scenario goes in contradiction with South Africa’s goals of drawing massive pools of foreign investment to inject momentum into the economy.

However, SARB officials argue that there is only so much that monetary policy can achieve. “current challenges facing the economy are primarily structural in nature and cannot be resolved by monetary policy alone. It is now even more urgent to have a combination of prudent macroeconomic policies and structural reforms that raise potential growth and lower the cost structure of the economy,” claims SARB Governon Lesetja Kganyago.

Tweaking the monetary policy could offer momentary relief to SA businesses

Lullu Krugel and Christies Viljoen of PwC Strategy& South Africa agree that monetary policy has a limited role to play in rescuing the country’s economy in the long term, although its value in mitigating the situation in the short term must not be underplayed either.

“A substantial reduction in interest rates would reduce debt repayment costs and ease pressure on household and business budgets. At the same time, there is likely to be very little impact on inflation rates which, at present, are primarily driven by supply-side factors,” explain Krugel and Viljoen.

The interest rate in South Africa is currently 100 basis points higher than the recommended level, and the economists believe that a 25 basis point reduction might not generate enough benefits for the business and domestic environment. Krugel and Viljoen advocate a 50 basis point reduction to stabilise the situation.

Nevertheless, the economists concede that a number of structural changes are required to benefit the economy in the long term, and agree with the premise being laid down by the SARB. Benefits from MPC changes usually last for a duration of one year, after which they are nullified by economic conditions.