The widely anticipated MPC decision to resume its interest rate-easing cycle by reducing rates by another 25 bps is the right one. It is a welcome recognition of the changed economic circumstances which have made this possible. While the MPC acknowledged the continued heightened global uncertainties facing the SA economy it saw them as somewhat more settled for now.
The majority view of the MPC therefore recognised the other factors which made it both desirable and practical to further cut borrowing costs for business and consumers at this key juncture in SA’s business cycle. At this stage even a small reduction in interest rates can have big positive impact on the national economic mood and on confidence levels.
Although it is recognised that monetary policy cannot do the heavy lifting in SA’s growth performance, lower borrowing costs are nevertheless supportive of SA’s incipient but weak economic recovery. The MPC has indeed reduced its 2025 GDP growth forecast from 1.7% to 1.2%, which is lower than the 1.4% growth assumption in the recent Budget. The reduced growth projections remain indicative of the extent to which the implementation of much needed structural reforms must be expedited to basically improve SA’s growth prospects.
The debate around a possible future lower inflation target of 3% outlined by SARB Governor Lesetja Kganyago remains a significant one for future monetary policy. The path and target will indeed need careful design, good communication and above all, wide buy-in. The SARB can hit its target for the wrong reasons, as well as miss the target for the right ones. Global research has confirmed that public support of inflation objectives and means is essential.
And Finance Minister Enoch Godongwana has also recently again emphasised that political support for monetary policy reform, such as lower inflation target, must be built before it can be implemented.