BUSA: SARB’s decision on interest rates is ‘correct’

The combination of low growth and high inflation poses the risk of the South African economy drifting into a ‘stagflation’ phase unless there is a collective effort by key stakeholders in the economy to implement the necessary remedial measures.

This was expressed by the private sector lobby group Business Unity South Africa (BUSA) following yesterday’s decision by the Monetary Policy Committee (MPC) to live interest rates unchanged at 5% (repo rate) and 8.5% prime rate. Communicating the rationale of the MPC South African Reserve Bank Governor Gill Marcus highlighted upside inflation risk while the economy remains under pressure.

Marcus said “Since the previous meeting of the Monetary Policy Committee (MPC), the headline inflation rate has returned to within the inflation target range.”

Despite this favourable development, inflation is expected to remain uncomfortably close to the upper end of the target band. Moreover, the upside risks to the inflation outlook remain elevated, dominated by uncertainties primarily relating to both the timing and the speed of the tapering of the US Fed’s bond purchasing programme.”

BUSA took the opportunity to say that the stagflation risk reinforces the importance of SA’s commitment to the implementation of the National Development Plan.

BUSA added that it “shares the realistic assessment of the present balance of risks facing the SA economy given by the MPC.”

BUSA said it was particularly concerned that the growth rate for 2013 may come in at below the previous consensus view of 2%. “Given the current low levels of business and consumer confidence, BUSA also believes that growth and business prospects have weakened for 2014 and 2015, with the risks on the downside.”

BUSA agrees that the deficit on the current account of the balance of payments makes the exchange rate more sensitive to possible capital flow slowdowns or reversals.”

The emphasis which the SARB has placed on the upward risks in the inflation outlook is reflected in the difficulties which many companies are experiencing with the rising costs of doing business and a struggle to remain competitive, despite a weaker exchange rate.”

news@ujuh.co.za

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