That the Reserve Bank’s monetary policy committee must do so in a weak economy is unfortunate
Global and local dilemmas make for a challenging background to the Reserve Bank’s monetary policy committee meeting this week.On the global front, banking sector turmoil after the failures of two smaller US banks and one large Swiss bank has created a new layer of uncertainty about the outlook for interest rates. The rapid rise in interest rates exposed weak bank balance sheets and business models, so was one of the key factors that sparked the banking crisis.
It might be even more concerned about the trend in inflation expectations, which the latest Bureau for Economic Research survey shows rose to an average 6.3% in the first quarter of 2023, from 6.1% in the fourth quarter of 2022. Even though inflation is expected to decrease in coming months, it’s still far from the 4.5% that the Bank targets. Rising expectations suggest price and wage setters in the economy could keep it there — unless the Bank stays the course on interest rate hikes.
It is most unfortunate that it has to do so in an economy that is so weak. At its most recent meeting, the Bank forecast growth of just 0.3% this year; the IMF’s new forecast is even weaker at 0.1%. What’s more tragic though is that even at this level of stagnation, the Bank estimates the economy is still growing above its potential or trend growth rate, so the inflationary pressure is still there. SA’s potential growth rate is basically zero, on the Bank’s estimates. That reflects the constraints on growth from high levels of load-shedding, as well as the dysfunction in transport and other public services.
There’s not a lot the Bank can do about that. But there’s little doubt that the structural reforms SA so urgently needs to boost growth could also address some of the Bank’s interest-rate dilemmas.
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