Busa says it bases its view on the following cumulative considerations:-
1. After four increases in the repo rate last year, bringing the prime overdraft rate to its highest level since 2003, the current level of interest rates must now be given an opportunity to exercise its full effect on the economy. It is well known that monetary policy operates with a pronounced time-lag and the Reserve Bank itself expects inflation to return to the 3-6% range in the second half of 2008. Higher inflation is also to a large extent being driven by two factors which are mostly outside SA's control – namely, oil and food prices.
2. While the overall growth outlook is still positive, the economic evidence in SA is increasingly suggesting a slowdown in certain key sectors of the economy such as manufacturing, retailing and housing prices. Consumption is being restrained by the steps taken so far – including the National Credit Act – and a better balance is emerging between consumption and investment. Consumer spending is becoming more disciplined.
3. Business confidence has become more fragile in the recent past for both internal and external reasons, and any further rise in interest rates at this stage could unnecessarily damage business and consumer sentiment
4. Busa emphasises that monetary policy alone cannot be expected to shoulder the sole responsibility of reducing inflation. There needs to be a more inclusive approach to containing inflation. The prospects of the SA economy reaching the Asgi-SA growth and employment goals may recede rapidly – unless restraint is shown in areas like Eskom tariff increases and there is better short-term management of power outages.
5. Overlaying the domestic factors are the latest international economic trends. The global economic outlook has deteriorated considerably in the past few weeks – as a result, interest rates in the US have been sharply reduced – and new uncertainties have crept into the international economic situation in ways which could make the SA economy more vulnerable.
Busa therefore believes that as far as the MPC meeting this week is concerned, the risks of doing nothing are now far less than the risks of yet higher interest causing serious damage to economic prospects and business confidence at the present juncture.
