In 2020, the SARB is likely to face pressure to cut interest rates to stimulate a stagnant economy. Thus far, the bank’s monetary policy committee has resisted, arguing instead that the key to growth lies in other policy measures.
"South Africa is a resilient economy, but the growing financing needs of government make it less resilient than it might be," said SARB deputy governor Rashad Cassim in an interview with Fin24.
Cassim, a long-serving member of the central bank's MPC, is also former head of research.
"[Many ask] if inflation is so low why are we not cutting?
"The economy needs to be resuscitated and it’s not obviously clear how that should be done.
"When you look at emerging market economies their investment as a percentage of GDP is 25%. In South Africa, it is 18 to 19%. What does it take [to raise it]?" he ponders.
In his view, discussion should focus on finding a solution to this problem, but it's complex. "That’s where the debate has to focus. In order to do that, a whole set of questions needs to be put on the table: why is business confidence so low? There is a potential demand."
For Cassim, the answer lies not in monetary policy but rather in stimulating business confidence and tackling other constraints to growth.
Previously, SARB governor Lesetja Kganyago has said that a series of government growth policies have not been implemented. In Cassim's view, lifting institutional constraints can result in modest growth.
'No growth creates urgency'
In the third term, growth contracted by 0.6%, while the December bout of load-shedding saw economists forecasting a recession for 2019. For Cassim, monetary policy : smooths out the cycles [of boom and bust]".
"Central banks take away the punch-bowl when the party warms up.
"The thing about monetary policy is that it may nudge you into spending a bit more, but it’s a temporary relief. We [the SARB] have stimulated the economy, but South Africa never returned to growth. That’s why the debate about monetary policy has become so complicated. It has got to do with other constraints outside of monetary policy."
Is the SARB pulling away the punch-bowl even when there isn’t a party? Are they being party poopers?
"The bank is taking a view on what the risks to inflation are in the next two years. If you cut today, the benefits (are only felt) two years from now. We are in the risk game and must ask: on balance, will inflation be above or below target? When there is less confidence those risks go up. The risk premium has increased."
Cassim says the economy is stuck in a low equilibrium growth trap. "One thing worse than no growth is low growth – low growth gives you complacency.
"When you have no growth, it creates urgency."