The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) welcomes the South African Reserve Bank’s decision to reduce both the repo and prime lending rates by 25 basis points and said the decision has the potential of stimulating local consumer demand and boosting production towards reviving the stuttering economy.
Speaking after the Governor’s announcement, SEIFSA Chief Economist Michael Ade said the decision provides some relief for businesses, which continue to operate in a tough economic environment characterized by low domestic growth, subdued demand, high unemployment, volatile output, high unit labour costs and poor business activity levels.
Moreover, Gross Domestic Product (GDP) growth has consistently deteriorated since quarter three of last year, despite the rebound from a technical recession, reflecting a continuing period of strain for businesses in 2019, with first-quarter growth results having shown a 3.2% annualized contraction.
“The performance of high-frequency data since the beginning of the year is also worrisome. The manufacturing Purchasing Managers’ Index, a proxy for business activity, has been trending in the contractionary zone from January 2019, reflecting generally poor inventory levels amid challenging supply chain management,” Ade said.
He added that manufacturing firms, including those in the diverse metals and engineering (M&E) cluster of industries, are wary, as indices of business confidence and business expectations are gradually constricting, with the undesired potential of negatively impacting on competitiveness, investment, production and employment.
Ade said the Reserve Bank’s decision to ease monetary policy is welcome, given the need to stimulate consumer demand further and improve on an ever-gloomy domestic outlook in the medium term.
“The timing, against the backdrop of moderate official inflation numbers, is apt, given the need also to stimulate spending by over-indebted consumers with restrained purchasing power. Correspondingly, the dovish stance of the US Federal Reserve Bank, which has signalled possible rate cuts of as much as half a percentage point later this year, must have partly influenced the outcome by the Monetary Policy Committee members,” he said.
In conclusion, Ade said the lowered interest rates will reduce borrowing costs of direct investors and domestic companies within the M&E cluster, thus benefitting key industries which are drivers of its domestic demand and supply patterns and boosting overall demand for its intermediate products, towards better production levels. Moreover, it will help struggling companies to mitigate production costs, offset rising petrol prices and losses arising from pricey intermediate imports and provide a basis for an improved differential for businesses faced with ever-fluctuating selling price inflation.