Reserve Bank to modify rates decision model to reflect new realities

The SA Reserve Bank will for the first time modify the model that partly influences its interest rate decisions, it says on its website.

The new, enhanced version of its model, the quarterly projection model (QPM), will factor in more accurately the changing dynamics of SA’s fiscal characteristics. It is likely to be employed when the central bank meets to discuss monetary policy on July 20.

In the past decade SA’s economy has changed dramatically, with analysts and economists claiming that the country has deindustrialised heavily. At the same time, its economic indicators have deteriorated, including its debt-to-GDP ratio, widening unemployment and government trade and account balances.

“In its current form, the QPM has no mechanism to account for fiscal policy in a systematic manner, limiting its ability to help explain how fiscal dynamics impact on inflation, growth and monetary policy,” the Bank said.

“This limitation has become more pronounced in the past 10years as fiscal metrics have changed greatly,” it said, adding that huge fiscal stimulus pumped into the economy during the pandemic also affected fiscal projections.

SA’s ratio of public debt-to-GDP almost tripled from 23% in 2008 to nearly 70% in early 2022 amid persistently large fiscal deficits, the bank said, adding that the country’s risk premium has also doubled.

In May, amid a diplomatic crisis, offshore investors fled SA’s bond market, sending yields up over 12.5% and flagging a default risk.

At the same time, state-owned utility Eskom has implemented record load-shedding as ageing coal-fired power plants falter.

The “enhanced” QPM model will factor in changes in international sentiment towards the country and its risk premium, the Bank said, adding it will also consider public and private wages separately, change the way the inflation estimate is reached and include spikes in fuel and electricity prices.

Reuters