Policy alone cannot solve economic crisis

Tuesday, August 23, 2011

Pretoria - Monetary policy alone cannot solve the global economic crisis, Reserve Bank Governor Gill Marcus said on Tuesday.

The governor said that normal cyclical downturns are often reinforced by tight monetary policies in response to an overheating economy and inflationary pressures.

"Unfortunately, we are not in a normal cyclical downturn, and the crisis cannot be solved through monetary policy alone. Households in the advanced economies are still in the process of deleveraging and repairing their impaired balance sheets, and monetary policy can only help to a certain extent," said Marcus at a meeting with the US Chamber of Commerce in South Africa.

The governor said the slowdown in the US economy in the first half of 2011 was interpreted as a temporary soft patch but now it is recognized is that the US economic recovery is weaker than anticipated, with fears of a possible return to replacing confidence with the outlook no better in the UK and Eurozone.

The South African economy, she said, will not be immune to global developments, with the economy having made a fragile and uneven recovery from the recession.

"The future growth prospects will be affected significantly by global developments," said the governor.

In the first quarter of 2011, South Africa's GDP grew by 4.8%. "However, the second quarter performance had been disappointing, with both the manufacturing and mining sectors likely to have subtracted from growth," said Marcus.

She said monetary policy has remained relatively accommodative with the repo rate at 5.5% - its lowest in 30 years. Inflation has been in the target range since March 2010 but is currently on an upward trend due to food and energy price pressures. Statistics South Africa is due to release the CPI figure tomorrow. In June, the Consumer Price Index rose to 5%.

South Africa, the governor said, will respond accordingly to a global downturn. "In the event of a significant global downturn, monetary policy will react appropriately."

The central bank's Monetary Policy Committee will meet next month to decide on interest rates.

"We are living in difficult times. The global economy is on the brink of falling back into what could be a prolonged recession unless purposeful and coordinated action is taken," said Marcus.

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