Will SA’s monetary policy be GDP sensitive?

South Africa's recent GDP reshuffling has economists and analysts reevaluating the country's economic indicators and monetary policy. Following the revision, Tertia Jacobs, Investec Corporate and Institutional Treasury Economist, shared her insights on the potential implications of the updated GDP numbers. The increase in the size of the economy has highlighted a shift in the structure of the economy, with a greater emphasis on consumption over fixed investment. This change suggests a lower potential growth rate, raising concerns about inflation and the economy's ability to grow sustainably without triggering inflationary pressures. One of the key implications of the GDP revision is its impact on the Reserve Bank's econometric model. The revised data will require adjustments to the model's assumptions, particularly regarding potential GDP. Calculating potential GDP is challenging, with factors like energy constraints and productivity levels playing significant roles. The decline in potential GDP over the past decade signals a need for close monitoring of South Africa's productivity, especially in a post-pandemic era where remote work could influence productivity levels. Despite expectations that the Reserve Bank may not introduce interest rate changes in the near term, the revised GDP numbers could affect the bank's interest rate forecast. The expected growth forecast for the year is likely to be revised higher, potentially narrowing the output gap. However, a smaller output gap raises the risk of increased inflation, prompting discussions on the need for interest rate adjustments to manage inflationary pressures effectively. In light of the recent economic crises, such as the COVID-19 pandemic and widespread looting, traditional economic assumptions may not hold. The Reserve Bank must carefully assess how the economy evolves in the current context to make informed decisions about monetary policy adjustments. Tertia Jacobs pointed out that while the econometric model might suggest the need for interest rate hikes due to faster growth and lower potential GDP, the bank must consider the broader economic landscape before making any changes. Regarding the potential shift in inflation management from a range to a specific target point, Tertia Jacobs expressed that focusing on a specific target could help anchor expectations and guide policy decisions. While the discussion on this change is ongoing and would involve coordination with the national treasury, emphasizing a target point for inflation could provide clarity and direction in containing inflationary pressures. Overall, the debate on monetary policy changes in response to the GDP revision underscores the importance of closely monitoring economic indicators and adapting policy measures to ensure sustainable economic growth and price stability.