Close call for interest rates in South Africa
The South African Reserve Bank has divided opinion over whether it will cut interest rates again on Thursday or stay on hold to reinforce its commitment to its 3% inflation target.
Economists were narrowly split, with 13 in a Bloomberg survey expecting Governor Lesetja Kganyago’s monetary policy committee to keep the benchmark rate at 6.75, while 11 anticipated a 25-basis-point reduction.
Traders were also divided. Forward-rate agreements used to speculate on borrowing costs implied a 52% chance of a 25-basis-point cut.
For the year as a whole, markets priced in 57 basis points of easing, up from 50 basis points a week earlier.
Economists in a separate survey see the six-member panel split over the decision, with four expected to back a hold and two favouring a quarter-point reduction.
The decision, expected after 15h00 in Pretoria, will be the second since Finance Minister Enoch Godongwana formally endorsed the lower 3% inflation target, and comes as he prepares the annual budget, which will show whether spending increases are aligned with the new goal.
Patrick Buthelezi at Sanlam Investments expects the bank to cut.
But he said a more prudent approach might be to hold back until after the Feb. 25 budget, while also waiting for clarity on the path of administered prices and electricity tariffs.
“I would wait a bit and cut a bit later,” Buthelezi said, citing the budget and the latest inflation figures for December, which showed a slight uptick to 3.6%.
“If you want to anchor inflation at 3%, you will allow restrictive monetary policy,” he said. “They’ll be divided on this decision; I don’t know which group will win that discussion.”
Others also expect a close call between those favouring a hike and those favouring a hold.
“Maybe they want to settle expectations around the target; they’re not there yet,” said Johann Els, chief economist for PSG Financial Services, who also expects a 25 basis points reduction. Though inflation expectations have cooled to 3.7%, they remain above the new target.
But “the combination of a lower forecast, a stronger rand, lower inflation expectations; I think we can see two or three rate cuts of 25 basis points each this year,” Els said.
The rand has rallied almost 8% against the dollar since the central bank’s November meeting, leaving it significantly stronger than policymakers had projected at the time.
That should help mute inflationary pressures by lowering import prices, and, as a result, the SARB is expected to lower its inflation forecast for this year.
On the other hand, potential downward revisions to medium-term inflation estimates may be partly offset by stronger growth expectations, prompting the MPC to deliver a dovish hold, BNP Paribas’ Jeffrey Schultz and Lior Kohanan wrote in a note.
“We maintain that a majority on the MPC favours a more patient approach to policy recalibration under the SARB’s new 3% inflation target,” they said. “We stick to our call for a quarterly pace of 25 basis point cuts in 2026 and a terminal rate of 6% reached by the end of the third quarter.”
Loading ...