All signs point to an interest rate cut this week

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) is widely expected to cut interest rates by 25 basis points tomorrow, 30 January.

The decision comes amidst persistently low inflation rates, with the latest December figure standing at 3.0%, well below the SARB’s midpoint target of 4.5%.

The decision also comes off the rand somewhat stabilising amid uncertain U.S. trade policies.

“December’s CPI inflation data came in significantly below expectations at 3.0%, with all major components showing subdued price pressures,” said Johann Els, Chief Economist at Old Mutual Group.

“This, coupled with lower inflation expectations and a relatively stable rand, creates a conducive environment for the SARB to reduce rates.”

The latest CPI report showed that rental and owner’s equivalent rent (OER) inflation was notably lower than anticipated, easing to 2.8% and 2.4% year-on-year, respectively.

However, food and consumer goods inflation remained way below the bottom end of the 3% to 6% target range, which further alleviated fears about upward price pressures.

Els said that these trends showed that there were minimal demand-driven inflationary risks, providing the MPC with the necessary confidence to continue with a rate cut.

Els emphasized that these trends indicate minimal demand-driven inflationary risks, providing the MPC with the necessary confidence to proceed with the rate cut.

“While the rand has experienced volatility due to ongoing uncertainties surrounding U.S. tariff policies, the lack of immediate tariff increases has alleviated some market concerns,” added Els.

“This stabilisation of the rand, combined with lower-than-expected inflation, supports the case for a measured rate reduction.”

Els added that the anticipated rate cut aligns with the broader economic strategy to boost growth by reducing borrowing costs where inflation is below the mid-point target.

However, the SARB’s likely cut will also be accompanied by a hawkish commentary addressing the potential external risks, such as the U.S. trade policies and their impact on the rand.

“Even though we expect a rate cut this week, the SARB is likely to issue a cautious statement that highlights the risks associated with U.S. policy shifts and their potential effects on the rand and inflation.”

“This balanced approach ensures that the Reserve Bank remains vigilant against any unforeseen inflationary pressures.”

Investec Chief Economist Annabel Bishop also said that the SARB’s MPC is likely to cut interest rates by 25 basis points later this week.

Looking ahead

However, Bishop said that no interest rate cut is expected at the March MPC meeting.

She noted that the interest rate cutting cycle is expected to slow this year, with the SARB expected to only cut again in July following two cuts in late 2024.

Els, however, remains positive, stating that there could be up to three more potential 25 basis point rate cuts in 2025.

“The MPC will need to stay agile, closely monitoring indicators such as currency moves, inflation expectations, and price trends to guide future monetary policy decisions,” said Els.

Els added that the upcoming MPC meeting will also need to consider the implications of the recently signed Expropriation Bill.

Although there has been some volatility due to the signing of the bill, it still includes strong protections for property owners and should not significantly deter investor confidence.

The Bill may add another level of uncertainty, but Els said that the overall economic fundamentals remain robust enough to support the Reserve Bank’s current policy trajectory.

With the global economy finding ways to deal with the complexities of US trade policies and their ripple effects, South Africa’s monetary policy stances appear poised to adapt.

It will need to balance domestic economic stability with external economic pressures.