Reserve Bank cuts interest rates in South Africa

The South African Reserve Bank has cut interest rates by 25 basis points, dropping the repo rate to 7.50%.

The latest decision by the Monetary Policy Committee (MPC) was in line with expectations on the back of lower inflation in South Africa.

Four members voted for the cut, while two voted for rates to remain unchanged.

The latest inflation data from South Africa stood at 3.0% in December, well below the SARB’s midpoint target of 4.5%.

The SARB believes that inflation should remain below the 4.5% target for the first half of the year.

However, headline inflation should revert to around 4.5% after the period as core inflation remains at its normal target.

Inflation expectations also align with the SARB’s target. However, the risks to the SARB’s target remain on the upside amidst global developments.

Looking at other indicators, GDP contracted in Q3 on the back of extremely weak agricultural production.

However, the SARB expects a rebound in Q4 amidst a recovery in agricultural production and higher spending due to two-pot withdrawals.

This should see the output gap, leaving the economy to perform in line with its potential from the quarter onwards.

The SARB also sees GDP growth reach 2.0% by 2027 despite the disappointing mining and manufacturing sectors, which are still below Covid-19 levels.

As growth picks up, the SARB expects improvements in the primary and secondary sectors, as well as a pick-up in investment.

The outlook of US Monetary Policy rate cuts looks limited in South Africa amidst rising tariffs.

Reserve Bank Governor Lesetja Kganyago added that the US Fed may even increase rates to tackle inflation.

Europe also sees weak economic growth expectations and elevated inflation targets, while China’s economy has been decelerating, which is marked by low interest rates and deflation.

The US dollar has thus seen strength, reaching a possible record high.

Trade war fears

The MPC also looked at the potential consequences of a global trade war, with US President Donald Trump threatening to increase tariffs across the globe.

The model used saw a 10% universal increase in US tariffs, with retaliatory measures by other countries.

The scenario showed higher inflation and interest rates globally and greater risk aversion in financial markets.

The scenario would see the rand depreciate to R21 to the dollar while domestic inflation hit 5.0%.

On a more positive note, the SARB also looked at a scenario where major structural reforms are introduced in the country.

This would see growth increase from 2.0% to 3.0% in 2027. This would also result in lower inflation and lower interest rates.

The reforms would lower South Africa’s risk premium and more monetary policy space.

Kganyago said that amidst the uncertain global environment, it remains essential for South Africa to maintain the domestic reform agenda.