International bank’s message about interest rate cuts in South Africa
Bank of America has thrown cold water on the South African Reserve Bank (SARB) cutting rates again by the end of the year, despite inflation remaining well contained.
Over the past year, the Monetary Policy Committee (MPC) has cut interest rates by a cumulative 125 basis points, bringing the repo rate down from 8.25% to 7.0%.
This came off the back of the lower inflation figures across the country, which hovered around 3.0% – the lower end of the SARB’s “official” target range.
However, as per expectations, the MPC paused rates in September, with four of the six MPC members voting in favour of a hold, while two members opted for a 25 basis point cut.
Tatonga Rusike, Chief Sub-Saharan Africa Economist for Bank of America, said that the minority votes indicate that some members think the repo rate could drop to 6.75%.
“In this line of thinking, other committee members could be persuaded to cut one more time should next inflation print surprises to the downside more significantly.”
However, it is crucial to note that Bank of America’s near-term headline inflation projections show an upward trend is on the horizon.
The world’s second-largest bank sees inflation at 3.5% in September, with a jump to 4% in October due to the end of year-on-year fuel deflation. CPI would stay above 4% to year-end.
“If our baseline holds, no further cuts expected. It’s time to see the effects of previous rate cuts and assess inflation dynamics in the coming months,” said Rusike.
“We would reevaluate our rate call should October CPI print less than 4%. For now, we maintain no cuts until the second half of 26.”
SARB’s new target
For the past year, the SARB has been pushing for a new inflation target across South Africa, which has led to further challenges in predicting the path of interest rate cuts.
In July, the SARB announced that the MPC would base its interest rate decisions on a “preferred” 3% target
Despite being within the target range of 3% to 6%, it is far lower than the “official” 4.5% midpoint target on which the SARB has been basing its interest rate decisions.
The SARB said that the current inflation range makes the nation uncompetitive and causes price pressure on citizens.
While the SARB sets the target, the Minister of Finance is responsible for setting the range, with Finance Minister Godongwana expressing anger at the SAR’s premature announcement of an “informal” target.
National Treasury and the SARB are working on finding a new target band, while a formal announcement will be made as soon as practical to anchor expectations.
Although markets are still waiting for an official announcement, Deputy Finance Minister David Masondo has endorsed a lower inflation target.
Speaking at the RMB Morgan Stanley 2025 Investor Conference last month, Masondo said the current inflation-targeting framework is far too broad and should be narrowed over time.
“The principle remains clear: low and stable inflation supports competitiveness, boosts demand, reduces borrowing costs, and strengthens employment creation,” said Masondo.
“Politically, it also helps to prevent the kind of social unrest that high inflation and high unemployment can trigger.”
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