Reserve Bank holds rates – but with a positive turn
The South African Reserve Bank’s (SARB’s) Monetary Policy Committee has voted to hold rates for the eighth consecutive time, keeping it at 15-year highs.
The repo rate has been held at 8.25%, with the prime lending rate at 11.75%. The rates remain the highest they have been since 2009 and have been in effect since May 2023.
The decision was in line with market expectations, where most economists anticipated a hold. The prevailing view is that the SARB will not cut interest rates ahead of the US Fed.
The US Fed, meanwhile, is only expected to cut rates in September, meaning South Africans will still have some wait ahead before seeing an inkling of relief.
Some economists were hopeful of a 25 basis point cut ahead of the announcement. However, this was ultimately too optimistic.
Notably, the decision was not unanimous – breaking from the trend seen over the past year.
Four members of the committee voted in favour of the hold, and two voted in favour of a 25 basis point cut, reflecting a turn in sentiment and pointing to the cutting cycle getting closer.
According to Bank of America (BofA) economist Tatonga Rusike, any minority voting for a cut would increase the likelihood of a rate cut in September.
Reserve Bank governor Lesetja Kganyago said that while global inflation has started to ease and the sharp price hikes are filtering out of the system, inflation is yet to stabilise in line with targets.
“It is clear that the battle against inflation is not yet won,” he said.
For South Africa, the inflation outlook is positive. Headline consumer inflation has sustained in the “top half” of the SARB’s range and is on its way to moving below the mid-point (4.5%) currently being targeted.
“For inflation expectations, the latest survey results show average expectations at 5% next year and 4.9% two years ahead, still uncomfortably above the SARB’s 4.5% objective, and above our own inflation forecasts,” Kganyago said.
“However, all categories of respondents lowered their inflation expectations from the previous survey. We anticipate further progress as inflation slows, helping to re-anchor expectations firmly at 4.5%. While the forecast has improved, the balance of risks is assessed to the upside.”
In discussing the stance, MPC members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5%.
The committee assessed that an unchanged stance remained appropriate, given the inflation risks. Some members, however, were of the view that the inflation outlook had improved enough to reduce the degree of restrictiveness.
“Global interest rates remain high, especially in the United States, and rates may stay higher for even longer than markets currently anticipate. This presents risks to the currency outlook,” Kganyago said.
“Domestically, inflation expectations do not yet reflect the 4.5% midpoint objective over the medium term. While expectations are moving in the right direction, they continue to show the impact of the recent inflation surge.”
The bank’s forward-looking model still sees rates easing to more neutral territory by 2025.
Economists see rates terminating between 100 and 150 basis points lower by the middle of next year. However, Kganyogo stressed that the decisions of the MPC will continue to be data dependent, and sensitive to the balance of risks to the outlook.
“We are committed to stabilising inflation at the mid-point of the target band. Achieving this outcome will improve the economic outlook and reduce borrowing costs,” the governor said.
He said that “additional measures” would improve economic conditions in South Africa.
These include reaching a prudent public debt level, improving the functioning of network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.
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