Reserve Bank has a new tool to help it decide on interest rates

The South African Reserve Bank has constructed a new inflation measure to monitor underlying price developments that will help support monetary policy decision-making.

Supercore inflation is made up of core price growth components that are more likely to be triggered by general economic conditions as measured by the output gap and show high sensitivity to the business cycle, authors including Samantha de Kock, MG Ferreira and Mpho Rapapali said in a central bank economic note published Friday.

The measure will assist policymakers to distinguish short-lived inflationary pressures from those showing more persistent trends, the authors said. It will also be used alongside headline and core inflation, which strips out food and non-alcoholic beverages, fuel and energy prices.

“Broadening the suite of measures for assessing underlying price pressures enhances robustness and confidence of correctly pinning down the persistent inflationary dynamics given the uncertainty around any single such measure,” the authors said. This is crucial for the formulation of monetary policy, they said.

While headline inflation is still above the midpoint of the central bank’s 3% to 6% target range, where it prefers to anchor expectations, supercore has hovered around the midpoint in recent months, the authors said. This suggests that demand-driven inflationary pressures are presently more balanced, they said.

That may add to the case for the central bank’s monetary policy committee to cut borrowing costs as soon as September. The key interest rate has been at a 15-year high of 8.25% since mid-2023 and the MPC has said it will only change course once inflation is sustained at the midpoint.

The bank now sees inflation moderating to 4.3% in the last quarter of 2024.

Interest rate cuts coming

Economists and analysts are predicting an interest rate cut in South Africa next month at the MPC’s penultimate meeting for the year.

At the latest meeting in July, the decision to hold rates was not unanimous, with two MPC members electing to cut rates by 25 basis points.

This represents a significant shift in tone, where the Reserve Bank has been united in holding rates to curb inflation.

The tone for interest rate cuts coming sooner rather than later was also supported by a similarly bullish view from the US Fed, which is also setting the stage for a September cut in the US.

Economists have noted that it is highly unlikely for South Africa to cut interest rates before the US—as this would have a negative impact on the rand—so a cut in the US is another strong signal that the MPC will move soon.

Investec Chief Economist Annabel Bishop said that markets have increased the probability of a 25 basis points cut in US interest rates in September from 70% at the start of July to 116%.

The Fed funds future also shows a roughly 85% chance of a second 25 basis point interest rate cut in the US this year, likely in November.

Current forecasts for South Africa are for a 25 basis point cut in September, another in November, and between 50-100 more basis points in the first half of 2025.

With Bloomberg

Read: Interest rate cuts in South Africa: All signs point to one month