Interest rate surprise for South Africa this week – what experts say
Economists and analysts widely expect the South African Reserve Bank (SARB) to cut interest rates by 25 basis points on Thursday (19 September), but at least one believes that a bigger cut could be made, and another seeing short-term pain.
Bloomberg’s survey of 22 economists has landed on a near-unanimous prediction of a 25 basis point cut being delivered by the SARB on Thursday.
However, the single outlier—Gryphon Asset Management’s Abri du Plessis—predicts a cut of 50 basis points.
While market pricing also points to the SARB lowering the key rate to 8%, Du Plessis believes there’s room for a more aggressive approach.
A stronger rand, lower oil prices and the need to stimulate the economy all argue for a deeper cut by the central bank, he said.
“Inflation is under control and coming down nicely. The oil price is assisting a lot more than everyone expected, and the stronger rand is going to help to keep inflation lower in the near term.
“Given these factors, I believe inflation over the next two or three months will be better than what was expected just a few months ago,” he said.
The view is also supported by some predictions of a 50-basis point cut to interest rates in the US later on Wednesday.
Consumer prices have trended lower for six months, finally falling below the SARB’s target rate of 4.5% on Wednesday for the first time since April 2021.
The rand has gained 3.3% since the bank’s last meeting on 18 July amid a resurgence of confidence in South Africa’s economy following the 29 May election.
Crude oil prices, meanwhile, have dropped 12% in the same period as demand from the biggest consumer, China, wanes.
For Du Plessis, that means the SARB now has an opportunity to shift its focus away from controlling inflation and more toward supporting growth.
“With inflation under control, I think the central bank can pay closer attention to South Africa’s growth rate — and that’s where we have a problem,” Du Plessis said.
“They’ve got to start helping by supporting the economy.”
Not so fast
However, Du Plessis’ view is a significant outlier among market analysts, mainly based on the better-than-expected inflation print.
The rub is that the Reserve Bank may take this as an opportunity to lower its inflation target—which means that the journey to a suitable and sustainable inflation level may yet be a long way out.
According to Lourens Pretorius, Fixed Income Portfolio Manager, Matrix Fund Managers, forward inflation expectations have been moderating over the last three months due to a combination of lower fuel, food and administered prices and a firmer rand.
“It is quite conceivable that South Africa will experience annual price increases of less than 4.0% in Q4 of 2024. More importantly, sustained inflation outcomes closer to the current midpoint of the target of 4.5% appear to be achievable throughout 2025,” he said.
With the South African neutral real rate somewhere between 2.5% and 2.75%, interest rates should fall to between 7.0% and 7.25%—or a cumulative 100–125 bps cumulative cutting cycle—in the coming period.
However, Pretorius noted that there is little expectation for the SARB to rush things.
“Whilst there is no doubt that there is room and certainly a need for local interest rate relief, we do not expect the SARB to be influenced into larger local cuts by larger US interest rate cuts.
“We would be surprised to see a larger cut than 25 bps by the SARB especially taking account of the quantum of cumulative cuts available to them.”
Moreover, the central bank has, on many occasions, expressed its desire to align South Africa’s inflation and targeted inflation to our peer economies.
“There are multiple associated benefits to lower long-run inflation, amongst these, a stable and competitive currency.
“To this extent, it is quite plausible that the SARB may view the current slowdown in local and global inflation as an ideal opportunity to re-anchor longer-term inflation expectations at more permanently lower levels,” Lourens said.
The SARB has previously noted that it views an inflation target of around 3% as more appropriate.
“This would imply some short-term pain for longer-term gain with the SARB possibly electing moderately tighter short-term monetary policy in favour of significantly lower rates if successful with re-anchoring long-term inflation expectations.”
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