Reserve Bank cuts rates by 25 basis points

The South African Reserve Bank (SARB’s) Monetary Policy Committee has elected to cut South Africa’s interest rates by 25 basis points.

This marks the first time since May 2023 that the committee has changed rates, and it is in line with economist and analyst expectations.

The repo rate is now sitting at 8.00%, and the prime lending rate has been cut to 11.50%. The decision to cut rates was unanimous.

The rate cut comes in the context of lower inflation in South Africa, as well as global central bank moves—mainly the US Fed, which cut rates by 50 basis points on Wednesday.

According to Reserve Bank governor Lesetja Kganyago, the MPC members considered an unchanged stance, a 25-basis point cut, and a 50-basis point cut.

“The MPC ultimately reached consensus on 25 basis points, agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term,” he said.

The governor said that the forecast sees rates moving towards neutral next year, stabilising slightly above 7%, implying another 75-100 basis point cuts to come.

“As before, the rate path from the Quarterly Projection Model remains a broad policy guide, changing from meeting to meeting. Decisions of the MPC will continue to be data dependent, and sensitive to the balance of risks to the outlook,” he said.

Kganyago noted that there are scenarios where inflation could undershoot the baseline forecast, if oil prices are lower or the exchange rate appreciates further.

However, he warned that, conversely, inflation could be higher than our baseline forecast given scenarios such as higher housing costs, larger electricity price increases, or wage increases that outrun inflation and productivity growth.

Food inflation remains a source of uncertainty, despite recent improvements.

“Global conditions pose additional challenges. Geopolitical risks are heightened and could generate further economic shocks. Policy uncertainty is also elevated, in various parts of the world. Both trade restrictions and debt levels are rising, and might go much higher.

“This mix could add significant inflationary pressure to the world economy, generating tighter financial conditions for South Africa and other countries,” he said.

For the time being, South African assets have performed relatively well. The rand has strengthened during the year, more than most peer currencies, while long-term yields have moderated and spreads over US rates have narrowed.

These moves have reversed some of the deterioration experienced since 2020, he said.

“Given a potentially adverse external environment, however, it is crucial to sustain domestic reform momentum. This entails both structural reforms to support growth capacity, and macroeconomic efforts to rebuild fiscal and monetary buffers.”

Kganyago said that MPC’s main contribution is to deliver low and stable inflation, with well-anchored inflation expectations.

“We also recommend additional measures that would improve economic conditions. These include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.”

The MPC will next meet for its final briefing for the year on 21 November 2024.

Read: Nationalisation of the Reserve Bank back on the menu in South Africa