Good signs for interest rate cuts in South Africa

The latest drop in inflation has given the South African Reserve Bank (SARB) more space to cut interest rates.

The latest data from Stats SA showed that annual headline consumer inflation moderated to 3.8% year over year in September, following a 4.4% rise in August.

This was broadly in line with economists’ expectations and was the first time that inflation dropped below 4% since 2021. It supports the SARB’s statement in its October monetary policy review that disinflation is now occurring.

The Bureau for Economic Research (BER) said that the in-line expectation outcome for inflation supports its view that the Reserve Bank will cut the repo rate by 25 basis points when the Monetary Policy Committee (MPC) meets in November.

This will follow a 25 basis point cut in September, which reduced the repo rate from a 15-year high of 8.25% to 8.00%. This was the first rate cut in over four years.

The BER is not alone in thinking there will be a cut in November.

Momentum Investments believes that inflation will average 4.7% in 2024 and ease to 4.3% in 2025.

“While the monthly inflation rates suggest a stabilisation in consumer prices, we maintain our view
that the SARB will proceed cautiously with interest rate cuts because SA’s economy remains vulnerable to external pressures,” said Momentum Investments.

“We expect three more 25 basis point cuts in the repo rate with the next cut in November. This will bring the repo rate to 7.25% by the end of 2025 (currently 8%).”

In addition, PPS Investments said that softer oil prices, moderating food prices, and a stronger rand should help ease price pressures.

The South African currency has gained nearly 5% since the business-friendly Government of National Unity (GNU) took power in June.

“Looking ahead, the current rate of inflation should offer the SARB some peace of mind,” said PPS Investments.

“While most economists expect the deceleration in inflation will encourage the SARB’s MPC to cut rates by a quarter point for a successive meeting in November, some see scope for a larger reduction.”

“However, South Africa’s rapid switch to become a net importer of fuel creates supply risks requiring
infrastructure to store and transport fuel. The SARB may also be cautious about the potential impact of
conflicts in the Middle East.”

Reserve Bank’s new target

Looking beyond interest rates, the Reserve Bank is pushing hard for a new inflation target in South Africa.

The current inflation target stands between 3% and 6%, with the SARB aiming for the 4.5% midpoint.

SARB Governor Lesetja Kganyago said the nation’s inflation target, which was first established in 2000, was overdue for review and should be adjusted lower.

South Africa’s inflation target is far above those of other nations, with the USA, UK, and EU targeting roughly 2.0% inflation each year.

This severely impacts South Africa’s competitiveness and means that South Africa’s inflation is far higher than that of other emerging markets.

Although the Reserve Bank is tasked with keeping inflation down, the Finance Minister actually sets the target.

“However, members of the MPC have made it quite clear that they are working with a 4.5% inflation target when making decisions about the appropriate monetary policy stance,” said the BER.

“They are unlikely to ‘secretly’ pursue a lower target, as this could harm their credibility (and thus the effectiveness of monetary policy) over the long term.”

Economists believe that Finance Minister Enoch Godongwana’s next-week Medium-term Budget Policy Statement (MTBPS) could see a possible lowering of the inflation target.

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