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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
However, the single outlier\u2014Gryphon Asset Management\u2019s Abri du Plessis\u2014predicts a cut of 50 basis points. <\/p>\n\n\n\n
While market pricing also points to the SARB lowering the key rate to 8%, Du Plessis believes there\u2019s room for a more aggressive approach.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
\u201cInflation 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. <\/p>\n\n\n\n
“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.<\/p>\n\n\n\n
The view is also supported by some predictions of a 50-basis point cut to interest rates in the US later on Wednesday.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
The rand has gained 3.3% since the bank\u2019s last meeting on 18 July amid a resurgence of confidence in South Africa\u2019s economy following the 29 May election. <\/p>\n\n\n\n
Crude oil prices, meanwhile, have dropped 12% in the same period as demand from the biggest consumer, China, wanes.<\/p>\n\n\n\n
For Du Plessis, that means the SARB now has an opportunity to shift its focus away from controlling inflation and more toward supporting growth. <\/p>\n\n\n\n
\u201cWith inflation under control, I think the central bank can pay closer attention to South Africa\u2019s growth rate \u2014 and that\u2019s where we have a problem,\u201d Du Plessis said. <\/p>\n\n\n\n
\u201cThey\u2019ve got to start helping by supporting the economy.\u201d<\/p>\n\n\n\n
Not so fast<\/strong><\/p>\n\n\n\n However, Du Plessis’ view is a significant outlier among market analysts, mainly based on the better-than-expected inflation print.<\/p>\n\n\n\n The rub is that the Reserve Bank may take this as an opportunity to lower its inflation target\u2014which means that the journey to a suitable and sustainable inflation level may yet be a long way out.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n “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.<\/p>\n\n\n\n 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%\u2014or a cumulative 100\u2013125 bps cumulative cutting cycle\u2014in the coming period.<\/p>\n\n\n\n However, Pretorius noted that there is little expectation for the SARB to rush things.<\/p>\n\n\n\n “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. <\/p>\n\n\n\n “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.”<\/p>\n\n\n\n Moreover, the central bank has, on many occasions, expressed its desire to align South Africa\u2019s inflation and targeted inflation to our peer economies. <\/p>\n\n\n\n “There are multiple associated benefits to lower long-run inflation, amongst these, a stable and competitive currency. <\/p>\n\n\n\n “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<\/strong>,” Lourens said.<\/p>\n\n\n\n The SARB has previously noted that it views an inflation target of around 3% as more appropriate.<\/p>\n\n\n\n “This would imply some short-term pain for longer-term gain <\/strong>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.”<\/p>\n\n\n\n
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