The latest drop in inflation has given the South African Reserve Bank (SARB) more space to cut interest rates. <\/p>\n\n\n\n
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. <\/p>\n\n\n\n
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. <\/p>\n\n\n\n
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. <\/p>\n\n\n\n
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. <\/p>\n\n\n\n
The BER is not alone in thinking there will be a cut in November.<\/p>\n\n\n\n
Momentum Investments believes that inflation will average 4.7% in 2024 and ease to 4.3% in 2025. <\/p>\n\n\n\n
“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\u2019s economy remains vulnerable to external pressures,” said Momentum Investments. <\/p>\n\n\n\n
“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%).” <\/p>\n\n\n\n
In addition, PPS Investments said that softer oil prices, moderating food prices, and a stronger rand should help ease price pressures.<\/p>\n\n\n\n
The South African currency has gained nearly 5% since the business-friendly Government of National Unity (GNU) took power in June. <\/p>\n\n\n\n
“Looking ahead, the current rate of inflation should offer the SARB some peace of mind,” said PPS Investments. <\/p>\n\n\n\n
“While most economists expect the deceleration in inflation will encourage the SARB\u2019s MPC to cut rates by a quarter point for a successive meeting in November, some see scope for a larger reduction.” <\/p>\n\n\n\n
“However, South Africa\u2019s 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.” <\/p>\n\n\n\n
Reserve Bank’s new target <\/strong><\/p>\n\n\n\n Looking beyond interest rates, the Reserve Bank is pushing hard for a new inflation target in South Africa. <\/p>\n\n\n\n The current inflation target stands between 3% and 6%, with the SARB aiming for the 4.5% midpoint. <\/p>\n\n\n\n SARB Governor Lesetja Kganyago said the nation\u2019s inflation target, which was first established in 2000, was overdue for review and should be adjusted lower.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n This severely impacts South Africa’s competitiveness and means that South Africa’s inflation is far higher than that of other emerging markets. <\/p>\n\n\n\n Although the Reserve Bank is tasked with keeping inflation down, the Finance Minister actually sets the target. <\/p>\n\n\n\n “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. <\/p>\n\n\n\n “They are unlikely to \u2018secretly\u2019 pursue a lower target, as this could harm their credibility (and thus the effectiveness of monetary policy) over the long term.” <\/p>\n\n\n\n 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.<\/p>\n\n\n\n