Reserve Bank cuts interest rates by a conservative 25 basis points.

By Lehlohonolo Lehana.

The South African Reserve Bank’s monetary policy committee (MPC) voted to cut interest rates by 25 basis points to 7.75% on Thursday.

This means the second rate cut in a cycle that began in September, when the central bank cut rates by another 25 basis points, the first reduction in more than four years. 

Reserve Bank governor Lesetja Kganyago said the decision was unanimous.

This also brings the prime lending rate — which is the rate commercial banks charge customers who need to borrow money — down by 0.25 percentage points to 11.25%.

“I think 25 basis points is cautious because the environment is uncertain and it calls for caution. 

“Inflation in the US surprised and came above expectations and similarly in the UK. In the Euro area, wages were rising at the fastest rate since 2000. That tells you the scale you are faced with, the uncertainty we face,” Kganyago told journalists at a briefing to announce the interest rate decision.

“The disinflation process is there but it is clearly a very bumpy road and it is making central banks cautious across the globe. As a central bank in a small, open economy, caution is what is going to be at play.”

Thursday’s decision came a day after data from Statistics South Africa showed that inflation had slowed sharply in October to 2.8% from 3.8% in September, the lowest reading in South Africa since June 2020 when it was 2.2%.

Kganyago noted that headline inflation had dipped below the Reserve Bank’s target range of 3% to 6% and that the prices of goods had slowed more than those of services, which mainly reflects the benefits of a stronger exchange rate and a lower oil price relative to last year. 

“These temporary supply shocks are likely to keep inflation below 4% until mid-2025. Thereafter, we see inflation modestly higher, relative to our September projections, reaching 4.6% from late 2025. This is because of a higher electricity price assumption, “the governor said. 

“In the near term, inflation appears more contained, however, the medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water.”

He said global interest rates could shift higher again and the recent rand depreciation demonstrated how rapidly changes in the global environment could affect South Africa.

The rand has weakened from R17.49 to the dollar and has been above R18 since the US presidential election at the start of the month.

First National Bank (FNB) CEO Harry Kellan welcomed the SARB’s decision, as this will lift consumer and business confidence.

“This continued positive outlook for the economy is supported by the Sarb’s forecasted decline in interest rates next year, which will reduce the cost of borrowing and further stimulate economic growth.

“Year-end is typically a period of increased spending, and some of this spending is funded by loans or credit card facilities. However, volatility in the Rand exchange rate and higher bond yields in many developed economies in recent weeks may result in fewer rate cuts next year.”

While it is too early to speculate on the impact of new US policies on South Africa, Kellan says we can potentially expect some significant changes early next year.

“We urge customers with debt and home loans in particular to consider maintaining their payments at present levels rather than reducing the payment in line with lower interest rates if their budget allows. The saving on interest costs over the term of the home loan will be significant.”

Kim Silberman, economist and macro strategist at Matrix Fund Managers, says the MPC erred on the side of caution.

“The Sarb justified its decision by citing uncertainty and medium-term risks to wages, food prices, electricity tariffs (now expected to increase 13.3% next year and 12.3% in 2026), water, and insurance.

“Interestingly, wages are a concern despite the Bureau for Economic Research’s (BER’s) 2-year inflation expectations having fallen to 4.8% and the Sarb anticipating that they will fall further from current levels.”

The next MPC meeting is on 30 January 2025.

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