The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is expected to announce its decision on the interest rate on Thursday, with many analysts, economists and ordinary citizens expecting some relief in the form of a 25 basis points decline.
Old Mutual’s group chief economist Johann Els, says expectations are mounting for an interest rate cut.
The repo rate is currently at a 14-year high of 8.25% and the prime lending rate is at 11.75%.
Els said inflation has eased considerably, with the headline rate dropping to 4.6% in July from 5.1% in June, comfortably within the SARB's target range.
The US Federal Reserve’s possible rate cut this month is also placing pressure on the SARB to take a more accommodative stance, according to Old Mutual.
Els argued that the SARB would have room to cut rates at both of its remaining meetings for 2024, on September 19 and November.
“I expect interest rates to be cut, perhaps more than expected by the market,” he emphasised.
The economist said the Reserve Bank has successfully brought inflation within its target range and with global pressures, particularly from the US, starting to ease, and therefore the path for a rate cut seems clear.
The importance of the US
Els also highlighted the importance of the US Federal Reserve’s meeting said to take place on Wednesday.
The US may cut their interest rate by 50 bps this week and that could set the tone for the SARB’s decision.
A rate cut by the Fed could ease global financial conditions, supporting a stronger Rand and providing the SARB with further impetus to further reduce rates.
“With the Fed likely cutting rates and local inflation pressures easing, the SARB should be confident in cutting rates at the upcoming meeting,” Els said.
Old Mutual noted that a rate cut by the Fed could ease global financial conditions, supporting a stronger rand and providing the SARB with further impetus to further reduce rates.
Not so fast...
Earlier this month, the Reserve Bank Governor, Lesetja Kganyago said South Africa has to sustain a low inflation for a period of time in order for the bank to justify further interest rate cuts.
The Governor acknowledged that there has been a decline in the inflation rate in July 2023 but emphasised that South Africa needs not just lower inflation, but have sustained low inflation.
Kganyago said the decline in the inflation rate in July and said he understood the optimism for an interest rate cut, but he still advised South Africans to be cautious.
“It was this time last year that we had an inflation reading that was at 4.7%, and there was excitement around it,” he noted.
“Lower inflation is always welcome, but what was needed to be seen was sustained low inflation, and indeed, the South African Reserve Bank was proved to have been correct because a few months later, inflation crept up,” Kganyago explained.
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