The South African Reserve Bank (Sarb) is expected to cut the benchmark repo by another 25 basis points on Thursday, bringing it to 7.75%, after inflation eased below the midpoint of the bank’s target range.
This would be 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.
The Reserve Bank’s monetary policy committee (MPC)’s decision this week will probably be driven by the “fact that our inflation is now well below the 4.5% midpoint of the target range, moving closer to the bottom 3%”, said chief economist at Citadel Maarten Ackerman.
“This provides a supportive environment for the Reserve Bank to continue cutting interest rates. As we approach the festive season, consumers may find some relief, particularly those managing high levels of debt, thanks to the beginning of the interest rate cutting cycle.”
Inflation slowed to 3.8% year-on-year in September from 4.4% in August, which is well below 4.5%, the midpoint of the Reserve Bank’s 3% to 6% target band.
The Reserve Bank could soon eye a new inflation target. While delivering a lecture at Stellenbosch University last month, the central bank’s governor, Lesetja Kganyago, said there was an “ongoing discussion about the inflation target and the desirability of moving to a lower target, in line with our peers”.
Economists at Nedbank expect October’s year-on-year inflation print, which Statistics South Africa is due to release on Wednesday, to show a further easing to about 3.3%, mainly as a result of fuel price cuts and a stronger rand.
“Overall, inflation is forecast to remain anchored around the Sarb’s target over the next three years, contained by continued global disinflation, subdued commodity prices, a steadier rand and measured domestic demand,” economists at Nedbank said in a note.
This, they said, gives the MPC room to cut interest rates by 25 basis points this week “as inflation continues to undershoot the Sarb 4.5% target and the outlook remains subdued”.
Investec economist Lara Hodes also predicted the MPC would cut rates by 25 basis points, citing the United States Federal Reserve’s 25 basis point interest rate cut last week, which followed a 50 basis point cut in September.
It’s unlikely the Reserve Bank will opt for a 50 basis point cut on Thursday, Citadel’s Ackerman said. “They remain cautious of maintaining a favourable interest rate differential to support the rand.”
Nedbank expects a further 75 basis points in reduction in 2025, which would take the repo rate down to 7% and the prime lending rate to 10.50% by the end of next year.
“If inflation and interest rates align with our forecasts, the real repo rate will remain above 2% throughout 2025,” the bank said.
