The Reserve Bank cut interest rates by 25 basis points as expected, saying it continued to see inflation stabilising near the midpoint of the target range but cautioned the outlook was highly uncertain — pointing to higher electricity prices, difficult global conditions and a weaker rand as upside risks to its inflation forecast.
The cut, which takes the benchmark repo rate down to 7.75%, was the second since the Bank began cutting rates at its September meeting for the first time since it began to hike interest rates in November 2021.
The decision was unanimous and Bank governor Lesetja Kganyago said, unlike at the previous meeting, there was no discussion about a 50 basis points cut. “The environment is uncertain and it calls for caution,” he said, citing higher-than-expected inflation numbers in the US and UK and rapid wage growth in Europe. “The disinflation process is there but it is clearly a very bumpy road.”
But the Bank did paint a more optimistic picture of growth, saying it still expected a sustained improvement in growth as reforms take effect, and saw growth reaching 2% in 2027.
Ratings agency S&P’s recent positive outlook on SA’s credit rating pointed to an improved country risk premium. With structural reforms this suggested upside for growth in the longer term, it said.
The latest consumer price index figures this week from Stats SA show the inflation rate fell to an unexpectedly low 2.8% in October, on declining fuel prices and slowing food price inflation, prompting Standard Chartered economist Razia Khan to describe the rate cut as a “relatively hawkish easing”.
“Despite the dramatic slowing of October headline inflation, which in the eyes of many might have justified a more front-loaded cut, the Reserve Bank stayed true to its mandate by cutting the repo rate by only 25 basis points,” she said.
The latest cut comes while Kganyago has been vocal on the need for SA to lower its inflation target, with many in the market of the view the Bank is preparing the ground for the formal announcement of a lower target. The Treasury has said it is reviewing the target, working with the Bank, but there is no indication of whether or when it might lower it.
Some economists believe the Bank may be going slow on interest rate cuts in a bid to get inflation down to well below the 4.5% it has targeted since 2017.
Kganyago denied the Bank was implicitly or informally targeting 3%. “But in case anybody thought so, there’s no point setting a target that is a secret. Because the usefulness of the target is to influence expectations, so if you start a target and it’s secret and nobody knows it ... it’s not useful as a policy anchor,” he said, adding the process with the Treasury was coming to a conclusion.
The Bank’s decision was based on an inflation forecast slightly better for the near term but slightly worse over the medium term. The monetary policy committee said “temporary supply shocks” — a stronger exchange rate and lower oil price — were likely to keep inflation below 4% until mid-2025 but thereafter inflation would be modestly higher than its projections at the time of the September meeting, reaching 4.6% from late 2025 rather than 4.4%.
Inflation could come out higher than the Bank has forecast in a scenario in which administered price inflation is higher, or the external environment proves more difficult with a weaker rand and higher oil prices, the committee said.
But it could also come out lower in a scenario “where geopolitical tensions subside and the oil price falls”, it said.
“In the near term, inflation appears well contained,” the committee said. “However the medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water as well as insurance premiums and wage settlements.”
It said the global macroeconomic context had become more challenging since the previous meeting with the dollar appreciating against most currencies, including the rand, and longer-term interest rates rising in the US and across the globe.
Updated: November 21 2024
This article has been updated throughout.
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