Reserve Bank set to keep interest rates steady

The Reserve Bank’s monetary policy committee (MPC) is widely expected to keep interest rates on hold at Thursday’s meeting.

This meeting marks the first since the implementation of US tariffs in August, a development that is expected to weigh on local inflation and growth.

It is also the MPC’s first gathering since the Bank announced it would now officially target the lower end of its 3%-6% inflation band, and the last before finance minister Enoch Godongwana presents his medium-term budget on November 12.

Reza Ismail, head of Bonds at Prescient Investment Management, said the August tariffs have worsened structural weaknesses in the economy, pointing to “weak capital formation, low business confidence and weak policy certainty.”

“We're going to move into a period in which these tariffs will start to manifest themselves into a range of goods and services. But as long as the public ... believes that [the Reserve Bank] can contain inflation ... we should be fine,” he said.

He does not expect a major policy shift in response to the tariffs. “I don’t actually think that the advent of these tariffs weighs too greatly... What we will certainly see is ... a little bit of a price bump coming along in the later part of the next two or three quarters. But I think that looking through that in the same way that we look through many other exogenous supply side shocks, the central bank won’t dwell too much on that with regard to how it's conducting its other imperatives.”

Economic data has offered some relief, with second-quarter GDP surprising to the upside at 0.8%. But Ismail is sceptical that this marks a turning point. “You’re seeing cyclical bounces here and there ... [but] I don't think that changes the overall [growth] story.”

Inflation, meanwhile, is expected to drift upwards in the coming months. At its July meeting, the Reserve Bank kept its inflation forecast unchanged at 3.3% for 2025, with CPI seen averaging 3.3% in 2026 and 3% in 2027. 

“At this stage, the drivers of inflation appear relatively isolated and temporary in nature. The upward pressure is coming mainly from food and utilities,” Nedbank economists said.

Nedbank noted the Reserve Bank has acknowledged this transition to the 3% target will take time.

I actually think that the bond market has bought into the idea that the [Reserve Bank] has got international credibility.

—  Reza Ismail, head of Bonds at Prescient Investment Management

“Consequently, there will be an adjustment period. During this transition, they will approach spells of rising inflation like they have always done. They will consider the sources of upward pressure and the risks of persistence. If they are reasonably confident that the pressures are isolated and temporary, they will look through the upturn without adjusting monetary policy,” Nedbank said.

“Conversely, if they see evidence of secondary effects or persistence, they will adjust interest rates accordingly.”

Ismail believes the new 3% target can be achieved without aggressive tightening, citing the successful shift to the 4.5% midpoint a few years ago.

“They managed to do that all seamlessly ... because they had 20 years of credibility behind it.”

He added: “Provided that you have this kind of stockpile of credibility, a central bank will realise the inflation that it wants. There are smaller, less sophisticated economies; there are economies that have got central banks that don’t have an iota of the degree of credibility that our [Bank] may have, but they successfully managed to guide the equilibrium inflation to around 3%.”

Financial markets appear to share that confidence. Bond yields have rallied, with the 10-year government bond yield easing to 9.57% in September, supported by sustained moderate inflation and robust gold demand.

“I actually think that the bond market has bought into the idea that the [Reserve Bank] has got international credibility,” Ismail said.

“It’s been an exceptional bull market for bonds, in an environment in which there is massive global uncertainty, there’s geopolitical tensions, there’s concerns about the slowing US economy... There are all these concerns that would ostensibly have pushed bond yields in the other direction. The only reason why you could have [the] bond market rally in such an exaggerated fashion is because the bond market is slowly assimilating the idea that ‘I’ve got to price in a smaller amount of inflation expectation’.”

The rand has also found support, strengthening to R17.59/$ in August from R18.29 in July, buoyed by firmer gold demand, a softer greenback and growing expectations of a Federal Reserve rate cut this week.

marxj@businesslive.co.za