The South African Reserve Bank (SARB) has pointed to a more challenging external environment, particularly to the medium-term inflation outlook as it delivered a hawkish 25 basis points interest rate cut.
This comes as the annual headline consumer inflation fell below the lower end of the SARB’s 3-6% target range in October, dipping to 2.8% largely driven by declining fuel and food prices.
But what was not explicitly stated in the SARB’s statement was how the global macroeconomic environment has grown increasingly challenging following the election of Donald Trump back to the White House, which has strengthened the US dollar, raised concerns of rising inflation and created limited room for central banks to pause or ease rates.
SARB Governor Lesetja Kganyago yesterday said the Monetary Policy Committee (MPC) unanimously decided to reduce the policy rate by 25 basis points from 8.0% to 7.75%, also bringing down the prime lending rate from 11.50% to 11.25% per annum.
This second consecutive rate cut has brought down borrowing costs to their lowest level since April 2023.
Kganyago said the MPC agreed that reducing the level of policy restrictiveness was still consistent with achieving the inflation target.
However, Kganyago said the risk outlook required a “cautious approach”.
“In the near term, inflation appears well contained. 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,” he said.
“Global interest rates could well shift higher again, and the recent rand depreciation demonstrates how rapidly changes in the global environment can affect South Africa. There are scenarios where inflation is higher than in our baseline.
“During the meeting, the MPC explored two such risk cases. One assumed higher administered price inflation. The other envisioned a more difficult external environment, with a weaker rand and higher oil prices. We also considered a favourable scenario where geopolitical tensions subside and the oil price falls.
These scenarios underscored the uncertainty surrounding the outlook.”
Everest Wealth CEO, Thys van Zyl, said the interest rate cut was a welcome windfall ahead of the festive season.
However, Van Zyl said the decision to lower by only 25 basis points was a missed opportunity as a reduction of 50 basis points could have given consumer spending and the economy even more momentum.
“It seems the Reserve Bank is going to take a more conservative approach. However, the latest interest rate cut comes ahead of the festive season and will boost retail sales and consumer spending and is also good news for the property and car markets,” Van Zyl said.
“It will also further help households’ ability to service their debt. Another reduction in January will give consumers a welcome boost after the festive season and another reduction in March can help supplement consumers’ disposable income.”
With headline inflation set to rise marginally over the coming months, economists believe the SARB will continue to cut rates in 25 basis points increments over the coming meetings to a cumulative rate reduction of 75 basis points in 2025.
Anchor Capital’s investment analyst, Casey Sprake, agreed that South Africa’s risk outlook required a cautious approach, hence the moderate 25 basis points rate cut.
“Furthermore, looking ahead, we view the October CPI print as marking the low point in this inflation cycle. While inflation is expected to remain subdued over the next three months, the trajectory will likely trend upward thereafter,” Sprake said.
“However, beyond this period, several factors could shift the inflation landscape. The weakened rand is expected to play a growing role, particularly as it increases the cost of imports. Additionally, pressures in the food sector are intensifying. Energy prices also remain a critical area to watch.”
Positively, however, the SARB’s improved economic growth forecast, now reaching 2% in 2027, as it expects sustained improvement as reforms take effect.
BUSINESS REPORT