Relief: Reserve Bank cuts rates by 25 basis points in wake of US Fed move and brightening inflation outlook

19 Sep 2024

The Monetary Policy Committee of the South African Reserve Bank cut its key repo rate by 25 basis points on Thursday with more in the pipeline, heralding at least some relief for hard-pressed consumers and a fragile economy.

The move was widely expected and while further cuts are in the pipeline, the Monetary Policy Committee statement pointedly noted that the South African Reserve Bank is going to keep a wary eye on inflation. The cut brings the central bank’s key repo rate to 8.0% and the prime lending rate for consumers to 11.50%.

This will bring some relief to consumers but is unlikely to trigger a spending binge. If you have a million-rand bond, for example, and were paying R10,837 a month at the prime rate of 11.75%, your monthly savings will now translate to R173. Even with lower petrol prices, that won’t come close to filling up your tank.

Still, it provides a modest injection of confidence to an ailing economy that only grew 0.4% in the second quarter of this year after flatlining in the first, and is seen as the start of a cautious trimming cycle.

“We welcome the Reserve Bank’s rate cut as it is consistent with the global trend towards lower interest rates. However, we do not anticipate a major cutting cycle,” FNB CEO Harry Kellan said in a statement.

“Our view is that interest rates will be further lowered in 2025, but rate cuts will be modest and will depend on new inflation data.”

The Monetary Policy Committee finally pulled the trigger after holding rates steady since May last year because of a brightening inflation outlook and in the wake of the US Federal Reserve’s 50 basis point cut on Wednesday, which was bigger than expected.

“... headline (inflation) eased to 4.4% in August, a 3-year low, and close to the middle of our target range. Our forecast suggests this progress will be sustained, with inflation contained below the 4.5% midpoint of our range through to the end of the forecast horizon, in 2026,” the Monetary Policy Committee statement said.

“In the near term, we continue to see a dip in headline inflation, supported by the stronger exchange rate and lower oil prices.”

The rand hit a 14-month high against the dollar after the US Fed cut widened the interest rate differential with the greenback and extended those gains to 17.40/dollar in early trade on Thursday, before easing back. After the Monetary Policy Committee decision it was little moved at 17.47/dollar.

‘Approaching end game with caution’

The Monetary Policy Committee statement said that “the risks to inflation are assessed as balanced”, but its tone was cautiously guarded.

Referring to the global inflation outlook, which has big implications on the domestic front, the statement said: “The case for caution is bolstered by the difficult and unpredictable geopolitical environment, with risks of inflationary shocks through trade restrictions and supply chain disruptions... For these reasons, central banks are approaching the endgame with caution.”

The Monetary Policy Committee had discussed a 50 basis point cut or a hold — so various options were on the table — but it reached a unanimous consensus on 25 basis points, which among other things maintains a solid rate differential with the US to support the rallying rand.

“We found this to be a prudent stance to take,” Governor Lesetja Kganyago said during the Q&A session.

On the subject of economic growth, the statement said it expected improvements in the second half of this year, with quarter-on-quarter growth of 0.6% in both the third and fourth quarters after a 0.4% expansion in the second quarter.

Rising confidence

“This reflects rising confidence, in part due to a stable electricity supply. We also expect extra spending given withdrawals from the new two-pot retirement system, although some of these funds will be absorbed by debt repayments and tax,” the statement read.

The end of the rolling nationwide power cuts dubbed “load shedding” has certainly brightened the growth outlook. The Monetary Policy Committee now sees it only taking 0.13 percentage points off growth this year with no effect at all over the next two years compared to a subtraction of 1.5 percentage points in 2023.

This was the first reduction in domestic interest rates in over four years, with the last coming in July 2020 when the Reserve Bank took a chainsaw to rates as the economy crumbled under the weight of the initial lockdowns to contain the Covid-19 pandemic. DM

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‘Approaching end game with caution’

Rising confidence