JOHANN ELS: Bank misses an opportunity for a larger rate cut

Inflation remains a central concern for SA consumers and policymakers as it quietly erodes purchasing power and undermines financial security. However, recent trends suggest that we are in a far better position than many might think.

Headline inflation has steadily declined, moderating to 4.4% in August from 4.6% in July. Even more importantly, the underlying pace of price changes over the past three months (the sequential pace, a three-month annualised rate of change) slowed to only 0.4%, while core slowed to 2%. The difference is mostly explained by the petrol price cuts included in headline but not core inflation.  

This measure bypasses the potential distortion of a typical year-on-year comparison and looks closer at the most recent price trends. By this measure there has been little — if any — upward price pressure over the short term.

In light of these promising developments, the SA Reserve Bank’s recent decision to cut the repo rate by only 25 basis points (bps) was a missed opportunity. With inflation pressures easing, the global environment favouring lower rates and a substantial downward revision in the Bank’s own forecasts, a cut of 50bps would have been both prudent and effective.

The Reserve Bank’s own inflation projections support this view. During the most recent meeting, the central bank revised its 2024 headline inflation forecast from 4.9% to 4.6% and its 2025 forecast from 4.4% to 4%. These revisions indicate that inflation is expected to remain below 4.5% until the end of 2026, which is in line with my own projections.

Core inflation, which strips out the volatile categories of food and energy, was similarly revised downward. It is expected to remain close to 4% for the next six quarters. With such a favourable inflation outlook, conditions were ripe for a more aggressive rate cut to ease the burden on consumers and businesses. 

In addition, the significant downward revisions in inflation are coupled with positive developments such as a stronger currency, lower oil prices and falling food prices, so a cut of 50bps would have made far more sense. Comparisons with other central banks, particularly the US Federal Reserve, make the Bank’s conservative approach even more puzzling. The Fed recently faced similar conditions, with inflation easing and economic growth slowing. In response it opted for a bolder rate cut of 50bps, recognising the need to act decisively amid shifting economic dynamics. However, SA’s central bank has historically taken a more cautious stance, and this conservative mindset seems to have prevailed once again. 

Bank governor Lesetja Kganyago stated that the decision to cut by 25bps was unanimous, though he acknowledged that the committee had discussed both a 50bps and leaving rates unchanged. Even contemplating unchanged rates boggles the mind. While unanimity is often seen as a sign of consensus, it also reflects a reluctance to break from established norms and take bolder steps when necessary. The decision to opt for the more conservative route, despite favourable conditions, reflects an adherence to caution that in this case may have been unnecessary. 

While I welcome the cut of 25bps, it is difficult not to feel that more could have been done. The Bank’s own forecasts suggest that inflation will keep declining, potentially reaching about 3% by October. With such a favourable outlook, the rationale for a larger rate cut becomes even more compelling. I expect that by November the Bank will have more data confirming this downward trend, and at that point a 50bps cut should be seriously considered.

The concept of the “neutral rate” — the interest rate at which monetary policy neither stimulates nor constrains economic growth — is another important aspect of this debate. Kganyago suggested that rates would probably stabilise just above 7%, which is considered the neutral rate. However, given the current inflation outlook and the weak state of consumer demand there is ample room for more aggressive rate cuts. I maintain my view that the Bank will ultimately deliver a total of 175bps in cuts during this cycle, with 150bps still to come after this most recent meeting. In the US I expect a total of 250bps of rate cuts. This differential should benefit the rand exchange rate. 

SA consumers and businesses are facing significant financial pressure from high interest rates, which have been kept elevated in an effort to control inflation. While the Bank has done a commendable job in keeping inflation within its target range, a more aggressive rate cut could have provided much-needed relief to households and businesses. The 25bps cut is certainly a step in the right direction, but it falls short of the kind of stimulus the economy needs right now. 

It is also important to consider the broader context. Global inflationary pressures are easing and SA’s inflation outlook is improving. The rand has stabilised, oil prices have decreased and food prices are no longer exerting the same upward pressure on inflation as they were earlier in the year. These factors all point to a more favourable inflation environment, one that supports a more aggressive rate-cutting strategy.

The inflation outlook remains promising with few material risks at present. A stronger rand exchange rate in coming months seems likely as the Fed board maintains the rate-cutting cycle and the dollar weakens further. The likely stronger rand will provide a welcome cushion against other potential inflation risks. 

While the Reserve Bank’s decision to cut rates is a positive development, it could have been more substantial. The combination of lower inflation forecasts, a stronger rand and declining oil and food prices provided the perfect opportunity for a cut of 50bps. I remain hopeful that by November, with inflation likely to drop further, the Bank will take more decisive action and deliver the rate cuts SA consumers and businesses need.

The road ahead for inflation control looks promising, and with the right policies in place we can ensure that both inflation and interest rates remain at sustainable levels for the foreseeable future. 

• Els is group chief economist at Old Mutual.