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Only one of 22 economists surveyed ahead of last week’s SA Reserve Bank monetary policy committee meeting expected a 50 basis point (bps) cut, as opposed to a 25 bps one.
But Bank governor Lesetja Kganyago said 50 was one of the options the committee discussed before it unanimously agreed on 25 bps. And it’s hard to imagine there weren’t some strong arguments in favour of the larger cut.
Inflation is already below the Bank’s effective target of 4.5%, having come in at a less-than-expected 4.4% for August. Looking ahead, the Bank’s updated forecasts show not only that average inflation will stay on target for the next two years but will be well below that 4.5% for a good part of the period. Inflation is now expected to average just 3.6% in the fourth quarter of this year and 3.7% in the first quarter of next year.
The Bank’s cut on Thursday is its first move since the last of the hikes in May 2023 and the first cut since the hiking cycle began as inflation climbed in 2021. The benchmark repo rate is now at 8% and it is widely expected that the Bank will cut by a further 25 bps at its November meeting. That would still leave interest rates comfortably positive in real, inflation-adjusted terms, and still “restrictive” relative to the Bank’s estimate of the neutral rate.
Declining global oil prices and a stronger rand have allowed for fuel price reductions, which have helped the disinflation process along and are expected to continue doing so for a while. But Kganyago suggested on Thursday he is “looking through” those supply-side good inflation “shocks” just as he looks through the bad shocks — so not assuming underlying inflationary pressure has subsided. But indications are that it has done.
Core inflation has come down nicely. Inflation expectations — the indicator of future wage and price pressures that the Bank closely watches — have moderated quite a bit, even if not yet to 4.5%. Some economists expect inflation could come down even faster than the Bank’s forecasts suggest.
It’s not as if SA’s economy is overheating, even though the growth rate is forecast to lift in the next few years. Growth of 1.1% this year (the Bank’s forecast) is still well below emerging market norms, but it is almost double last year’s 0.6%. And next year’s forecast 1.6%, rising to 1.8% in 2026, gets the economy back to keeping pace with population growth.
Lower interest rates and lower inflation will boost disposable incomes and help growth, with the turnaround in load-shedding and a much-hoped-for improvement in rail and ports.
But how low will interest rates go? That is the big question. Kganyago made it ultra clear on Thursday that the Bank will stay cautious. Its own model indicates it will cut by a cumulative total of 100 bps to bring the repo to 7.25% by the fourth quarter of 2026. Some economists expect less; some believe the Bank will end up doing a lot more. Capital Economics and Goldman Sachs are among those who expect the repo to end closer to 6.25%-6.5%, and by sooner than end-2026. Markets too have been pricing in more of a downcycle.
That is especially so after the US Federal Reserve opted for a 50 bps cut last Wednesday. This will ease global financial conditions and make it easier for emerging markets to cut rates, helping to strengthen their currencies and the commodity prices many rely on. However, the external environment remains one of the sources of risk for global inflation and financial conditions for SA and others. The committee cited geopolitical risks and elevated political uncertainty. It did not mention specifics but these are not hard to see, with the US election on a knife edge, likewise the Middle East.
Food inflation is also a source of uncertainty, though it has come down. And SA’s high administered prices (from electricity and water to rates), with high public debt, continue to keep its inflation rate structurally high.
The Bank pointed to the need for SA’s macroeconomic policy to focus on rebuilding fiscal and monetary buffers. On the monetary side, the Bank has made very clear its desire for a lower inflation target, and a sustainably lower inflation rate, than the 4.5% midpoint of SA’s official 3%-6% target range.
Chances are then that consumers and business can enjoy the reprieve and make the most of the interest rate relief as it rolls out over the coming year. But they should not take on loads of debt in anticipation of hugely lower rates.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
EDITORIAL: How low will interest rates go?
Only one of 22 economists surveyed ahead of last week’s SA Reserve Bank monetary policy committee meeting expected a 50 basis point (bps) cut, as opposed to a 25 bps one.
But Bank governor Lesetja Kganyago said 50 was one of the options the committee discussed before it unanimously agreed on 25 bps. And it’s hard to imagine there weren’t some strong arguments in favour of the larger cut.
Inflation is already below the Bank’s effective target of 4.5%, having come in at a less-than-expected 4.4% for August. Looking ahead, the Bank’s updated forecasts show not only that average inflation will stay on target for the next two years but will be well below that 4.5% for a good part of the period. Inflation is now expected to average just 3.6% in the fourth quarter of this year and 3.7% in the first quarter of next year.
The Bank’s cut on Thursday is its first move since the last of the hikes in May 2023 and the first cut since the hiking cycle began as inflation climbed in 2021. The benchmark repo rate is now at 8% and it is widely expected that the Bank will cut by a further 25 bps at its November meeting. That would still leave interest rates comfortably positive in real, inflation-adjusted terms, and still “restrictive” relative to the Bank’s estimate of the neutral rate.
Declining global oil prices and a stronger rand have allowed for fuel price reductions, which have helped the disinflation process along and are expected to continue doing so for a while. But Kganyago suggested on Thursday he is “looking through” those supply-side good inflation “shocks” just as he looks through the bad shocks — so not assuming underlying inflationary pressure has subsided. But indications are that it has done.
Core inflation has come down nicely. Inflation expectations — the indicator of future wage and price pressures that the Bank closely watches — have moderated quite a bit, even if not yet to 4.5%. Some economists expect inflation could come down even faster than the Bank’s forecasts suggest.
It’s not as if SA’s economy is overheating, even though the growth rate is forecast to lift in the next few years. Growth of 1.1% this year (the Bank’s forecast) is still well below emerging market norms, but it is almost double last year’s 0.6%. And next year’s forecast 1.6%, rising to 1.8% in 2026, gets the economy back to keeping pace with population growth.
Lower interest rates and lower inflation will boost disposable incomes and help growth, with the turnaround in load-shedding and a much-hoped-for improvement in rail and ports.
But how low will interest rates go? That is the big question. Kganyago made it ultra clear on Thursday that the Bank will stay cautious. Its own model indicates it will cut by a cumulative total of 100 bps to bring the repo to 7.25% by the fourth quarter of 2026. Some economists expect less; some believe the Bank will end up doing a lot more. Capital Economics and Goldman Sachs are among those who expect the repo to end closer to 6.25%-6.5%, and by sooner than end-2026. Markets too have been pricing in more of a downcycle.
That is especially so after the US Federal Reserve opted for a 50 bps cut last Wednesday. This will ease global financial conditions and make it easier for emerging markets to cut rates, helping to strengthen their currencies and the commodity prices many rely on. However, the external environment remains one of the sources of risk for global inflation and financial conditions for SA and others. The committee cited geopolitical risks and elevated political uncertainty. It did not mention specifics but these are not hard to see, with the US election on a knife edge, likewise the Middle East.
Food inflation is also a source of uncertainty, though it has come down. And SA’s high administered prices (from electricity and water to rates), with high public debt, continue to keep its inflation rate structurally high.
The Bank pointed to the need for SA’s macroeconomic policy to focus on rebuilding fiscal and monetary buffers. On the monetary side, the Bank has made very clear its desire for a lower inflation target, and a sustainably lower inflation rate, than the 4.5% midpoint of SA’s official 3%-6% target range.
Chances are then that consumers and business can enjoy the reprieve and make the most of the interest rate relief as it rolls out over the coming year. But they should not take on loads of debt in anticipation of hugely lower rates.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.