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The Reserve Bank's head office in Pretoria. Picture: LEFTY SHIVAMBU/GALLO IMAGES
The Reserve Bank’s monetary policy committee meets this week for the first time in 2025 and the first since the inauguration of US President Donald Trump.
A 25-basis point rate cut is pretty much a done deal. There are just two real questions. One is whether it will be a unanimous vote or a split one in which a couple of dissenting hawks prefer to hold rates. The other question is what the committee will signal about the future path of interest rates.
Alas, any excitement at the prospect of another rate cut on Thursday must be tempered with the expectation that this may be one of the last rate cuts of this cycle — even the last one — in a cutting cycle that must be one of the shallowest in SA.
As inflation began to climb sharply from late 2021, with the economy opening up post-Covid and later Russia’s invasion of Ukraine, the Bank more than doubled the benchmark repo rate from a pandemic era low of 3.5% to a peak of 8.25% in May 2023. There it stayed for 16 months before the first of the repo rate cuts in September last year.
A cut this week would take the repo to 7.50%. That is still way above the 6.25% at which it stood on the eve of the pandemic. And in real, inflation adjusted terms it’s a hefty 3.5% or so, assuming the Bank’s November forecast that inflation will average 4% this year.
But the world is tough these days and uncertain. If the committee just had to worry about domestic factors it might well see space for more cuts. Economic growth remains disappointing so there’s little demand pressure on prices. Consumer price inflation is at the bottom of the 3%-6% inflation target range.
Not only that but for the past three months the inflation numbers have come in below the market consensus and below the Bank’s own forecasts. That’s often a sign that underlying pressure on prices could stay weak. The latest official data certainly indicate that core inflation, in areas such as rentals, is muted. It will not be hard for the committee to justify another 25 basis point cut: indeed it would be hard to justify anything else.
But how many more will there be? Most economists still expect a further 25 basis points in March. Economists such as Bank of America’s Tatonga Rusike don’t expect even that. And everyone expects a more hawkish tone from the committee this time than last time.
There are some domestic risks to the inflation outlook, particularly Eskom tariffs. But the major risks are external. They are significant. And most of them have to do with Trump. The rand-dollar exchange rate has recovered to some extent from earlier bouts of weakness. But it is still extremely vulnerable and that means the oil price in rand terms, which is one of the big direct drivers of the inflation rate, looks risky too.
Trump’s first days have made it clear his administration will shift policy dramatically, on several fronts, but nobody really knows what his plans are in detail, whether on tariffs or on taxes. It is an environment of uncertainty, of high US treasury yields, little expectation of further US rate cuts and a strong dollar.
None of that looks good for the rand or for rates. As always, what the committee says will be at least as interesting as what it does.
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: Sigh. This may be the last rate cut
The Reserve Bank’s monetary policy committee meets this week for the first time in 2025 and the first since the inauguration of US President Donald Trump.
A 25-basis point rate cut is pretty much a done deal. There are just two real questions. One is whether it will be a unanimous vote or a split one in which a couple of dissenting hawks prefer to hold rates. The other question is what the committee will signal about the future path of interest rates.
Alas, any excitement at the prospect of another rate cut on Thursday must be tempered with the expectation that this may be one of the last rate cuts of this cycle — even the last one — in a cutting cycle that must be one of the shallowest in SA.
As inflation began to climb sharply from late 2021, with the economy opening up post-Covid and later Russia’s invasion of Ukraine, the Bank more than doubled the benchmark repo rate from a pandemic era low of 3.5% to a peak of 8.25% in May 2023. There it stayed for 16 months before the first of the repo rate cuts in September last year.
A cut this week would take the repo to 7.50%. That is still way above the 6.25% at which it stood on the eve of the pandemic. And in real, inflation adjusted terms it’s a hefty 3.5% or so, assuming the Bank’s November forecast that inflation will average 4% this year.
But the world is tough these days and uncertain. If the committee just had to worry about domestic factors it might well see space for more cuts. Economic growth remains disappointing so there’s little demand pressure on prices. Consumer price inflation is at the bottom of the 3%-6% inflation target range.
Not only that but for the past three months the inflation numbers have come in below the market consensus and below the Bank’s own forecasts. That’s often a sign that underlying pressure on prices could stay weak. The latest official data certainly indicate that core inflation, in areas such as rentals, is muted. It will not be hard for the committee to justify another 25 basis point cut: indeed it would be hard to justify anything else.
But how many more will there be? Most economists still expect a further 25 basis points in March. Economists such as Bank of America’s Tatonga Rusike don’t expect even that. And everyone expects a more hawkish tone from the committee this time than last time.
There are some domestic risks to the inflation outlook, particularly Eskom tariffs. But the major risks are external. They are significant. And most of them have to do with Trump. The rand-dollar exchange rate has recovered to some extent from earlier bouts of weakness. But it is still extremely vulnerable and that means the oil price in rand terms, which is one of the big direct drivers of the inflation rate, looks risky too.
Trump’s first days have made it clear his administration will shift policy dramatically, on several fronts, but nobody really knows what his plans are in detail, whether on tariffs or on taxes. It is an environment of uncertainty, of high US treasury yields, little expectation of further US rate cuts and a strong dollar.
None of that looks good for the rand or for rates. As always, what the committee says will be at least as interesting as what it does.
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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.