The South African Reserve Bank (SARB) is expected to cut interest rates for the second time in a row during the Monetary Policy Committee’s (MPC) last meeting for the year this week.
This comes as disinflation in South Africa supports expectations for a 25-basis point cut by the SARB, with headline consumer inflation reaching 3.8% in September, in spite of uncertainty about the US Federal Reserve’s (Fed) stance since the election of Donald Trump back to the White House.
This would be a welcome relief for financially-constrained consumers as the rates cut would put some money in their pockets ahead of the Black Friday and festive season shopping period.
It also comes as ratings agencies have started to look at South Africa’s economic performance with a renewed eye as S&P Global Ratings on Friday revised the country’s ratings outlook from stable to positive on improved reform programme and economic growth potential.
Economists on Friday said the SARB will likely find it too early to consider the practical implications of Trump’s second presidential term and will, in any event, avoid contributing to the political debate.
As a result, they said the SARB will likely to stick to the prevailing fundamentals of falling interest rates in advanced economies and softer local inflation, just like the Fed and the Bank of England.
Investec economist Lara Hodes said that October’s consumer inflation reading was projected at around 3.3%, supported by base effects as well as a further notable fuel price cut during the month.
Specifically, the petrol price was reduced by a further R1.14 at the beginning of October, providing further reprieve to consumers.
“The SARB is projected to decrease the repo rate by a further 25 basis points [this] week, the second cut in the cycle, following the Fed’s 25 basis points decrease last week,” Hodes said.
“A potential lowering of the inflation target has seen markets pricing in a shallower rate cut trajectory domestically, while the US could also see fewer cuts than previously forecast, under the Trump Presidency with its expected protectionist policies.”
However, Hodes said there remained an upside risk to food inflation from grain-related products, “following a poor crop harvest due to the drought”, according to Agbiz, after inflation in this category eased somewhat in September.
In September, the SARB’s MPC decided to reduce the policy rate by 25 basis points to 8% per annum, the first rates cut in three years, and continued to see a dip in headline inflation supported by the stronger exchange rate and lower oil prices.
The MPC said lower headline inflation was also reflecting a better food price outlook, with inflation for this category below the midpoint through 2025 and 2026.
However, these benefits were partly offset by higher electricity prices, with an expected inflation rate more than double that of headline.
FNB economists also said they were expecting a 25 basis points cut in the MPC’s final meeting for 2023 as the structural reform agenda continued to gain traction and has done well for risk perception and could assist with lower structural inflation over the longer term.
However, they did note that geopolitical tensions in the Middle East continued to prevail and market reactions to the US election outcome favoured the dollar to the detriment of the dollar/rand exchange rate, which could have more immediate implications for inflation.
“There is also a likelihood that global growth is even slower, which would worsen the monetary policy dilemma. While the magnitude of these risks is unfolding, they are likely to keep monetary policy cautious over the next few years,” said FNB economists.
“Whether it will affect the current cutting cycle, which we expect to end in May 2025, will require more information than currently on hand. For now, we still believe another 25 basis points interest rate cut is on the cards for next week’s MPC meeting.”