Sarb cuts by 25 basis points
Relief
As expected, but a more cautious cutting tone for the rest of the year.
The South African Reserve Bank (Sarb) cut its repo rate by 25 basis points (bps) on Thursday for the third consecutive Monetary Policy Committee (MPC) meeting, bringing the benchmark rate to 7.5%.
Sarb governor Lesetja Kganyago announced the widely expected move following the MPC’s first meeting for 2025. Still, his tone was one of caution for further cuts for the rest of the year amid an uncertain global environment.
The reduction takes SA’s prime interest rate for commercial banks to 11%.
The last time SA’s repo rate was below 7.75% was in the first few months of 2023.
Kganyago said four MPC members opted for the cut, while two wanted a hold.
SA inflation has fallen firmly within the Sarb’s 3-6% target range, with the Consumer Price Index (CPI) coming in at 3% for December. While this was marginally higher than the November CPI print of 2.9%, it was still below economists’ expectations of around 3.2%.
Kganyago noted that “rate cut expectations have been pared back” globally recently.
“The space for rate cuts by the Federal Reserve now looks limited, with core inflation still elevated and new inflation risks emerging, such as rising tariffs on trade. It is even possible that US rates could go up again, to stabilise inflation.”
Upside risks
Kganyago warned that on the local front, risks to SA’s inflation outlook “are assessed to the upside”.
“In the near term, inflation appears well contained. However, the medium-term outlook is more uncertain than usual, with material risks from the external environment. Domestic factors such as administered prices are also problematic.”
“Against this backdrop, the MPC decided to reduce the policy rate by 25 bps, with effect from 31 January 2025 ...”
“The committee ultimately agreed that it was possible to reduce the degree of policy restrictiveness, making the stance somewhat more neutral. However, all members were concerned about the uncertain global outlook.”
Earlier in his MPC statement, Kganyago noted that headline inflation averaged 4.4% last year, near the middle of the Sarb’s target range.
“Inflation slowed to 3% in December, having started the year above 5%. This was mainly due to favourable goods-price developments, including food inflation reaching 15-year lows, as well as lower fuel costs.
“Because of these transitory factors, inflation is likely to remain in the bottom half of our target range through the first half of this year, but headline inflation should revert to around 4.5% thereafter, aided by core inflation which remains at or below the midpoint over the forecast horizon,” he said.
Trade war scenario
Meanwhile, Kganyago confirmed that the MPC is also keeping an eye on the implications of a possible trade war scenario globally in the wake of increasing tariff threats by new US President Donald Trump.
“Given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario. This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries,” he explained.
“The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets.
“In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts,” he said.
“We also looked at a scenario of accelerated structural reforms, domestically. This showed SA economic growth picking up gradually, getting to 3% in 2027. Importantly, this scenario also showed lower inflation and lower interest rates in South Africa, demonstrating how structural reforms can reduce the country risk premium and create more monetary policy space,” Kganyago added.
Rate cut reaction
Commenting on the rate cut decision, Standard Bank chief economist Goolam Ballim said it was “vintage Sarb”.
“The governor was articulate in sketching the fresh risks to domestic price stability, while also delivering a rational 25bp cut,” he added.
Ballim said that the last time the rate was in this range was back in early 2023, when the Sarb lifted the repo rate from 7.25% to 7.75% in March 2023.
Despite Kganyago’s more cautious tone at the latest MPC announcement, Ballim believes a further rate cut is still on the cards.
“Another 25bp [cut] for execution during the first half of 2025 is plausible. Inflation is likely to remain at or below the mid-point of the target zone through 2025,” he said.
FNB chief economist Mamello Matikinca-Ngwenya said today’s 25bp rate cut comes as expected.
“Inflation has continued to surprise analysts to the downside, remaining at the bottom of the inflation target band, and these levels are expected to be maintained until the second half of 2025 when positive base effects fade and domestic demand improves,” she pointed out.
“We anticipate that a lift in inflation in the latter part of the year will dampen policy space and the scope for a more extensive interest rate cutting cycle,” she said. However, she added that based on current inflation forecasts there should be “space for a couple more cuts this year”.
Stanlib economist Kevin Lings commented: “Overall, the MPC statement contained no surprises and maintained a very cautious/hawkish approach to the setting of monetary policy. This would suggest that the Sarb does not want to risk reversing the recent gains in getting inflation down to well below the mid-point of the target range.”
However, Lings still expects the Sarb to cut rates by an additional 25bps at the next MPC meeting in March.
“This is especially if President Trump has not increased import tariffs on a substantial and sustained basis.”
-MONEYWEB
Sarb governor Lesetja Kganyago announced the widely expected move following the MPC’s first meeting for 2025. Still, his tone was one of caution for further cuts for the rest of the year amid an uncertain global environment.
The reduction takes SA’s prime interest rate for commercial banks to 11%.
The last time SA’s repo rate was below 7.75% was in the first few months of 2023.
Kganyago said four MPC members opted for the cut, while two wanted a hold.
SA inflation has fallen firmly within the Sarb’s 3-6% target range, with the Consumer Price Index (CPI) coming in at 3% for December. While this was marginally higher than the November CPI print of 2.9%, it was still below economists’ expectations of around 3.2%.
Kganyago noted that “rate cut expectations have been pared back” globally recently.
“The space for rate cuts by the Federal Reserve now looks limited, with core inflation still elevated and new inflation risks emerging, such as rising tariffs on trade. It is even possible that US rates could go up again, to stabilise inflation.”
Upside risks
Kganyago warned that on the local front, risks to SA’s inflation outlook “are assessed to the upside”.
“In the near term, inflation appears well contained. However, the medium-term outlook is more uncertain than usual, with material risks from the external environment. Domestic factors such as administered prices are also problematic.”
“Against this backdrop, the MPC decided to reduce the policy rate by 25 bps, with effect from 31 January 2025 ...”
“The committee ultimately agreed that it was possible to reduce the degree of policy restrictiveness, making the stance somewhat more neutral. However, all members were concerned about the uncertain global outlook.”
Earlier in his MPC statement, Kganyago noted that headline inflation averaged 4.4% last year, near the middle of the Sarb’s target range.
“Inflation slowed to 3% in December, having started the year above 5%. This was mainly due to favourable goods-price developments, including food inflation reaching 15-year lows, as well as lower fuel costs.
“Because of these transitory factors, inflation is likely to remain in the bottom half of our target range through the first half of this year, but headline inflation should revert to around 4.5% thereafter, aided by core inflation which remains at or below the midpoint over the forecast horizon,” he said.
Trade war scenario
Meanwhile, Kganyago confirmed that the MPC is also keeping an eye on the implications of a possible trade war scenario globally in the wake of increasing tariff threats by new US President Donald Trump.
“Given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario. This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries,” he explained.
“The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets.
“In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts,” he said.
“We also looked at a scenario of accelerated structural reforms, domestically. This showed SA economic growth picking up gradually, getting to 3% in 2027. Importantly, this scenario also showed lower inflation and lower interest rates in South Africa, demonstrating how structural reforms can reduce the country risk premium and create more monetary policy space,” Kganyago added.
Rate cut reaction
Commenting on the rate cut decision, Standard Bank chief economist Goolam Ballim said it was “vintage Sarb”.
“The governor was articulate in sketching the fresh risks to domestic price stability, while also delivering a rational 25bp cut,” he added.
Ballim said that the last time the rate was in this range was back in early 2023, when the Sarb lifted the repo rate from 7.25% to 7.75% in March 2023.
Despite Kganyago’s more cautious tone at the latest MPC announcement, Ballim believes a further rate cut is still on the cards.
“Another 25bp [cut] for execution during the first half of 2025 is plausible. Inflation is likely to remain at or below the mid-point of the target zone through 2025,” he said.
FNB chief economist Mamello Matikinca-Ngwenya said today’s 25bp rate cut comes as expected.
“Inflation has continued to surprise analysts to the downside, remaining at the bottom of the inflation target band, and these levels are expected to be maintained until the second half of 2025 when positive base effects fade and domestic demand improves,” she pointed out.
“We anticipate that a lift in inflation in the latter part of the year will dampen policy space and the scope for a more extensive interest rate cutting cycle,” she said. However, she added that based on current inflation forecasts there should be “space for a couple more cuts this year”.
Stanlib economist Kevin Lings commented: “Overall, the MPC statement contained no surprises and maintained a very cautious/hawkish approach to the setting of monetary policy. This would suggest that the Sarb does not want to risk reversing the recent gains in getting inflation down to well below the mid-point of the target range.”
However, Lings still expects the Sarb to cut rates by an additional 25bps at the next MPC meeting in March.
“This is especially if President Trump has not increased import tariffs on a substantial and sustained basis.”
-MONEYWEB
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