The Monetary Policy Committee (MPC) has opted for a measured approach, cutting the repo rate by just 25 basis points to 7.75%. This reduces the prime lending rate to 11.25%.
This comes despite South Africa's inflation rate dropping to 2.8%, below the Reserve Bank's target range of 3% to 6%.
Reserve Bank Governor Lesetja Kganyago said that the decision to cut rates was unanimous, while the cut was in line with economists' expectations. "There was no discussion about a 50 basis point cut. None," he told reporters on Thursday.
South Africa was among the first countries to raise interest rates post-pandemic, with the repo rate climbing from 3.5% in 2021 to a peak of 8.25% by 2023. Despite the recent reductions, rates have only been cut by 50 basis points in total this year, reflecting a cautious stance.
“Growth could be higher from next year, given ongoing reforms. These include structural reforms, especially in the network sectors, such as electricity and transport,” the governor said.
Kganyago highlighted that while inflation appears well-contained in the short term, medium-term risks persist. “Material upside risks include higher prices for food, electricity, water, insurance premiums, and wage settlements,” he said.
Additional potential headwinds include volatile global conditions and a depreciating rand.
The rand has weakened significantly, trading around R18.15 to the dollar, down from R17.29/$ earlier this month. Market analysts attribute the decline partly to expectations of Donald Trump’s return to the U.S. presidency, which could lead to increased U.S. inflation and higher interest rates.
A weaker rand raises the cost of imports, including oil, which could stoke local inflation.
The MPC has adjusted its inflation forecast slightly higher, projecting 4.6% inflation by the end of 2025, up from the 4.4% expected in September. This revision incorporates a significant electricity price hike.
Despite these risks, the Reserve Bank anticipates that rates will stabilise slightly above 7%, leaving room for further modest rate cuts. However, Kganyago stressed that decisions will remain data-driven and adaptive to evolving economic conditions.
“Global interest rates could shift higher again, and the recent rand depreciation demonstrates how rapidly changes in the global environment can affect South Africa,” he said.
The governor underscored the importance of domestic reforms to sustain economic growth. “Additional measures to improve economic conditions include reaching a prudent public debt level, strengthening network industries like electricity and transport, lowering administered price inflation, and aligning real wage growth with productivity gains,” Kganyago said.
The next MPC meeting is scheduled for 30 January 2025, where further adjustments will be considered based on the latest economic data and projections.
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