The South African Reserve Bank’s (SARB) Monetary Policy Committee has decided to reduce the country’s interest rates by 25 basis points.
This is the first change since 2020 and aligns with the expectations of economists and analysts.
The repo rate is now at 8.00%, and the prime lending rate has been reduced to 11.50%. The decision to cut rates was unanimous.
This move comes amid lower inflation in South Africa and similar moves by global central banks, notably the US Federal Reserve, which cut rates by 50 basis points on Wednesday.
According to Reserve Bank Governor Lesetja Kganyago, the MPC members considered various options, including no change, a 25-basis point cut, and a 50-basis point cut.
“The MPC ultimately reached consensus on 25 basis points, agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term,” he said.
The governor said that the forecast anticipates rates moving towards neutral next year, stabilising slightly above 7%, suggesting further cuts of 75-100 basis points.
Kganyago noted that inflation could undershoot the baseline forecast if oil prices drop or the exchange rate appreciates further. Conversely, inflation could exceed the baseline forecast due to higher housing costs, larger electricity price increases, or wage increases outpacing inflation and productivity growth.
“Global conditions pose additional challenges. Geopolitical risks are heightened and could generate further economic shocks. Policy uncertainty is also elevated, in various parts of the world. Both trade restrictions and debt levels are rising, and might go much higher.
“This mix could add significant inflationary pressure to the world economy, generating tighter financial conditions for South Africa and other countries,” he said.
Currently, South African assets have performed relatively well. The rand has strengthened, more than most peer currencies, while long-term yields have moderated and spreads over US rates have narrowed.
These moves have reversed some of the deterioration experienced since 2020, he said.
“Given a potentially adverse external environment, however, it is crucial to sustain domestic reform momentum. This entails both structural reforms to support growth capacity, and macroeconomic efforts to rebuild fiscal and monetary buffers.”
The MPC will next meet for its final briefing of the year on 21 November 2024.
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