Hopes Dashed for Bigger Interest Rate Cut in South Africa

Hopes Dashed for Bigger Interest Rate Cut in South Africa

The South African Reserve Bank (SARB) is expected to cut interest rates by only 25 basis points, bringing the repo rate down to 7.75% from 8%. Despite a significant slowdown in inflation, new global and local risks have influenced the Monetary Policy Committee’s (MPC) cautious approach.

Inflation Slows but Risks Remain

Annual inflation in October slowed to 2.8%, falling below the SARB’s target range of 3% to 6%. While this signals easing price pressures, economists believe the SARB will look past this temporary decline.

Elna Moolman, head of South Africa macroeconomic research at Standard Bank, predicts a 25 basis point cut, reflecting the SARB’s focus on balancing short-term gains with long-term stability.

Global Risks Weigh on Decisions

The global economic landscape remains volatile, with the rand losing almost 3% against the dollar since the US election earlier this month. Concerns over the Federal Reserve’s future policies and their impact on the US dollar add to South Africa’s economic challenges.

Johann Els, chief economist at Old Mutual Group, notes that the MPC will likely emphasize risks stemming from the new US administration’s potential tariff and tax policies, as well as ongoing global tensions, including the Russia-Ukraine conflict.

Emerging Market Sentiment and Domestic Challenges

Negative sentiment toward emerging market assets further complicates South Africa’s economic outlook. Koketso Mano, senior economist at FNB, highlights that the MPC is unlikely to adopt an aggressive approach to rate cuts, given lingering inflation concerns and external pressures.

“Gradual is better than too quick,” Mano adds, underscoring the Reserve Bank’s cautious stance.

Why a Bigger Rate Cut Is Unlikely

The SARB’s conservative approach reflects its commitment to maintaining economic stability. Factors such as:

• Currency Depreciation: A weaker rand drives up import costs.
• Global Uncertainty: Unpredictable global markets pose challenges for emerging economies.
• Domestic Price Pressures: Persistent risks to inflation, despite its temporary slowdown.

Looking Ahead

Governor Lesetja Kganyago will announce the MPC’s decision at a briefing in Johannesburg on 21 November. While the anticipated rate cut may be modest, it reflects a careful balancing act between supporting economic growth and safeguarding financial stability in a turbulent global environment.