South African Reserve Bank shares interest rate expectations

Rashad Cassim

South African Reserve Bank deputy governor Rashad Cassim said they estimate that the country’s neutral rate is 7%.

The neutral rate is the interest rate that neither speeds up nor slows down the economy. It is the level at which the policy rate will settle when inflation is at target, and output is at potential.

Cassim shared this information during his speech at the Central Banking Conference held at the Mount Nelson Hotel in Cape Town this week.

He said the neutral rate is a concept many of the Reserve Bank’s close watchers have questions about.

“In South Africa, we estimate this neutral rate to be 7% over time, of which 4.5% is compensation for inflation and 2.5% is the so-called neutral real interest rate,” he said.

The neutral real interest rate of 2.5% is the neutral rate excluding inflation.

The 2.5% is made up of 0.5%, which reflects the global real rate derived from the longer-run real policy rate of the US, Europe, and Japan, plus 2% for the South African risk premium.

“As with potential growth, we cannot be sure that the neutral rate is exactly 7%. It is an unobservable concept, and our tools for measuring it are imperfect,” Cassim said.

“Nonetheless, a rate of around 7% is a reasonable place to start conversations about the policy stance.”

It suggests that current rates, at 7.25%, are in the region of the neutral rate, and it also illustrates how loose policy was back when we were at 3.5%.

“Of course, if the inflation-adjusted rate needs to be around 2.5%, then for policy to be neutral, we need inflation to be around 4.5%,” he said.

The Reserve Bank deputy governor said the country is not there yet as inflation is still close to 7%.

“For this reason, the extent to which the policy rate will change from the current 7.25% will depend on whether we feel confident that disinflation is proceeding and we will get to 4.5% this year.”

The Monetary Policy Committee (MPC) will meet on 28 March, and many economists expect a small interest rate increase this month.

A 25 basis point increase would take the repo rate to 7.5% and the prime lending rate to 11%.


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