Interest rate relief coming for South Africa

Economists are almost unanimous that the South African Reserve Bank will deliver a 25-basis-point interest-rate cut on Thursday. Almost, but not quite.

Gryphon Asset Management’s Abri du Plessis is the outlier in a Bloomberg survey of 22 economists, who predicts a cut of 50 basis points.

While market pricing also points to the SARB lowering the key rate to 8%, Du Plessis believes there’s room for a more aggressive approach.

A stronger rand, lower oil prices and the need to stimulate the economy all argue for a deeper cut by the central bank, says Du Plessis. 

Consumer prices have trended lower for five months to within a whisker of the central bank’s objective. It’s likely to have hit that level in August for the first time in more than three years, data may show Wednesday, according to the median estimate in a separate Bloomberg survey.

“Inflation is under control and coming down nicely,” Du Plessis said. “The oil price is assisting a lot more than everyone expected, and the stronger rand will help keep inflation lower in the near term.”

“Given these factors, I believe inflation over the next two or three months will be better than what was expected just a few months ago.”

The five-year breakeven rate, a market measure of price-growth expectations, fell to 4.28% on Tuesday, the lowest since April 2021. The central bank prefers to peg inflation at the 4.5% midpoint of its 3% to 6% target range. 

The rand has gained 3.3% since the bank’s last meeting on July 18 amid a resurgence of confidence in South Africa’s economy following the May 29 election.

Crude oil prices, meanwhile, have dropped 12% in the same period as demand from the biggest consumer, China, wanes.

For Du Plessis, that means the SARB now has an opportunity to shift its focus away from controlling inflation and more toward supporting growth.

The nation’s economy staged a fragile recovery in the three months through June, growing 0.4% as household consumption rose.

“With inflation under control, I think the central bank can pay closer attention to South Africa’s growth rate — and that’s where we have a problem,” Du Plessis said. “They’ve got to start helping by supporting the economy.”