Big interest rate cut for South Africa on the cards

The Reserve Bank may cut interest rates by 50 basis points this week as inflation trends lower and the South African economy remains relatively weak. 

This is feedback from Old Mutual chief economist Johann Els, who outlined his expectations for this week’s Reserve Bank Monetary Policy Committee (MPC) meeting. 

Els explained that headline inflation has been steadily declining throughout the year, with the September reading for inflation, which came out last month, showing that prices are increasing at the slowest rate in three years. 

It is important to note that a lower inflation rate, as long as it remains positive, just means that prices are increasing at a slower rate – not that they are coming down. 

Els expects the reading for October, coming out on 20 November, to indicate that inflation has trended even lower. 

Els predicts that headline inflation, which stood at 3.8% in September, will drop sharply to around 3% and could potentially dip further to 2.9% or even 2.8%. 

This anticipated decrease represents a significant turning point, potentially marking the lowest inflation rate observed in the current cycle.

The sharp decline expected in October is not solely due to the consistent decline in the price of fuel at the pumps but reflects a broader easing of price pressures across various sectors. 

“The inflationary landscape is showing signs of substantial relaxation, evident not just in transient factors like fuel but across a spectrum of consumer goods, from food to durable goods, all indicating minimal inflationary pressures,” he said.

With this backdrop, Els suggested that the Reserve Bank may consider a 50-basis point rate cut in its upcoming decision, a move he believes is justified by the underpinning economic conditions. 

Els explained that the Reserve Bank has traditionally taken a cautious stance, hesitant to make dramatic moves to avoid any instability in financial markets. 

However, the current environment provides a unique opportunity for more aggressive action as South African assets appear to be more resilient with a new government in place, and the economy is in desperate need of stimulus. 

“Given the recent shortfall in inflation and projections that it will remain subdued, a more substantial rate cut would align with the economic signals we are observing,” he commented.

Els also expressed concern that the bank might opt for a more conservative 25-basis point cut, influenced by global economic uncertainties and potential shifts in US policy. 

He warned that such caution, while prudent, may not fully capitalise on the opportunity to stimulate economic growth at a crucial time. 

“The Reserve Bank’s approach, while typically geared towards mitigating risk, should also be responsive to clear economic indicators.” 

“We have a window to support economic recovery more robustly without jeopardising our inflation targets.”

Els admitted that policy shifts in the United States under President Trump’s administration will also play an important role. 

The Trump administration’s economic policies, particularly around trade and fiscal stimulus, pose a potential risk to global inflation trends, influencing decisions by central banks worldwide. 

The Reserve Bank is likely to consider these international policy moves as a factor in their rate decision, suggesting that Trump’s policies could prompt a cautious approach to avoid any adverse effects on South Africa’s financial stability.

However, it might also push the bank to be more aggressive to cut rates while it can, before any potential policies threaten that outlook.

It is also vital to note that Trump’s policies have yet to be enacted and may never be implemented. 

Crucially, the US Federal Reserve cut interest rates by 25 basis points earlier this month, giving the Reserve Bank more room to cut. 

Perhaps even more importantly, it signalled its intention to continue cutting rates despite the uncertainty of a new presidency and potentially inflationary policies. This will give the Reserve Bank confidence to continue on its cutting path.