Interest rate cut coming for South Africa next week

The Reserve Bank’s Monetary Policy Committee (MPC) is likely to cut interest rates at its next meeting at the end of July. 

However, after this cut, interest rates are expected to move sideways for an extended period of time as the bank adjusts to a potentially lower inflation target and prices pick up slightly towards the end of 2025. 

This is feedback from Old Mutual chief economist Johann Els, who gave the insurer’s outlook for inflation and interest rates as part of his mid-year macroeconomic update. 

Els explained that the South African consumer is in a good position, with cost-of-living pressures easing and household debt stabilising. 

This has largely resulted from lower inflation and interest rates, with some positive impact on finances stemming from the two-pot retirement system. 

As a result, consumer spending has picked up over the past few months as more disposable income is freed up, driving economic growth. 

Els expects this trend to continue as inflation has remained below the lower end of the Reserve Bank’s 3% to 6% target range so far in 2025. 

Crucially, inflation expectations have come down for 2025, with all the social groups surveyed expecting it to average less than 4% for the year. 

This gives the Reserve Bank’s Monetary Policy Committee (MPC) more room to cut interest rates in the second half of the year. 

Els said he expects the MPC to cut rates by 25 basis points at its July meeting, which would give more relief to South African households. 

This is one of the main cyclical factors driving economic growth throughout the rest of the year, with Els expecting second-quarter GDP growth of 0.8%. 

Another factor pointing towards further interest rate cuts is the US Federal Reserve, which Els expects to cut its own federal funds rate multiple times in the second half of the year. 

This reduces the potential impact of an interest rate cut in weakening the rand, giving the Reserve Bank additional room to cut rates. 

The graph below, courtesy of Els and Old Mutual, shows South Africa’s prevailing prime rate, repo rate, and headline inflation. Inflation remains firmly at the lower end of the Reserve Bank’s target range. 

Lower target and inflation uptick present a challenge 

Despite the increased room for further interest rate cuts in 2024, Els expects rates to move sideways after July for at least another year. 

This is largely due to the looming implementation of a lower inflation target for the Reserve Bank to meet and a steady uptick in inflation throughout 2025 and 2026. 

Els explained that in his forecasts, he is already factoring in the impact of a lower inflation target as he thinks it will be implemented relatively soon. 

Given the country’s current low inflation rate, South Africa has an ideal opportunity to lower its inflation target. 

Els said that now is the chance for South Africa to lower the inflation target due to the relatively benign level of inflation and lower inflation expectations. 

As a result, lowering the rate now is unlikely to significantly impact monetary policy, as inflation is already around 3%. 

The challenge with implementing a lower target rate is that, in achieving the lower target, monetary policy will have to be tightened. 

This poses the risk of negatively impacting economic growth, which is something South Africa cannot afford given its stagnatn economy. 

Thus, timing plays a key role in deciding when to lower the target rate. If it is lowered while inflation is already at 3%, monetary policy would not have to be tightened to achieve the target. 

With a mild uptick in inflation expected throughout 2025 and 2026, with inflation edging up towards 4.5%, the window to lower the target will close. 

Els said imposing a lower inflation target will impact growth in the coming year, but will eventually boost economic activity substantially in the long run. 

Interest rates will remain slightly elevated over the coming year as the lower target is implemented and achieved, but will be reduced more significantly in 2027/28.