Sarb announces 25bp rate cut

Prime interest rate of commercial banks falls to 11.5%.

The South African Reserve Bank (Sarb) cut its repurchase rate (repo rate) by 25 basis points to 8% on Thursday, the first cut since the Covid-19 global economic fallout four-and-a-half years ago.

Central bank governor Lesetja Kganyago confirmed the decision following the Sarb’s September Monetary Policy Committee (MPC) meeting in Pretoria.

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The widely expected move aligns with expectations from most economists and market watchers. It is the first Sarb rate cut since the Covid cutting cycle ended in July 2020.

Listen: How much will rate cuts help consumers?

Just a day before the MPC’s latest decision, Statistics South Africa announced that the country’s annual inflation rate fell below the midpoint of the Sarb’s target range of between 3% and 6% for the first time in over three years.

Consumer prices increased by 4.4% in August, compared with 4.6% in the previous month.

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A better inflation forecast, lower oil prices, a stronger rand, and the US Federal Reserve’s decision to cut rates by half a point gave impetus to an interest rate cut.

After a US Federal Open Market Committee (FOMC) meeting on Wednesday, the country’s federal funds rate is in a range of 4.75% to 5%.

Since the rate-hiking cycle started in November 2021, the prime lending rate has increased to 11.75%, where it stayed since May 2023.

Listen: How much will rate cuts help consumers?

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The central bank governor said MPC members considered an unchanged stance, a 25-basis point cut, and a 50-basis point cut but ultimately reached a consensus on 25 basis points, agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term.

Although global inflation is slowing, and countries are nearing their policy targets, risks remain. “Given the difficult and unpredictable geopolitical environment, central banks remain cautious as there may be risks of inflationary shocks through trade restrictions and supply chain disruptions, among other factors,” Kganyago notes.

“For these reasons, central banks are approaching the endgame with caution.”

The MPC’s forecast sees rates moving towards neutral next year, stabilising slightly above 7%. “Decisions of the MPC will continue to be data dependent and sensitive to the balance of risks to the outlook.”

Inflation outlook 

South Africa’s headline inflation eased to 4.4% in August, a three-year low, and close to the middle of the Sarb’s target range, the governor notes. “Our forecast suggests this progress will be sustained, with inflation contained below the 4.5% midpoint of our range through to the end of the forecast horizon in 2026.”

Geopolitical risks are heightened, though, and could generate further economic shocks. “Policy uncertainty is also elevated in various parts of the world. Both trade restrictions and debt levels are rising and might go much higher. This mix could add significant inflationary pressure to the world economy, generating tighter financial conditions for South Africa and other countries,” he adds.

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