The South African Reserve Bank is expected to cut the benchmark repo by another 25 basis points on Thursday
Economists are expecting the South African Reserve Bank to cut interest rates by 25 basis points when it concludes its monetary policy meeting this week, essentially bringing the repo rate down to 7.50% and the prime rate to 11%.
This will be the third consecutive cut, after the Reserve Bank reduced rates by a cumulative 50 basis points in the last two meetings in 2024.
After December’s inflation rate ticked up to 3% — still lower than economists’ expectations — the Reserve Bank has a good case for cutting interest rates by 25 basis points this week, said Zandile Makhoba, the consumer economist at Liberty.
She added that the average for 2024’s inflation rate was at 2.8%, which was also lower than expectations of it reaching from 3% to 6%.
“These factors are encouraging for the monetary policy committee to create some stimulus in the economy, by giving us a rate cut,” she said.
The outlook for the year is also more positive, giving the Reserve Bank more room to cut interest rates this year.
“The Reserve Bank forecasted inflation to remain around the 4% mark, and that’s in line with the consensus of most economists,” Makhoba said.
“From an inflation perspective, there isn’t really much calling for a rate hike. There is possibly more room for a rate cut, but I think there are factors that might make the MPC [monetary policy committee] a bit cautious on cutting further.”
The weakening rand might be an inflationary factor and the Reserve Bank will tread cautiously as it assesses the implication of developments in the United States under the new Trump administration, she added.
Economists at Nedbank also expect a 25 basis point interest rate cut “amid cautious rhetoric warning of mounting upside risks to the inflation outlook”.
“The decision to cut will likely be motivated by the benign inflation outcomes of the past two months and a relatively subdued inflation outlook,” it said.
Inflation edged up to 3% in December from 2.9% in November, mainly driven by slower deflation in transport and increasing food inflation, according to Statistics South Africa. Transport slowed to 2% from 3.3%, inflation for food and non-alcoholic beverages edged up to 1.7% from 1.6%.
“The performances of the subcategories were mixed but broadly showed price increases due to fading base effects,” the Nedbank economists said.
The US Federal Reserve is also expected to announce its rates decision this week. After cutting rates by a cumulative 100 basis points last year, economists believe it will keep them unchanged at 4.25% to 4.5%.
This is on the back of “recent evidence of sticky inflation and growing concerns that Trump’s policies could reawaken price pressures”, according to Nedbank.
Investec economist Lara Hodes is also expecting the Reserve Bank to cut rates by 25 basis points because inflation is below 4.5% — the mid-point of central banks 3% to 6% target band. It is likely to remain lower than this point for the rest of the year, she added.
But Makhoba noted that inflation is easing but administered prices are increasing and this is affecting consumers’ pockets.
“We’re sitting at a very interesting balance. Inflation is going down but there are still a number of key components that are very high, for example administered prices like electricity, water. Those are still key essentials that consumers are seeing very high inflation on,”she said.
“What looks like an overall relief of 2.8% is not necessarily the lived experience for the consumer because, while there are marginally lower increases on high prices, we’re not seeing price reductions at all in most of the CPI categories, which is still going to be a concern for consumers.”
The picture is not completely bleak.
“On the upside, interest rate cuts should provide some relief, especially because South Africa households hold a significant amount of debt. It will help balance those household balance sheets and help us cope with the changes coming forward,” said Makhoba.