Reserve Bank governor Lesetja Kganyago. (Waldo Swiegers/Bloomberg via Getty Images)
The South African Reserve Bank cut interest rates by 25 basis points on Thursday, citing an upside risk to inflation outlook and bringing the benchmark repo rate to 7.5% while the prime lending rate is now at 11%.
The widely expected decision was not unanimous. Two of the central bank’s six monetary policy committee (MPC) members wanted to leave rates unchanged, while four supported the decrease, governor Lesetja Kganyago said.
He said inflation expectations have “largely aligned” with the Reserve Bank’s midpoint objective and that it “appears to be well contained” in the near future.
But he also warned that the medium-term outlook for inflation was “more uncertain than usual, with material risks from the external environment”.
He added that administered prices in the local economic climate were also “problematic”.
Kganyago said inflation was likely to remain in the bottom half of the bank’s 3% to 6% target range through the first half of this year, after the December rate came in at 3%, backed by lower fuel costs and food inflation at a 15-year low. Headline inflation should revert to around 4.5% thereafter, he said.
The MPC takes a risk-based approach and considers the uncertainty in the global environment in its decision, Kganyago reiterated.
“We must move with caution,” he told reporters, adding that most central banks around the world are taking this stance.
The Reserve Bank expects the economy to have rebounded in the fourth quarter of 2024, helped by more “normal agricultural production as well as housing spending, given tailwinds including lower inflation and two-pot pension withdrawals”.
“We think this expected rebound in growth will close the output gap, leaving the economy to operate in line with its potential from the current quarter onwards,” Kganyago said.
“We expect potential growth to trend higher over the next few years. This gets growth
to about 2% by 2027.”
The Bureau for Economic Research said a further 25 basis point cut after Thursday’s announcement is unlikely as the Reserve Bank “seems to place significant emphasis on the upside risks to inflation”.
But FNB expects inflation to remain below 4% in the first half of 2025, creating further opportunities for rate cuts this year.
“Today’s rate cut is certain to further lift business prospects in the upcoming months as consumer and business confidence rise. While we noted a modest inflation uptick at the end of 2024, projections for the year ahead indicate declining inflation expectations,” the bank’s Harry Kellan said.