This comes as inflation eased to 4.4% in August, below the midpoint of the Reserve Bank’s 3-6% target band
The South African Reserve Bank cut interest rates by 25 basis points on Thursday, saying it continued to see a dip in headline inflation in the near term, supported by a stronger rand. The reduction, the first one of more than four years, leaves the benchmark repo rate at 8%.
With reduced interest rates, South African consumers can expect lower repayments on home loans, credit cards and other debt, while new homeowners can expect monthly payments to drop by R750 to R775 per R1 million loan, said Albert Botha, the head of fixed income at Ashburton Investments.
The widely expected decision by the monetary policy committee (MPC) was unanimous, Reserve Bank governor Lesetja Kganyago told a media briefing. He said the MPC considered both a 25-basis point cut and a 50-basis point cut, but agreed that “a less restrictive stance was consistent with sustainably lower inflation over the medium term”.
The committee took a risk-based stance given uncertainties in the global and local economy and the fact that it is targeting a low and sustained inflation, he said.
Thursday’s decision came a day after data from Statistics South Africa, which showed that inflation eased for the third consecutive month to 4.4% year-on-year in August from 4.6% in July, reaching its lowest level since April 2021. This is below the midpoint of the Reserve Bank’s 3-6% target band.
On Thursday, Kganyago said the central bank expected this progress to be sustained,
with inflation contained below the 4.5% midpoint through to the end of the forecast horizon in 2026. The Reserve Bank expects core inflation to be slightly below 4.5% over the medium term.
“As long as headline inflation stabilises at lower levels, we anticipate further progress in re-anchoring expectations around the middle of our target range,” Kganyago said, adding that the risks to inflation were assessed as balanced.
The decision also comes after the United States Federal Reserve cut interest rates on Wednesday by 50 basis points, the first time in four years, leaving interest rates in a 4.75% – 5% range.
Kganyago noted the Fed’s move, as well as last week’s cut by the European Central Bank and the Bank of England easing in August, but added: “Despite these welcome developments, central banks are moving carefully, and policy stances remain relatively tight”.
Ashburton’s Botha said the Fed is expected to cut rates further in 2024 and 2025, with the Sarb likely to follow suit.
“The Sarb [South African Reserve Bank] is likely to mirror this rate path, with cuts expected at the end of the month and continuing through next year. Projections suggest the repo rate will bottom out between 6.25% and 6.75%,” he said.
Economists at Nedbank also said they expect another 25 basis point rate cut, taking the repo rate to 7.75% by the end of 2024. At this stage, a further 75 basis point reduction in 2025 is possible, they said.
Kganyago said South Africa’s economic growth — which grew marginally by 0.4% in the second quarter — was marginally below the central bank’s expectations for the first half of the year, although it predicted improvements in the second half, with growth of 0.6% in both quarters.
“This reflects rising confidence, in part due to a stable electricity supply. We also expect extra spending given withdrawals from the new Two-Pot retirement system, although some of these funds will be absorbed by debt repayments and tax,” he said.
A reduction in interest rates puts more cash back into businesses, encourages them to invest and contributes to improved business confidence levels, said First National Bank’s Wandile Mnguni.
“The cost to borrow also decreases, enabling SMEs [small and medium enterprises] to borrow money, or access additional funds, to expand or start new projects at a lower cost. This has a positive impact on the economy as it stimulates growth,” Mnguni said.
“Furthermore, interest rate decreases have a direct impact on the disposable income of consumers, allowing them to spend more, which is always positive for small businesses. If the right strategies are implemented at the correct time, businesses can improve their cash flow and increase their profits in the long term.”