The South African Reserve Bank’s (SARB’s) Monetary Policy Committee has voted to hold rates for the eighth consecutive time, keeping them at 15-year highs.
The repo rate remains at 8.25%, with the prime lending rate at 11.75%, the highest since 2009, in effect since May 2023. This decision aligns with market expectations, as most economists anticipated a hold. It is expected that the SARB will not cut interest rates ahead of the US Federal Reserve.
The US Fed is anticipated to cut rates only in September, meaning South Africans will have to wait a bit longer before experiencing any relief. Some economists hoped for a 25 basis point cut, but this was ultimately too optimistic.
Interestingly, the decision was not unanimous, a break from the trend over the past year. Four committee members voted in favor of holding the rates, while two supported a 25 basis point cut, indicating a shift in sentiment and suggesting that a rate-cutting cycle may be nearing.
Bank of America economist Tatonga Rusike noted that any minority vote for a cut increases the likelihood of a rate cut in September. Reserve Bank Governor Lesetja Kganyago highlighted that while global inflation is easing, inflation has not yet stabilised in line with targets.
“It is clear that the battle against inflation is not yet won,” Kganyago said. For South Africa, the inflation outlook is positive. Headline consumer inflation has remained in the “top half” of the SARB’s range and is moving towards the mid-point (4.5%) currently targeted.
Kganyago pointed out that the latest survey results show average inflation expectations at 5% for next year and 4.9% two years ahead, still above the SARB’s 4.5% objective. However, all respondent categories lowered their expectations from the previous survey, suggesting progress as inflation slows, helping to re-anchor expectations firmly at 4.5%.
Despite improvements, the balance of risks remains on the upside. MPC members agreed that a restrictive policy is still necessary to stabilise inflation at 4.5%. Some members felt the inflation outlook had improved enough to consider reducing the restrictiveness.
Kganyago also noted that global interest rates, particularly in the US, remain high and could stay higher for longer than markets anticipate, presenting risks to the currency outlook. Domestically, inflation expectations have not yet aligned with the 4.5% midpoint objective over the medium term.
The bank’s forward-looking model sees rates easing to more neutral territory by 2025. Economists expect rates to be 100 to 150 basis points lower by mid-next year. However, Kganyago emphasized that the MPC’s decisions will continue to be data-dependent and sensitive to the balance of risks.
“We are committed to stabilizing inflation at the mid-point of the target band. Achieving this outcome will improve the economic outlook and reduce borrowing costs,” Kganyago said.
He added that “additional measures” would improve economic conditions in South Africa, including reaching a prudent public debt level, enhancing the functioning of network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.
