The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has decided to cut the interest rate by 25 basis points (bps) for the first quarter of 2025.
The repo rate was cut by 25 bps and will fall from 7.75% to 7.50%. This means the prime lending rate will also drop from 11.25% to 11%
This is the third consecutive cut by the MPC after a 14-year high. In September the Reserve Bank Governor, Lesetja Kganyago cut the repo rate by 25bps and again in November he cut the interest rate by another 25bsp.
There was hope that the Kganyago and the MPC would give South Africans a 50 basis points cut as we head into the first half of the year. This would have seen the prime lending rate drop to 10.75% and the interest rate fall to 7.25%.
This was not a unanimous decision according to Kganyago and he said that four members of the MPC preferred this action, while two supported an unchanged stance.
"The committee ultimately agreed that it was possible to reduce the degree of policy restrictiveness, making the stance somewhat more neutral. However, all members were concerned about the uncertain global outlook," he said.
"The MPC would like to emphasise that its decisions will be made on a meeting-by-meeting basis, with no forward guidance and no pre-commitment to any specific rate path. Such decisions will continue to be outlook dependent, responsive to data developments, and sensitive to the balance of risks to the forecast," Kganyago said.
The Governor said that given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario.
"This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries. The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets," he explained.
"In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts".
The Governor said that the MPC also looked at a scenario of accelerated structural reforms, domestically.
He noted that this showed growth picking up gradually, getting to 3% in 2027.
"Importantly, this scenario also showed lower inflation and lower interest rates in South Africa, demonstrating how structural reforms can reduce the country risk premium and create more monetary policy space," Kganyago said.
"Considering the difficulties of the external environment, it remains crucial to sustain domestic reform momentum while protecting macroeconomic stability."
Will we see another interest rate cut in the year?
Casey Sprake, an Investment Analyst at Anchor Capital said that given that the Reserve Bank has indicated its intention to lower the repo rate to a “neutral” level she forecasted that an additional cumulative 25 to 50 bps rate cut could be seen in the first half of 2025.
Sprake explained that several factors impacted that interest rate.
These factors include: the US administration, the scale and composition of China’s policy stimulus, and the impacts of ongoing global conflicts.
"We expect inflation to gradually rise from its recent lows as base effects fade, food inflation normalises, and fuel prices recover following their late 2024 drop," she explained.
South Africa’s economic outlook is improving
Last week, Kganyago emphasised that sentiment around SA’s economic outlook is improving when compared to last year. However, he warned that inflation is still an issue.
Kganyago was speaking at the World Economic Forum’s annual meeting in Davos, Switzerland and told international media that GDP could grow to 2% in 2025, versus the 1.1% growth projected for 2024.
“Depending on who is forecasting, growth varies between 1.6% and 2% (in 2025). We think it would be closer to 2% than closer to 1.6%,” he told Reuters Global Markets Forum.
“The structural reform agenda has gained momentum, and it has been given impetus by this Government of National Unity with a very clear focus on taking South Africa’s economic trajectory to the next level,” Kganyago added.
The Governor noted that South Africa's inflation outlook is more “muddied” by protectionist policies impacted by President Donald Trump and his new administration.
Kganyago said that inflation will also be impacted by the dollar and rand exchange rate, global oil prices and local food prices.
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