Introduction to Interest Rate Cuts
The South African Reserve Bank (Sarb) has signaled potential future interest rate cuts as it adjusts its inflation-targeting framework from the midpoint of 4.5% to 3%. This decision was made as the Sarb’s Monetary Policy Committee (MPC) reduced its benchmark lending rate for the second time in a row by 25 basis points to 7%, the lowest level since November 2022.
Impact on Lending Rates
As a result of this cut, the prime lending rate will also decline from 10.75% to 10.50% per annum. This reduction was widely anticipated due to concerns over a new US tariff regime threatening the already fragile economy. The MPC’s decision highlights its focus on stable domestic conditions, despite the global trade environment that could intermittently weigh on sentiment, lift the cost of borrowing, and weaken the rand.
Economic Expert Insights
FNB chief economist Mamello Matikinca-Ngwenya stated that while they expected the MPC to reflect more restraint, the rate cut decision was not a surprise. She noted that despite adverse global conditions and rising local inflation, headline inflation over the coming months should remain contained around the 4.5% midpoint of the target range. This trajectory is supported by weak oil prices and a benign local environment, which should assist with containing inflation expectations and maintaining interest rates.
Inflation Target Adjustments
Sarb Governor Lesetja Kganyago noted a stronger rand and more moderate inflation expectations. The Sarb will start aiming at the bottom of the inflation target range, which is at 3%, as their inflation target going forward. However, food inflation has risen, mainly due to meat prices, and fuel prices are also falling more slowly. As a result, the Sarb expects headline inflation to rise over the next few months, averaging 3.3% for the year.
Interest Rate Forecasts
Kganyago explained that in the Sarb’s Quarterly Projection Model, for a 4.5% objective, rates bottom out around 7%. By contrast, the forecast for a 3% objective has roughly five more cuts over the medium term, taking interest rates slightly below 6%. The logic of the model is that interest rates need to fall as inflation eases, to prevent the inflation-adjusted rate, or real interest rate, from rising too much.
Benefits of Lowering Inflation Targets
Frank Blackmore, lead economist at KPMG, said there are several benefits to lowering the inflation target from the current 4.5% to the 3% level. Core inflation remains close to 3%, and expectations will take a while to come down to the 3% level. This could lead to further rate cuts, resulting in lower borrowing costs and supporting the strength of the rand.
Economic Growth Forecasts
The Sarb has revised downwards the country’s 2025 growth forecast by 0.2 percentage points, from 1.2% to 1%, due to weak economic activity and the potential impact of higher US tariffs. Kganyago warned that though the global economic outlook was largely unchanged, there are risks that permanently higher tariffs or adverse geopolitical developments could cause more disruption to the global economy.
Conclusion
In conclusion, the Sarb’s decision to cut interest rates and adjust its inflation-targeting framework is a positive step towards supporting the economy. While there are risks associated with the global trade environment, the Sarb’s focus on stable domestic conditions and its efforts to contain inflation expectations are expected to have a positive impact on the economy. As economists predict further rate cuts and lower borrowing costs, the future of the South African economy looks promising, with potential for modest growth and a stronger rand.
