South Africa’s Central Bank Rate Cut

By Kopano Gumbi, Tannur Anders, and Bhargav Acharya

PRETORIA (Reuters) – South Africa’s central bank adopted a cautious approach after cutting its lending rate for the first time in over four years, noting that while inflation has decreased more swiftly than anticipated, certain risks remain.

The South African Reserve Bank (SARB) reduced its primary lending rate to 8% from 8.25%, aligning with economist expectations following recent data indicating headline inflation dropped slightly below 4.5%, which is within the bank’s target range.

SARB Governor Lesetja Kganyago reported that the Monetary Policy Committee considered options to maintain the rate, reduce it by 25 basis points (bps), or decrease it by 50 bps. Kganyago emphasized the importance of caution, stating, “Adventurism is not part of our monetary policy toolkit.”

This decision follows the U.S. Federal Reserve’s unexpected 50-basis point cut and positions South Africa among emerging markets initiating a monetary easing cycle, influenced by earlier movers in Latin America and central Europe.

The SARB had maintained the repo rate unchanged for seven consecutive meetings prior to Thursday and had previously raised rates ten consecutive times. According to Sisamkele Kobus, a fixed income analyst at Ninety One, she forecasts that future rate adjustments will be modest.

For much of the last three years, annual inflation hovered around or above the SARB’s target range, averaging 5.9% in 2023 and 6.9% in 2022. However, it saw a significant drop in July and continued to decline in August.

The SARB expressed optimism for sustained progress in controlling inflation, projecting it will remain below the midpoint of 4.5% until 2026. They indicated that inflation expectations are gradually improving, supported by recent surveys.

The bank added, “As long as headline inflation stabilizes at lower levels, we anticipate further progress in re-anchoring expectations around the middle of our target range.”

Economic growth is expected to strengthen in the last two quarters of this year, aided by the suspension of rolling blackouts by power utility Eskom and increased consumer spending due to the government’s pension reforms.

The rand has benefitted from a coalition government formed after May’s parliamentary elections, though it remained relatively stable following the rate cut announcement. Analysts anticipate another 25 bps reduction in November at the SARB’s final policy meeting for the year.