South Africa Central Bank Joins Easing Club with 25 Basis Point Rate Cut, Reports Reuters

By Kopano Gumbi, Tannur Anders, and Bhargav Acharya

PRETORIA – South Africa’s central bank adopted a cautious approach following its first interest rate cut in over four years, noting that although inflation had decreased more rapidly than anticipated, potential risks to the economic outlook remain.

The South African Reserve Bank (SARB) reduced its main lending rate from 8.25% to 8%, aligning with economists’ forecasts. This decision came a day after data revealed headline inflation had dipped just below 4.5%, within the central bank’s target range.

SARB Governor Lesetja Kganyago discussed the deliberations of the Monetary Policy Committee, which considered whether to maintain the current rate, implement a cut of 25 basis points, or a more substantial reduction of 50 basis points. "We found that a 25 basis points adjustment was a prudent approach," Kganyago stated during a press conference. "Caution is essential; adventurism is not part of our monetary policy toolkit."

The move follows a larger-than-expected 50 basis points reduction by the U.S. Federal Reserve, positioning South Africa as the latest emerging market to initiate a monetary easing cycle, joining others in Latin America and central Europe.

Before this cut, the SARB had maintained the repo rate at 8.25% for seven consecutive meetings, after a series of ten increases previously.

Sisamkele Kobus, a fixed income analyst at Ninety One, expressed expectations that future repo rate cuts will be modest and incremental.

Over the past three years, annual inflation has hovered near or above the upper limit of the central bank’s target range, averaging 5.9% in 2023 and 6.9% in 2022. However, inflation exhibited a sharp decline in July and continued to decrease in August.

The SARB indicated that it anticipates sustained progress in curbing inflation, projecting inflation to remain below the 4.5% midpoint of its target range through 2026, based on recent surveys that reflect improving inflation expectations.

The central bank stated, "As long as headline inflation stabilizes at lower levels, we foresee continued progress in re-anchoring expectations towards the middle of our target range."

Economic growth is predicted to strengthen in the latter half of this year, aided by the suspension of rolling power outages by utility provider Eskom and an increase in consumer spending driven by the government’s pension reform initiative.

The rand has also seen positive effects from growing confidence related to the establishment of a coalition government following the recent elections, where the African National Congress lost its parliamentary majority. However, the currency remained relatively stable after the announcement of the rate cut.

Economists anticipate an additional 25 basis points reduction in November, during the SARB’s final monetary policy meeting of the year.