South Africa’s Reserve Bank (SARB) reduced its benchmark interest rate for the first time in four years. The monetary policy committee (MPC) lowered the rate by 25 basis points, bringing it to 8%, as announced by Governor Lesetja Kganyago during a press briefing north of Johannesburg on Thursday. This adjustment matched the median forecast of 24 economists polled by Bloomberg, with only one analyst predicting a more aggressive 50 basis-point reduction.
This decision comes hot on the heels of a 50 basis-point cut by the U.S. Federal Reserve, which has contributed to a global trend of easing financial conditions. The SARB’s MPC had contemplated various options, including a more significant 50 basis-point reduction or maintaining the rate unchanged. Ultimately, the committee reached a consensus for a 25 basis-point cut, as Kganyago articulated: “The MPC ultimately reached consensus on 25 basis points, agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term.”
Kganyago further emphasised the need for prudence, stating, “You have got to be cautious, adventurism is not part of our monetary policy toolkit.”
The South African rand responded positively to the announcement, strengthening by 0.3% against the dollar, trading at 17.4863 by 5:42 p.m. in Johannesburg. Government bond yields also showed a favourable reaction, with the yield on bonds maturing in February 2035 easing by two basis points to 10.16%.
The rate cut follows data released a day earlier, showing that inflation cooled more than anticipated in August, reaching 4.4%. This marks the first time in over three years that inflation has dipped below the central bank’s target band midpoint of 4.5%. The SARB now expects inflation to average 4.6% in 2023, 4% in 2024, and 4.4% in 2026, revising its previous forecasts of 4.9%, 4.4%, and 4.5%, respectively.
“The risks to inflation are assessed as balanced,” Kganyago remarked, a notable shift from the July statement in which risks were assessed as skewed to the upside. Previously stubborn inflationary pressures had kept the benchmark rate at 8.25% since May 2023, despite ongoing economic fragility and a persistently high unemployment rate, which hovers above 30%.
With one more policy meeting scheduled before the year’s end, speculation surrounding further rate cuts is rife. Forward rate agreements are currently pricing in an additional 35 basis points of easing, with Bloomberg Economics projecting further 25 basis-point reductions in both November and May, potentially bringing the interest rate to 7.5% before stabilisation.
The SARB’s cautious yet optimistic policy stance reflects a broader shift in monetary policy as inflationary concerns ease, paving the way for potential relief in borrowing costs for South Africa’s struggling economy.
