SARB Cuts Interest Rates By 25 Basis Points Amid Economic Uncertainty

The South African Reserve Bank (SARB) has announced a 25 basis point reduction in interest rates, despite inflation now falling below the bank’s target range of 3% to 6%. This decision was made during the Monetary Policy Committee’s (MPC) final meeting for 2024.

SARB ‘s Unanimous Decision

On Thursday, SARB Governor Lesetja Kganyago stated that the decision to cut rates by 25 basis points was unanimous among MPC members. He emphasized that there was no discussion about a 50 basis point cut, unlike during the September meeting.

South Africa was among the first countries to raise interest rates following the pandemic, with the repo rate increasing from 3.5% in 2021 to 8.25% by 2023. This year, rates have only been lowered by 50 basis points, bringing the repo rate to 7.75%.

In contrast, the United States, where inflation stands at 2.6%, has already reduced rates by 75 basis points this year, with the possibility of further cuts in December. South Africa’s latest annual inflation rate of 2.8% is now lower than that of countries such as the Netherlands (3.3%), Brazil (4.8%), and India (5.8%).

Global Economic Impact

Kganyago warned that global interest rates could rise again, and the recent depreciation of the rand highlights how quickly changes in the global environment can impact South Africa. The rand has weakened from R17.29/$ to around R18.15 since the US presidential election earlier this month.

The potential return of Donald Trump has strengthened the US dollar, as his proposed policies to increase import tariffs and lower taxes are expected to fuel inflation, keeping US interest rates relatively high.

Higher interest rates generally make a currency more attractive to investors, and the dollar may become a preferred safe-haven investment if a Trump 2.0 term causes market volatility.

Local Economic Implications

A weaker rand compared to the dollar will likely increase inflation in South Africa, as many key imports, particularly oil, are priced in dollars, driving up local prices. Kganyago noted that rising protectionism could further fuel inflation.

The latest rate cut brings the prime rate to 11.25%, reducing the monthly instalment on a new R2-million bond (at prime) by approximately R340. Kganyago stated that while local inflation appears well-contained in the near term, the medium-term outlook remains highly uncertain, with significant upside risks, including higher prices for food, electricity, water, insurance premiums, and wage settlements.

The Reserve Bank’s forecast anticipates further cuts in the repo rate, stabilizing slightly above 7%. Kganyago also mentioned that the bank is engaged in a rigorous debate with the Treasury about lowering the inflation target range of 3% to 6%, advocating for a lower inflation goal.

The next MPC meeting is scheduled for 30 January 2025.

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