Policy error if Reserve Bank does not cut repo rate on Thursday – economist

The Reserve Bank will be making a policy error if it does not cut the repo rate on Thursday after the meeting of the Monetary Policy Committee, an economist says. The oil price and the petrol price have decreased, and inflation is expected to trend lower in the coming months, while the Rand is also stronger, leaving no excuse for the Reserve Bank not to cut the repo rate.

The South African Reserve Bank (Sarb) has the constitutional mandate to protect the value of the Rand by keeping inflation low and steady. It uses interest rates to influence the level of inflation. The National Treasury sets the inflation target in consultation with the Sarb to act as a benchmark to measure price stability.

The Monetary Policy Committee (MPC) of the Sarb independently makes monetary policy to achieve this target, currently between 3 and 6%. Monetary policy is implemented by setting a short-term policy rate called the repo rate that affects the borrowing costs of the financial sector, which in turn affects the broader economy.

Elize Kruger, an independent economist, says since the previous Monetary Policy Committee (MPC) meeting, the oil price has tanked from $84.8 per barrel to around $71 per barrel now, while the Rand exchange rate also trended stronger, currently around R17.93/$ compared to R18.18 at the time of the previous meeting.

“Consequently, the Rand price of oil dropped by about 19% compared to the time of the previous meeting, leading to notable declines in fuel prices in the past few months.”

ALSO READ: Repo rate remains unchanged at 8.25%

Petrol and diesel becoming cheaper

Kruger also points out that after four consecutive monthly declines, the petrol price has reached its lowest level since February 2023, with cumulative cuts of R3.36 per litre, while the diesel price has been cut for six consecutive months, cumulatively by about R2.70 per litre.

“In addition to these price cuts, the current over-recovery at the pumps (124 c/l for petrol and 118 c/l for 0.05S diesel) suggests that further cuts of at least R1 per litre in both petrol and diesel prices (conservative assumption) are on the cards for early October.” 

ALSO READ: September fuel price update: Petrol and diesel still in line for major cuts

Inflation going down too, helping the repo rate

Headline inflation is forecast to moderate notably in the upcoming 12 months, Kruger says. Average headline inflation was 5.3% in the first half of the year, while the forecast average for the second half of 2024 is 3.9%.

“The full-year average forecast for 2024 is 4.5% and 4.4% for 2025, while core inflation has remained well contained. Inflation will on average hover exactly around the mid-point of the Sarb target band.”

ALSO READ: One step closer to repo rate cut in September

What does this mean for the repo rate?

Kruger says with headline inflation moderating notably, the real repo rate is exceptionally restrictive for an economy muddling along below 1% real growth. “With very gradual repo rate cuts of 25 basis points every second month, the real repo rate will remain fairly restrictive for some time to come, and as such, the Sarb has ample justification to cut the repo rate even by 50 basis points at the upcoming MPC meeting. 

“However, given recent Sarb rhetoric and an ever-conservative committee, a repo rate cut of 25 basis points remains the base case forecast.”

ALSO READ: Inflation now expected to average 5.1% this year

Inflation for August

Kruger says August is traditionally a low survey month, and therefore developments in fuel and food prices typically play a heavier role. “There could also be still some “overflow” of municipal tariff increases coming through for municipalities that have not implemented the annual increases in July.”

Inflation is forecast at 4.5% in August compared to 4.6% in July. The inflation rate for August will be announced on Wednesday.

September will likely see headline inflation dip below 4% for the first time since March 2021, at 3.9%, while October’s headline CPI is currently forecast at 3.1%, Kruger says.

Frank Blackmore, lead economist at KPMG South Africa, also says the recent reductions in headline inflation to the current 4.6% will allow the MPC room to reduce interest rates. “This follows a long decline from July of 2022, when a high of 7.7% was recorded to that current 4.6%, which is only 0.1 percentage points above the target rate.

“However, initially the reduction in interest rates will be conservative at 25 basis points but can be followed by a 50 basis point repo rate reduction in November if this trend and moderate inflation continue.”