Reserve Bank Governor Lesetja Kganyago. Picture: Gallo Images
The Monetary Policy Committee of the South African Reserve Bank has decided to cut the repo rate by only 25 basis points, despite economists calling for a cut of 50 basis points.
After Statistics SA announced this week that the inflation rate for October decreased by a full 1% in October from September, economists said there were no inflation expectations to justify not cutting the repo rate by 50 basis points.
South African Reserve Bank (Sarb) governor Lesetja Kganyago and the Monetary Policy Committee (MPC) didn’t seem to agree.
Announcing the committee’s decision on Thursday, Kganyago said the global macroeconomic context had become more challenging since the previous MPC meeting in September. Then the repo rate was also cut by 25 basis points. The 25 basis points cut brings the repo rate to 7.75%.
“The dollar has appreciated against most currencies, including the rand. Longer-term interest rates have increased in the US and across the globe. Short-term rate expectations have likewise shifted up.”
He added that, in general, monetary policy in major economies remains restrictive and headline inflation has slowed.
“While this has provided some room for major central banks to ease rates further over the past two months, new inflation pressures and heightened uncertainty suggest diminished policy space.
“With underlying inflation still above target in several economies, there are risks of policy reversals.”
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Turning to South Africa, Kganyago said economic growth recovery continues after a weak economic performance in 2023 and the first half of 2024. “In the near term, we expect output to benefit from a variety of tailwinds, including lower inflation, higher disposable income and extra spending from pension withdrawals via the new two-pot retirement system.
“It is unclear how much this will boost the third-quarter growth numbers, which are due in a few weeks. The data flow has been mixed lately, with some indicators disappointing, while others have been positive.
“For instance, recent manufacturing data was subdued, but mining was stronger. Encouragingly, the most recent labour force survey showed relatively large and broad-based job gains and lower unemployment.”
Kganyago said the Sarb still expects a sustained improvement in growth over the medium term as reforms take effect. “Our forecast now extends out to 2027 and we see growth reaching 2% in that year.
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The risks to the growth outlook are assessed to be balanced, he said. “Given mixed data outcomes, it is possible that near-term growth could fall short of current projections. At the same time, growth could be higher from next year, given ongoing reforms. These include structural reforms, especially in the network sectors, such as electricity and transport.
“Furthermore, the recent positive outlook on South Africa’s credit rating from Standard & Poor’s points to an improving country risk premium. These factors suggest upside risks to the longer-term growth forecast.”
Moving to consumer prices, Kganyago admitted that headline inflation dipped below the Sarb target range. “Goods prices have slowed more than those for services, which mainly reflects the benefits of a stronger exchange rate and a lower oil price, compared to last year. These temporary supply shocks are likely to keep inflation below 4% until mid-2025.”
He said thereafter the Sarb expects inflation to increase modestly compared to its September projections, reaching 4.6% from late 2025, rather than 4.4%, primarily due to a higher electricity price assumption.
“At the same time, core inflation is marginally lower for this year and next year, which reflects recent data outcomes. We continue to see headline inflation stabilising near our midpoint objective over the forecast horizon.
“In this context, we anticipate inflation expectations will moderate further. These expectations have been quite backward-looking, with higher past inflation projected well into the future. Survey expectations remain above our midpoint objective. We expect that our policy stance and the experience of lower inflation will anchor expectations more firmly at lower levels.”
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Kganyago said the risks to the inflation outlook are assessed as balanced. “In the near term, inflation appears well contained. However, the medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water, as well as insurance premiums and wage settlements.”
Against this backdrop, he said, the MPC decided to reduce the repo rate by 25 basis points. “The MPC agreed that reducing the level of policy restrictiveness is still consistent with achieving the inflation target.”
However, he warned the risk outlook requires a cautious approach, as global interest rates could well shift higher again, while the recent depreciation of the rand demonstrates how rapidly changes in the global environment can affect South Africa.
“The forecast sees rates easing further in future, stabilising a bit above 7%. However, this rate path from the Quarterly Projection Model remains a broad policy guide. The MPC would like to emphasise that its decisions will be made on a meeting-by-meeting basis, with no forward guidance and no pre-commitment to any specific rate path.”
He emphasised that these decisions will continue to be outlook dependent and responsive to data.
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Additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.
Kganyago said base effects and rising confidence factors support near-term growth, while withdrawals under the two-pot retirement system are now expected to reach R51 billion for the current quarter, compared to a previous forecast of R40 billion, with a larger proportion of withdrawals now expected to be used for consumption rather than debt repayments.
“The latest projections show 0.5% growth in the third quarter and 0.7% growth in the fourth, little changed from the September forecast, which had 0.6% growth in both quarters. Growth for 2024 remains 1.1%, while for 2025 it is 1.7% (up from 1.6%) and still 1.8% for 2026.”
He pointed out that goods inflation was 1.4% and services inflation 4.4% for October, while the implied starting point of the rand/dollar exchange rate is R17.74, for the fourth quarter of 2024, with R17.96 for the first quarter of 25Q1. Fuel prices also fell by 19.1% in October.
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“In the current forecast, inflation reaches 4.6% in the fourth quarter of 2025 and stays there throughout 2026. Previously, inflation was at 4.4% from the fourth quarter of 2025 to the second quarter of 2026 and 4.3% for the third and fourth quarters of 2026.
“These projections are modestly higher than in the previous forecast round, mainly due to higher electricity prices. Inflation now averages 4.6% in 2026, versus 4.4% previously. Average BER survey expectations for two years ahead were at 4.8%.
“Market-based expectations, from break-evens, are around 5.4% for the longer-term, 10-year measure, while medium-term expectations, up to 5-years, are around 4.3%. This scenario assumed a 25% bulk-price increase for electricity, as well as higher water price increases.”
Compared to the baseline, electricity inflation is higher by around 5-6 percentage points in 2025 and 2026, while water inflation is around 3-5 percentage points higher, he said.
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