Approaching rate cuts: what the Reserve Bank has in store for South Africa

As interest rate cuts loom on the horizon, analysts are closely monitoring the fluctuating financial landscape both locally and globally.

Albert Botha, Head of Fixed Income at Ashburton Investments, provided commentary on the evolving situation, emphasising the uncertainties and potential shifts influencing the South African Reserve Bank (Sarb).

The current economic climate presents a dual challenge, with global interest rates on a downward trajectory over the long term.

President Trump’s penchant for appointing Federal Reserve governors open to rate cuts could affirm this easing bias, echoing throughout international markets.

This trend may ultimately bolster expectations for multiple reductions in South Africa’s repo rate, currently set at 6.75%.

Botha outlines an optimistic prediction for the coming year, suggesting that the market is pricing in about three to four cuts of 0.25%.

Market expectations hint that the repo rate could eventually slide to an appealing range of 5.75% to 6.00%.

If conditions allow the US Federal Reserve to drop rates by over 1%, South Africa might also find its pathway toward a lowered repo rate tapering nearer to 5.75%.

The historical backdrop of South Africa’s repo rate averages, typically 1% to 1.5% above inflation, adds context to the current discussions.

With inflation expectations now gliding toward 3%, a premium of 1.5% over this target would correspond to an “equilibrium” rate of 4.5%.

Botha cautions, however, that previous averages were established during a phase of significantly lower global real interest rates, indicating a need for adjustment in the ongoing high-rate scenario.

Looking ahead, if global rates continue their descent while the Sarb remains vigilant over inflation control, South Africa might settle into a long-term average repo rate around 5.5%.

This eventuality would provide a considerable boost to the local economy, particularly benefiting the housing sector and easing financial pressures on corporate and governmental borrowers through lower funding costs.

Conversely, prevailing views from the Nedbank economic unit suggest caution surrounding the prospect of immediate rate cuts. As the Monetary Policy Committee (MPC) prepares to meet next week, they predict the repo rate will remain stable at 6.75%.

This conservative approach is primarily due to the recent uptick in inflation rates, which rose to 3.6% in December after a slight dip in November, fuelled by rising housing costs, restaurant fees, and modest increases in fuel prices.

With core inflation escalating slightly from 3.2% to 3.3%, the MPC may prefer to hold the line given that underlying price pressures remain well contained.

In a rapidly evolving economic landscape, the balance between controlling inflation and stimulating growth presents a complex challenge for the Sarb and the South African economy.

BUSINESS REPORT