South African Reserve Bank Cuts Repo Rate By 25 Basis Points Amid Global Uncertainty

The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) on Thursday decided to lower the repo rate by 25 basis points, starting from Jan. 31. Out of the committee members, four supported this decision, while two preferred to keep the rate unchanged.

SARB Governor Lesetja Kganyago said the committee agreed that reducing the level of policy restrictiveness would bring a more neutral stance, but they remained cautious due to the uncertain global economic outlook.

Kganyago mentioned that consumer prices and headline inflation averaged 4.4% in the previous year, which is close to the middle of the target range.

"Inflation slowed to 3% in December, having started the year above 5%. This was mainly due to favorable goods-price developments, including food inflation reaching 15-year lows, as well as lower fuel costs," he said, SA News reported.

He added, "Because of these transitory factors, inflation is likely to remain in the bottom half of our target range through the first half of this year. But headline inflation should revert to around 4.5% thereafter, aided by core inflation which remains at or below the midpoint over the forecast horizon."

The latest survey shows that inflation expectations are now closely aligned with the midpoint target. Kganyago stated that while inflation is currently well-controlled, the medium-term outlook is uncertain, with risks from the global economy and domestic issues like administered prices.

He also mentioned that interest rates are expected to gradually decrease over the next few years, stabilizing around 7.25%. However, the Monetary Policy Committee (MPC) emphasized that this forecast is just a general guideline, and decisions will be made based on each meeting, without any commitment to a specific rate path or forward guidance.

Kganyago explained that decisions will continue to depend on the outlook and be responsive to data, while also considering the risks to the economic forecast. He mentioned that, given the tough global situation, the MPC reviewed a trade war scenario during the meeting.

In this scenario, the US increased tariffs by 10% points, with other countries responding with retaliatory measures. This scenario resulted in higher inflation and interest rates globally, as well as greater risk in financial markets.

According to the model, this situation would cause the rand to depreciate to nearly R21 to the dollar, domestic inflation to rise to 5%, and the policy rate to increase by half a percentage point from the baseline forecasts.

The committee also reviewed a scenario with faster domestic structural reforms, which showed gradual growth reaching 3% by 2027. This scenario indicated lower inflation and lower interest rates in South Africa, demonstrating that such reforms could reduce country risk and provide more monetary policy flexibility.

Last month, South Africa's GDP dropped by 0.3% in the third quarter of 2024, after a 0.3% increase in the second quarter, dragged mainly down by the agricultural industry.