THE South African Reserve Bank (SARB) has been called out for being “too conservative” after opting for the lowest cut in the cost of borrowing to offer some relief to consumers.
As expected, the SARB yesterday cut its repurchase rate (repo rate) by 25 basis points to 8% a year, following seven consecutive meetings at a 15-year peak of 8.25%.
This means the prime lending rate will decline from 11.75% to 11.5% per annum, bringing some respite to debt-burdened consumers.
This also marked the SARB’s first policy easing since the Covid-19 pandemic in mid-2020 as the annual inflation rate slowed to a three-year low of 4.4% in August, below the SARB’s 4.5% midpoint target level.
The SARB’s Monetary Policy Committee (MPC) raised interest rates by a massive 475 basis points since 2021 after extreme inflationary pressures hit the South African economy following the Covid-19 pandemic.
SARB governor Lesetja Kganyago yesterday said the central bank’s MPC members considered an unchanged stance, a 25-basis point cut, and a 50-basis point cut.
Kganyago said the MPC ultimately reached consensus on 25 basis points, agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term.
“The forecast sees rates moving towards neutral next year, stabilising slightly above 7%. As before, the rate path from the Quarterly Projection Model remains a broad policy guide, changing from meeting to meeting,” Kganyago said.
“There are scenarios where inflation could undershoot the baseline forecast, if oil prices are lower or the exchange rate appreciates further. Global conditions pose additional challenges. Geopolitical risks are heightened and could generate further economic shocks.”
Debt Rescue CEO Neil Roets said it was too little, too late from Kganyago to pull South Africans out of financial ruin.
“While any relief is welcome, this small reprieve will not make any significant difference in the lives of over half of the South African population (55%) currently living in poverty,” Roets said.
“It will also do little to nothing to pull the middle class out of the financial ruin that is the final consequence of indebtedness. People have reached the end of the road, and they have nowhere left to turn. It is time to heed this ticking time bomb – before it’s too late.”
The SARB projected inflation to remain below the 4.5% midpoint through the end of the forecast horizon in 2026.
Accordingly, inflation projections were revised downwards, with 2024's forecast cut to 4.6% from 4.9%, the 2025 estimate was reduced to 4% from 4.4%, and the 2026 projection trimmed to 4.4% from 4.5%.
Old Mutual Group chief economist Johann Els said conditions were “rife for a 50 basis point rate cut”, similar to the US Federal Reserve’s (Fed’s).
The Fed on Wednesday announced a 50 basis points rate cut and noted that its easing cycle would be measured.
Els said the sharp downward revision of headline inflation for the forecast period going forward should have prompted the SARB to be more dovish.
“This was a clear missed opportunity with such significant downward revisions in terms of inflation and the statements around the impact of the stronger currency, lower oil prices, lower food prices helping the inflation outlook. I think this was a clear missed opportunity. But as I said before, conservative central bankers in South Africa would not have cut by 50 basis points at this meeting,” Els said.
“The Fed, with exactly these circumstances, would have cut by 50 looking at the downward regions in South Africa's inflation numbers. The Reserve Bank decided not to. I stick with my view that by November they will actually cut by 50 basis points. By that time, the Fed would have cut another 50 basis points in early November, and our own inflation numbers would have come down even further with October inflation close to 3%.
“So I still expect another 50 basis points for South Africa, so a total of 75 basis points for this meeting today and the November meeting.”
Concerning economic activity, the SARB maintained its 2024 projection at 1.1%, while revising its 2025 forecast up to 1.6% from 1.5%, and its 2026 forecast to 1.8% from 1.7%.
North West University Business School economist Professor Raymond Parsons said the MPC statement recognised that South Africa’s economic growth had been too low for too long.
“The MPC also acknowledged that a major weak link in South Africa’s growth prospects was total gross fixed capital formation (GFCF), which has declined for four successive quarters,” Parsons said.
“Apart from structural remedies and reforms, however, strengthening GFCF also needs progressive lowering of borrowing costs of capital to help improve the risk-reward ratio of private investment plans, especially for SMMEs.”
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