The South African Reserve Bank (SARB) has implemented its first interest rate cut in four years, lowering the rate by 25 basis points to 8%. This decision follows a significant decline in the country’s headline inflation, now at its lowest level in three years. The rate had been held steady at 8.25% since May 2023.
Economic Context and SARB’s Decision
Governor Lesetja Kganyago explained that the adjustment aligns with the bank’s forecast of reduced inflationary pressures in the medium term. In August 2024, South Africa’s inflation rate eased to 4.4%, down from 4.6% in July, largely due to decreased transport costs and utility rates. This marks the lowest inflation level since April 2021.By reducing the lending rate, SARB aims to stimulate economic activity in the country, which has struggled with sluggish growth. Despite improvements in electricity supply and increased optimism surrounding the government of national unity (GNU), the economy grew by only 0.4% in the second half of 2024.
Predictions for Future Rate Cuts
The latest rate cut had been widely anticipated by economists, many of whom foresee further reductions over the coming months. Projections suggest the central bank could cut the lending rate in the next three quarters, potentially lowering it to 7.25% by May 2025.The decision is underpinned by forecasts that inflation will average 4.7% in 2024 and decrease further to 4.3% in 2025. Economists have pointed out that South Africa’s monetary policy is nearing what SARB considers a “neutral” position, approximately 100 basis points away.In line with this stance, SARB has opted for a gradual approach to rate adjustments. However, some experts argue that the bank should consider more aggressive cuts, such as reducing rates by 50 basis points, to accelerate economic recovery.
Next Steps for SARB
The Monetary Policy Committee (MPC) of SARB is set to announce its next rate decision on November 21, 2024. The decision will be closely monitored as the bank balances the need to spur growth with maintaining long-term economic stability.
