The South African Reserve Bank (SARB) has adopted a circumspect stance regarding the potential for further interest rate cuts this year amidst a backdrop of uncertain global economic conditions.
The SARB on Thursday cut its key interest rate by another 25 basis points to 7.50% per annum as anticipated, marking the third successive reduction since September 2024.
SARB Governor Lesetja Kganyago said four members of the Monetary Policy Committee (MPC) preferred this action, while two supported an unchanged stance.
The SARB's announcement follows after the US Federal Reserve (Fed) announced on Wednesday that its interest rate will be kept unchanged following a 25 basis points cut in December, the third consecutive interest rate cut for a cumulative 100 basis points last year.
Riaan Grobler, head of advisory services at Everest Wealth, cast doubt on whether the SARB’s cutting cycle might be nearing its end, especially considering the Fed’s evolving caution.
“The question is therefore whether the Reserve Bank will announce another reduction of 25 basis points in March,” Grobler said.
“And whether it will also apply the brakes first, with Kganyago again emphasising that global economic uncertainties and President Donald Trump's trade policy pose a risk to inflation and that caution must therefore be exercised.”
Despite inflation remaining well-contained, Kganyago acknowledged an unusual level of uncertainty regarding the medium-term outlook.
The SARB projected that inflation may linger in the lower half of the target range for the first half of this year, but anticipated a rise closer to 4.5% due to risks from global developments.
“The committee ultimately agreed that it was possible to reduce the degree of policy restrictiveness, making the stance somewhat more neutral. However, all members were concerned about the uncertain global outlook,” Kganyago said.
Furthermore, the MPC has been proactively considering global scenarios that could impact local economic conditions.
A potential trade war scenario, featuring a universal increase of 10 percentage points in US tariffs, was reviewed, revealing implications such as higher global inflation and interest rates.
“Our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5%," Kganyago cautioned.
Since the last MPC meeting in November 2024, the rand has depreciated by approximately 1.6% against the dollar, leading to higher costs for essential goods such as fuel and white maize, which has seen price hikes of over 10%.
Analysts attribute these inflationary pressures not only to domestic issues but also to increased geopolitical uncertainty stemming from US foreign policy.
Casey Sprake, investment analyst for fixed income at Anchor Capital, said she expected the SARB to adopt a cautious, data-dependent approach moving forward.
“Given the evolving global landscape, the SARB may opt to delay further rate reductions as it monitors external developments and their implications for domestic inflation dynamics,” Sprake said.
“The MPC will likely maintain a cautious, data-dependent approach, retaining a somewhat hawkish tone to ensure inflation expectations remain firmly anchored at 4.5%.”
Despite the challenging economic climate, there is a cautious optimism surrounding South Africa’s economic prospects.
The SARB expects a rebound in the fourth quarter, with potential growth projected to reach around 2% by 2027, underpinned by the effects of structural reforms.
“Importantly, this scenario predicts lower inflation and interest rates, demonstrating how structural reforms can reduce the country’s risk-premium and generate more monetary policy space," Kganyago said.
Nedbank chief economist, Nicky Weimar, echoed this sentiment, suggesting the MPC was positioning itself for a gradual easing cycle.
Weimar said fears of renewed rand weakness against the backdrop of a more hawkish Fed seem to be the main reason for the cautious message from the MPC.
Weimar said the fear of renewed rand weakness, given the Federal Reserve's more hawkish inclinations, could lead the SARB to adopt a cautious approach in the meetings ahead.
“Since it would probably take time for Trump’s policies to crystalise and even longer for the impact on inflation to emerge, the Fed appears to be a signalling a prolonged pause in US interest rates,” she said.
“The SARB captured these developments in the gradual upward revisions to its repo rate projections during the past two meetings. Consequently, meaningful further rate cuts look increasingly unlikely. We still expect the SARB to follow through with another 25 basis points reduction in the repo rate, but it now appears more likely around the middle of the year.”
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