Economists are calling for a 50 basis point cut in the repo rate following Wednesday’s announcement that the inflation rate fell by 1% in October. They argue that there is now no expectation of inflation that justifies not reducing the repo rate by 50 basis points.

The South African Reserve Bank (Sarb) has a constitutional mandate to protect the value of the rand by keeping inflation low and stable and uses interest rates to influence the level of inflation. To protect the value of the rand, the Sarb currently uses inflation targeting to keep consumer price inflation between 3% and 6%.

Professor Bonke Dumisa, independent economic analyst, says the inflation rate down to 2.8% in October like announced by Statistics SA is very encouraging, especially when compared to the impressive 3.8% in September.

“It encourages me to say that the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) is expected to announce tomorrow (November 21) a 50 basis point reduction in the repo rate, from 8% to 7.5%. There is absolutely no inflation expectation that justifies not reducing the repo rate by 50 basis points.”

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Sarb has many reasons to cut the repo rate, even by 50 basis points

Independent economist Elize Kruger agrees. According to her, with inflation at this low level and a pension rate at 8.0%, the real pension rate is at 5.2%, which is exceptionally restrictive for an economy that gets by with real growth equal to or less than 1%.

“Even if the average in 2024 is estimated at 4.4%, this implies a real pension rate of 3.6%, which is close to a percentage point above the neutral interest rate received by the Sarb.

“With very gradual reductions of 25 basis points every two months, the real repo rate will remain quite restrictive for some time to come and as such, the Sarb has many reasons to reduce the repo rate, even by 50 basis points, at the MPC meeting.”

However, she points out that given the recent Sarb speech, the recent depreciation of the rand and a conservative committee, a 25 basis point reduction in the repo rate remains the base case forecast. “Apart from the short-term impact on the rand exchange rate (which I expect will fully reverse in the coming months), the impact of Trump’s victory in terms of policy changes will likely be more of a factor over the medium term and should, in my view, not derail local interest rate expectations in the current cycle.

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The Sarb could easily lower the repo rate by 50 basis points

Frank Blackmore, senior economist at KPMG, says the inflation rate of 2.8% is well below the Sarb’s target level of 4.5%. It also highlights that the main contributors to inflation remain housing and utilities, notably electricity at 11.5%, as well as miscellaneous goods and services adding a percentage point, notably insurance and financial services.

“We see that food inflation has increased from 0.9% in September to 0.7% this month. Core inflation also fell, excluding food and non-alcoholic beverages, fuels and energy, to 3.9%. Given these numbers, Sarb could easily cut interest rates by 50 basis points, but the expectation is likely to cut another 25 basis points and then continue those 25 basis point reductions until in 2025 until we reach the level of around 7% on the pension rate. , which corresponds to a long-term sustainable level.

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Inflation expected to accelerate again in the coming months

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the lower inflation rate of 2.8% in October was broadly in line with their expectations and they still expect the Sarb to reduce the repo rate by 25 basis points tomorrow.

“The disinflation campaign is now over and the overall rate will gradually increase over the coming months. We correctly predicted the fall in the inflation rate in October and the decimal changes meant our overall forecast of 2.9% was slightly off. The consensus forecast was inflation of 3.1%.

“October’s inflation rate follows a series of favorable inflation surprises, but marks the latest disinflation figure, as headline inflation will gradually increase from November onwards. However, South Africa’s inflation rate in 2025 will on average be lower than the 4.5% we forecast for 2024.”

He said the subdued inflation outlook means the Sarb can continue its policy easing cycle next year, although there are risks of a slower normalization of US monetary policy, putting central banks at risk. emerging markets on the path to fewer rate cuts.

“Our revised forecasts call for a cumulative rate cut of 75 basis points in 2025, compared to 100 basis points previously forecast. Additionally, a weaker South African rand, mainly due to a stronger US dollar, poses a risk to inflation forecasts.

“The rand has been among the worst performing emerging market currencies since Donald Trump’s election victory. We expect the rand to deteriorate over the coming months, with the local unit expected to reach R18.0/US$ by mid-2025. »

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A 25 basis point reduction in the repo rate is expected, with another 75 basis points in 2025

Johannes (Matimba) Khosa and Nicky Weimar, economists at Nedbank Group’s economic unit, say their forecast was for inflation to fall to 3.3%, compared to the market forecast of 3.2%. They expect headline inflation to start rising slightly in December and throughout next year as the base normalizes.

“Fuel prices will also increase due to an uptick in global oil prices and a weaker rand. In November, the price of Brent crude rose more than 1% and the rand lost ground against the strengthening US dollar, which recovered after Donald Trump’s victory in the US elections.

“Food prices will also rise as the impact of drier weather conditions earlier in the year continues to impact some food products. However, global disinflation and favorable weather conditions will partly mitigate the potential for food inflation to rise.

They believe that improving domestic operating conditions through stable electricity supply and further efficiency gains in logistics should also help contain input costs and operating expenses throughout the food supply chain. They forecast that inflation will end the year just below 4% and average 4.5% in 2024.

“Upside risks to our forecasts have increased somewhat over the past month. The most significant concern is the likely change in US economic policy over the next four years under the Trump administration, which will put pressure on the rand.

“Ongoing geopolitical tensions around oil-producing regions could disrupt supply channels, leading to a further surge in oil prices. High wage deals and the possibility of higher-than-expected electricity tariffs and other administered prices could also exert some upward pressure.

Khosa and Weimar warn that economic recovery is unlikely to lead to significant demand pressure on prices. “Despite these risks, the inflation outlook remains relatively subdued, with the CPI expected to hover around the Sarb’s 4.5% target. Therefore, we expected Sarb to cut interest rates by 25 basis points tomorrow, followed by a further reduction of 75 basis points in 2025.”

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MPC to cut 25 basis points and remain cautious

Koketso Mano, senior economist at FNB, says the inflation rate was also lower than FNB’s expectations of 3%. “We forecast inflation at 3.2% in November and expect inflation to rise steadily until 2025, but not to exceed 4.0%. This trend is supported by positive base effects and contained underlying inflation.

“At the September MPC meeting, the Sarb forecast average inflation of 4.0% next year and 4.4% in 2026. This benign inflation trend, alongside recent rate cuts, interest in advanced economies, support a continued local reduction cycle.”

Mano says the FNB expects a 25 basis point cut at tomorrow’s MPC meeting and each subsequent meeting until May 2025, but stresses that the outlook is not without challenges.

“The Fed has signaled that a slower interest rate reduction cycle is on the agenda, which will put pressure on emerging market assets.

“In addition, trade restrictions and fiscal policy easing remain relevant risks to the inflation outlook and global financial conditions. These factors should encourage the MPC to remain cautious.